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Laura Stover, RFC® discusses the concept of time segmentation and its application in allocating retirement savings for a stable income during retirement. Time segmentation involves matching investments with the point in time when they will be needed to meet retirement income needs. This strategy provides clarity, comfort, and control over retirement income and helps mitigate the effects of market volatility.

We cover the four buckets of money in a time segmented approach and emphasize the importance of purpose-based allocation. The benefits of time segmentation include flexibility, optionality, and reduced risk capacity.

It’s important to work with an income specialist to determine the best strategy for individual retirement goals. Key takeaways include the significance of purpose-based allocation, the four buckets of money in a time segmented approach, the potential benefits of time segmentation in reducing the impact of market volatility, and providing flexibility and optionality to long-term growth buckets.

Time segmentation is a strategy to invest for retirement and emphasizes its role in aligning investments with the point in time when withdrawals are needed to meet retirement income needs.

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Timestamps (show notes):0:01:54 Time segmentation is a strategy to match investments with retirement income needs
0:05:14 Bond laddering can be part of the time segmentation strategy
0:06:31 Duration risk and default risk can be eliminated with time segmentation
0:07:44 Time segmentation provides flexibility and optionality for long-term growth
0:08:47 Allocation of assets for different purposes and spending shocks
0:10:19 Time segmentation helps with comfort, control, and certainty in retirement
0:11:49 Explanation of the four-bucket time segmentation approach
0:13:35 Purpose of each bucket in the time segmentation strategy
0:14:16 Visualizing money in phases for risk and purpose understanding
0:14:49 Importance of purpose-based allocation and risk capacity reduction
0:15:39 Utilizing various investment vehicles and tools for each bucket
0:16:35 Importance of having a plan and confidence in making decisions
0:17:08 Utilizing bonds, annuities, CDs, and other vehicles for conservative buckets
0:18:20 Guaranteeing retirement income and managing risk with predictability
0:19:13 Segregating bonds for income guarantee and risk identification
0:20:05 Exploring the concept of the bond tent and different strategies
0:23:25 Managing investment exposure and stress testing risk
0:26:36 Customizing income plan and purpose-based allocation for specific needs

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Simple diversification used to be the go-to plan for a typical portfolio. A balanced plan of stocks, bonds, and cash would simply do the trick. But that type of diversification has been proven less effective in recent years with the abundance of market volatility. Today, Laura Stover, RFC® takes on financial guru Dave Ramsey’s version of a Safe withdrawal rule.

As we approach retirement, our priorities begin to shift. While we still want to grow our money and stay ahead of inflation, protecting what we’ve accumulated and generating income become top priorities. Traditional diversification, which involves a mix of stocks, bonds, and cash, has proven less effective in recent years due to increased market volatility.

A major risk retirees face is having a big market pullback at the same time they’re withdrawing their retirement paycheck. This can lead to a negative sequence of returns To mitigate this risk, it is essential to divide assets among different baskets or segments. By separating assets into different time frames and corresponding risk profiles, investors can balance the need for income today with the potential for growth in the future.

It is important to stay informed about market trends and adapt your retirement strategy accordingly. Market volatility and economic conditions will continue to change, requiring investors to explore alternative diversification strategies and consider new factors when constructing their portfolios. By staying proactive and working with a trusted financial advisor, individuals can navigate the complexities of retirement planning and retire with confidence.

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Timestamps (show notes):0:03:06 The importance of shifting from accumulation to preservation and income planning

0:06:15 Mitigating risk and maximizing time in retirement planning

0:08:31 Diversification to take advantage of different market cycles

0:11:54 Discussion of Dave Ramsey’s suggestion of a higher withdrawal rate

0:13:38 Questioning the validity of Dave Ramsey’s claim

0:14:10 Studies on the 4% rule and withdrawal rates.

0:15:02 Dave Ramsey’s 8% withdrawal rate and its flaws.

0:15:58 Structured notes as a potential investment option.

0:18:19 Deferred income annuities and their considerations.

0:19:10 Guaranteed income stream with potential principal invasion.

0:22:11 Concerns with relying solely on high withdrawal rates.

0:27:07 Benefits of including alternative diversification strategies in portfolios

0:28:16 Purpose-based allocation can redefine wealth and solve for income

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Today Laura Stover, RFC® explores the concept of choice overload and how it can affect your investment behavior and retirement planning. With so many options and information available to us, it’s easy to feel overwhelmed and unsure of the best path to take. But today we will provide you with tips and insights to help you navigate through this sea of choices and make informed decisions that align with your goals and aspirations.

Having more choices does not always translate to better decisions. In fact, research has shown that too many options can lead to decision paralysis or option paralysis. When faced with a multitude of choices, we tend to become indecisive and unsure of which path to take.

This phenomenon has been observed in studies conducted by Stanford University, where researchers found that customers were more likely to make a purchase when presented with a limited selection of options compared to an extensive selection. Humans are simply not good at making decisions when they are overwhelmed with choices.

As investors, we are bombarded with information and tools that promise to help us make the best financial decisions. However, this abundance of choices can complicate rather than simplify our decision-making process. It can lead to biases and traps that hinder us from making sound investment decisions. Let’s explore some of these traps and how to avoid them.

The first trap is inertia. When faced with too many choices, some investors choose to avoid making a decision altogether and do nothing. This can be detrimental to your financial well-being, as doing nothing is still a decision in itself.

To overcome this trap, it’s important to have a clear understanding of your goals and the purpose behind your investment decisions. By aligning your choices with your overall plan, you can overcome inertia and take action towards achieving your financial goals.

The second trap is naive diversification. This occurs when investors spread their assets among all available investment options without considering their goals, asset allocation, or cost. Naive diversification can lead to a hodgepodge of investments that may not align with your risk profile or financial objectives.

To avoid this trap, it’s crucial to have a well-defined asset allocation strategy that separates your safe investments from your growth investments. This strategy should be based on your risk profile and long-term goals, rather than simply picking a little bit of everything.

The third trap is opting for attention-grabbing investments. It’s easy to get caught up in the latest buzz and choose investments based on what you recently saw on the news or heard from friends and family. However, this can lead to impulsive decisions and overspending on investments that may not be suitable for your unique situation.

To avoid this trap, it’s important to do your own research and seek advice from trusted sources. Look for content that is backed by reputable research and consider how the investment aligns with your overall plan and risk tolerance.

To navigate through the jungle of choices and make the best financial decisions, it’s important to start with a process. This process should involve unpacking the industry jargon and deciphering the content of the information presented to you. Look for trusted sources and limit the number of options available to you.

Focus on a few top options that align with your goals and consider the full range of alternatives. By narrowing down your choices and understanding the purpose behind each investment, you can make informed decisions that are in line with your financial objectives.

It’s also important to have a strategy call with a financial advisor who can guide you through the decision-making process. A trusted advisor can help you unpack the information and provide you with a vetted selection of options that align with your goals and risk profile. They can also help you understand the implications and potential impact of each choice, ensuring that you are making decisions that are appropriate for your unique situation.

In conclusion, choice overload can be overwhelming and lead to poor investment decisions. By starting with a process, understanding your goals, and seeking advice from trusted sources, you can navigate through the sea of choices and make informed decisions that align with your financial objectives. Remember to focus on the purpose behind each investment and consider the implications and potential impact on your overall plan. With the right guidance and a clear understanding of your goals, you can make the best financial decisions for a successful retirement.

The future outlook for investors is promising, as technology continues to provide us with more tools and information to make informed decisions. However, it’s important to stay grounded and focused on your goals. Don’t get caught up in the hype or the latest buzz. Instead, rely on a well-defined process, trusted sources, and the guidance of a financial advisor to help you navigate through the choices and make the best financial decisions for your retirement.

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Timestamps (show notes):0:01:52 Too many choices can lead to decision paralysis or option paralysis
0:03:08 Stanford University study on choice overload and decision making
0:04:07 People are not good at making decisions when given too many options
0:06:29 The complexity of investment products and information can complicate decisions
0:08:14 Choice overload can lead to inertia, naive diversification, and attention-grabbing investments
0:09:31 Advisors may also be overwhelmed by the choices and information available
0:10:20 Purpose-based allocation can help overcome inertia and make better choices
0:11:16 Naive diversification is not an effective way to diversify investments
0:12:46 Avoid making investment decisions based on attention-grabbing news or media
0:16:08 Tips for evaluating the credibility of financial articles
0:17:29 Starting with a process and identifying goals and risks
0:18:02 Potential risks such as inflation and market volatility
0:19:31 Considering risks and asset allocations for retirement planning
0:20:04 Importance of understanding buzzwords and investment options
0:21:29 Making decisions appropriate for individual situations
0:22:13 Coordinating income sources and understanding the impact of expenses
0:23:25 Importance of asset allocation and diversification for investment portfolios

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Laura Stover, RFC®, takes on the topic of interest rates today, and how they relate to your financial future. It is important to consider the historical context of interest rates. Over the past few decades, interest rates have been kept artificially low by central banks around the world. This was done in an effort to stimulate economic growth and prevent deflation. However, it was only a matter of time before rates began to rise.

If we look back to the 1970s, interest rates were much higher than they are today, even 19% at one point. This was a period of high inflation and economic instability, and the Fed’s actions were aimed at cooling down the economy and reducing inflationary pressure.

In comparison, the current interest rates are still relatively low. While they may feel high for those who have only experienced the last 20 years of low rates, they are nowhere near the levels seen in the past.

When the Federal Reserve raises interest rates, it aims to increase the cost of credit throughout the economy. This makes loans more expensive for businesses and consumers, leading to a reduction in borrowing and spending. The Fed funds rate, which is the rate at which commercial banks charge each other for short-term loans, has a direct impact on the cost of borrowing for individuals and businesses.

Higher interest rates can have a negative impact on the stock market, as businesses may amend or pause plans for growth due to the increased cost of borrowing. However, it is important to note that the relationship between interest rates and the stock market is not always straightforward. In some cases, rising rates can actually be a sign of a strong economy, which can be positive for stocks.

In light of the current interest rate environment, it is crucial to have a well-diversified portfolio that can weather different market conditions. This means having a mix of assets that can provide both growth and stability. One approach to achieving this is through the use of a bucket strategy.

The bucket strategy involves dividing your savings into different buckets, each with a specific purpose and time horizon. The first bucket is for immediate cash needs and should be held in liquid accounts such as high-yield savings or money market accounts. The second bucket is for intermediate-term expenses and can be invested in low-risk assets such as bonds or CDs. The third bucket is for long-term growth and can be invested more aggressively in stocks or other higher-yield investments.

By diversifying your portfolio in this way, you can take advantage of higher fixed rates for your liquid bucket while still having the potential for growth in your long-term bucket. This approach allows you to balance risk and reward and ensure that you have access to funds when you need them while also allowing your savings to grow over time.

In a rising interest rate environment, we also discuss alternatives to traditional bank products. One option is a Treasury Floating Rate Fund (T-Flo), which is a low-cost, fully liquid investment linked to U.S. government debt. These funds can provide a higher yield than traditional bank accounts while still offering the safety and security of U.S. Treasury bonds.

Another option to consider is a Multi-Year Guaranteed Annuity (MYGA), which is a type of fixed annuity that offers a guaranteed interest rate for a set period of time. MYGAs can provide a stable source of retirement income and can be a good option for those looking for a higher interest rate than what is currently available in bank CDs.

Structured notes are also worth exploring as a fixed alternative. These notes are linked to the performance of an underlying asset, such as a stock or index, and can provide a higher yield than traditional fixed-income investments.

While it is impossible to predict the future direction of interest rates with certainty, there are a few key factors to consider. The Federal Reserve has indicated that it plans to continue raising rates in the coming months, although the pace of rate hikes may slow down. Additionally, inflation is currently at historically high levels but is expected to decline in the months ahead.

It is important to stay informed and regularly review your portfolio allocation to ensure that it is aligned with your risk profile and financial goals. Working with a qualified financial advisor can help you navigate the changing interest rate environment and make informed decisions about your retirement savings.

Rising interest rates can have a significant impact on your retirement plans. It is important to understand the historical context of interest rates and the implications of rising rates on various aspects of the economy. By diversifying your portfolio and exploring fixed alternatives, you can mitigate the risks associated with rising rates and position yourself for a secure retirement. Stay informed, seek professional advice, and make adjustments as needed to ensure that your retirement plan remains on track.

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Timestamps (show notes):0:01:57 Discussion on the impact of interest rates on the economy

0:05:41 Explaining the relationship between interest rates and the stock market

0:07:00 Consumer spending and its role in the economy

0:08:03 Concerns about a potential recession and inflation

0:09:55 Historical perspective on interest rates

0:13:23 Importance of diversification and having a liquid bucket

0:16:26 Explanation of the bucket strategy for retirement savings

0:17:44 Discussion on treasury floating rate funds as a diversification option

0:20:41 Explanation of the inverse relationship between bond prices and interest rates

0:21:50 Introduction of multi-year guaranteed annuities as an investment option

0:23:42 Mention of structured notes and evaluation of existing annuities

0:24:56 Discussion on increasing annuity payouts due to rising interest rates

0:28:04 Importance of having a growth bucket for long-term retirement savings

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Laura Stover, RFC® looks at the ongoing Israel-Hamas war and how it might affect interest rates and your financial future.. With ongoing uncertainty about the economy, wars in Europe and the Middle East, and protests at home, it’s no wonder that Americans are taking a closer look at their financial plans.

In particular, we will explore the potential impact of the Israel-Hamas war on the US, the implications for interest rates, and the threat of inflation. So, let’s dive in and unpack these important topics.

One of the biggest questions on everyone’s mind is how the escalation of the Israel-Hamas war could affect the US. Could it lead to a wider regional conflict? And what would be the consequences for the US economy?

If the conflict deepens and other players such as Hezbollah and Iran become involved, it could send oil prices soaring. This, in turn, would lead to higher costs for gasoline and consumer products that rely on diesel and jet fuel for transport. The fear is that this surge in inflation could plunge the US economy into a recession and trigger layoffs.

Inflation is another major concern for Americans, and rightly so. Despite some reports suggesting that inflation is easing, prices are still rising, albeit at a slower pace. The current core inflation rate stands at 3.2%, down from 6.5% in December 2022. However, this is still significantly higher than the Federal Reserve’s target of 2%. It’s important to note that we have embedded inflation that is here to stay, and we are currently experiencing 40-year highs in prices. The average American is spending 3.2% more on groceries and facing rising gas prices. If the Israel-Hamas war escalates and triggers a surge in oil prices, the situation could worsen.

The Fed has been on a tightening cycle for the past 17 months, raising interest rates from 5.25% to 5.5%. They have hiked rates 11 times, the highest number in 40 years. The recent cool down in inflation has led to optimism in the markets, and it’s highly unlikely that the Fed will start cutting rates anytime soon. They will likely stay the course and continue to monitor the situation.

Given the uncertainty surrounding geopolitical events and their potential impact on the economy, it’s crucial to have a comprehensive retirement plan in place. This plan should address future higher taxes, rising healthcare costs, and market volatility. It should also include a strategy for generating income that isn’t at risk.

Capital preservation should be a primary goal for retirees, as they no longer have the luxury of dollar-cost averaging through contributions to their retirement accounts. By segmenting their assets for growth and utilizing a range of investment tools, retirees can better weather market downturns and protect their nest egg.

While we can’t predict the future or control geopolitical events, we can take steps to protect our financial well-being. By staying informed, adjusting our plans as necessary, and working with a team of experts, we can navigate the uncertainties of the global landscape.

It’s important to remember that the past is not always an accurate predictor of the future, and each economic cycle is unique. However, by having a comprehensive retirement plan in place and being prepared for potential market downturns, we can better position ourselves for a secure and prosperous retirement.

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Timestamps (show notes):0:01:01 Discussion on the Federal Reserve’s BTFP initiative
0:02:50 Increase in credit card debt and its relation to stimulus
0:04:20 Explanation of BTFP and its comparison to quantitative easing
0:07:56 Potential consequences and concerns with BTFP
0:09:04 Digital ID and its implications
0:10:26 Analysis of Federal Reserve’s control over the economy
0:14:40 Discussion on the valuation of collateral and pension buyouts
0:15:14 Reduction in pensions and need for retirement planning
0:15:44 Loss of control with lump sum pensions
0:16:29 Bloomberg’s report on a massive liquidity backstop program
0:17:07 Questioning the need for a large backstop

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Laura Stover, RFC® discusses the Federal Reserve’s Bank Term Funding Program (BTFP) today, a topic that is often overlooked, but has significant implications for our economy.This program, which was introduced in response to the failures of banks earlier this year, has the potential to create new money and impact the value of long-term securities. Let’s dive deeper into this issue and explore its implications.

To understand the BTFP, we first need to differentiate it from quantitative easing (QE). QE is a Fed open market operation that involves buying bonds out of the market to ease monetary conditions. On the other hand, the BTFP is a credit facility that allows bondholders to use their bonds as collateral for a loan. While both tools aim to add liquidity to the system, the BTFP specifically targets bondholders with heavy capital losses.

The BTFP is essentially a generous version of the old discount window, providing a direct loan from the Federal Reserve to banks. This program aims to prevent market panic and ensure that banks have the ability to meet the needs of depositors. However, if defaults occur, the BTFP could effectively become a form of quantitative easing.

One of the key concerns with the BTFP is the potential for inflation and interest rate spikes. With inflation running at its highest levels since the 1980s, focusing on financial stability could risk creating further inflationary pressures. Additionally, the BTFP’s valuation of collateral at par, regardless of the actual value, could lead to a significant deterioration in the value of long-term securities.

Further, the BTFP raises questions about the need for such a massive backstop. While it was understandable during the financial crisis of 2008, the current economic climate doesn’t seem to warrant such a program. The influx of liquidity through the BTFP, combined with the trillions of dollars printed during the pandemic, raises concerns about the long-term impact on the value of the dollar and the sustainability of our economy.

The Federal Reserve’s Bank Term Funding Program is a significant development in our financial landscape. While it may not be as well-known as quantitative easing, it has the potential to create new money and impact the value of long-term securities.

By staying informed and working with a qualified financial advisor, you can navigate these uncertain times and make informed decisions about your retirement. Remember to consider all aspects of your financial life and ensure that your retirement plan is well-rounded and aligned with your goals.

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Laura Stover, RFC® is discussing the recent decision by the Federal Reserve to leave interest rates unchanged and the potential implications for retirees and investors. We will also explore the ongoing efforts by the Fed to combat inflation and the impact it may have on the economy.

The Federal Reserve recently announced that it would be keeping interest rates unchanged at its October meeting. While the market initially responded favorably to this decision, there is still uncertainty about the possibility of rate hikes in the future. The Fed will meet again in December, and if inflation remains high, there is a chance that rates may be raised.

This week’s featured article from The Washington Post titled “The Fed is Still Pushing to Get Inflation Down. Do People Feel it?” highlights the ongoing efforts by the Federal Reserve to control inflation. The Fed has been raising interest rates in an attempt to cool down an overheating economy and bring inflation back to its target of 2%. However, there is still uncertainty about whether these measures will be effective. Fed Chair Powell acknowledges that there’s still some mystery surrounding the matter.

The decision to raise interest rates can have significant implications for retirees and investors. Bonds, which are often a key component of retirement portfolios, are particularly sensitive to interest rate changes. When rates increase, the prices of existing bonds decline, as new bonds with higher interest rate payments become more appealing to investors.

Bonds are having their own 2008. That doesn’t mean you throw the baby out with the bathwater, as they say. Stocks really didn’t do all that well last year either. And stocks are starting to come back again led by that magnificent seven.

In light of the current market conditions and the potential impact of rising interest rates, it is crucial for retirees and investors to have a well-diversified portfolio and a risk management strategy in place. Traditional 60/40 portfolios may not be sufficient in navigating these complex market conditions.

You have to have stop loss indicators that are designed with a goal to mitigate downside risk and remove that emotion from the investing process. Your static 60/40 portfolio doesn’t do that. Your target date fund doesn’t do that. Your 401K, your 403b, many of your mutual funds are not actively managed with those types of algorithms and proprietary intellectual property with rules to help navigate through different market cycles.

When planning for retirement, it is essential to have a comprehensive income plan that takes into account the potential impact of interest rates and inflation. Relying solely on interest rates for generating income may not be sufficient. It is important to explore alternative options such as structured notes, index CDs, and annuities that can provide income guarantees and potentially higher returns.

We are making our world-class CPA’s available to you, even at this busy time of year. You can call LS Wealth at 419-633-0955 or go to redefiningwealth.info.

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Timestamps (show notes):0:01:01 Discussion on the Fed’s decision to leave interest rates unchanged

0:03:47 Uncertainty surrounding inflation and potential rate hikes in December

0:05:15 Impact of rate hikes on the economy and consumers

0:08:33 Concerns about the US government’s spending and debt

0:09:15 Implications for retirees and investors with bond market performance

0:12:01 Importance of diversification and using quantitative investment indicators

0:13:12 Decline in bond values as interest rates rise

0:14:36 Bond market decline and potential impact on portfolios

0:15:41 Invitation to schedule a strategy session for portfolio analysis

0:16:17 Bonds are struggling, but don’t throw out the baby.

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Laura Stover, RFC is solo today for a special episode as we cover this week’s featured article from Kiplinger “Consistency Is the Key to Investing When You’re Retired.” We need to focus on consistent returns rather than average returns or market fluctuations. While volatility may be advantageous during the accumulation phase, it can be detrimental to retirees who rely on their investments for income.

We also are covering ongoing news events, such as the Israel-Mideast situation,the debt ceiling, and more. What effects could these events have on investing and retirement? As always, it’s important to use non-correlated strategies and options to hedge against volatility and manage risk.

We hear from other financial authorities in today’s show, including David Walker, the seventh comptroller general of the United States. His book questions whether we will still be a superpower by 2040, and he outlines several things he believes the US Government should do, especially as it relates to the ever-growing debt ceiling.

Today, you’ll also hear from one of my favorite money managers, Jay Pestrichelli, discussing how he’s looking at investments in 2023.

As always, it’s important to have a solid income plan, addressing healthcare costs and taxes in retirement.

Link: America in 2040 – Still a SuperPower?
https://www.amazon.com/America-2040-Superpower-Pathway-Success/dp/1665500840

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Timestamps (show notes):0:01:59 Discussion on consistency of returns in investing
0:03:25 Importance of preserving capital in retirement
0:04:40 The need for consistent returns instead of average returns
0:07:12 Difference between active and dormant accounts
0:08:20 Caution against variable annuities and suggestion for other investments
0:10:14 Importance of avoiding excessive volatility in retirement
0:11:33 Emphasis on securing consistent income in retirement
0:13:02 Discussion on geopolitical stressors and potential impact on the market
0:16:35 David Walker discusses the four criteria for being a superpower
0:17:35 Walker talks about the alliance against US interests
0:19:45 Walker proposes a three-step plan for fiscal policy
0:21:00 Discussion on inflation, interest rates, and portfolio construction
0:23:00 Jay Pestrichelli discusses traditional risk management and derivatives

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Laura Stover, RFC® is joined by guest co-host Darlene Tucker, CFP® today. This week’s weekend brief comes from Forbes: “5 Predictions For An Economic ‘Soft Landing’ That Were Totally Wrong.”

With a lot of uncertainty in the world, and now 2 wars going on, investors are asking what that means for their futures. Are we in for a soft landing? Before we answer that, Darlene and I look at some history – 5 times that media called for a soft landing, but got it totally wrong. This happened in 1973, 1980, 1981-1982, 1989-1991, and of course in 2007-2009. In each one of these examples, the “landing” was anything but soft.

Of course, past performance does not guarantee future results. But while some analysts are calling for a soft landing now, in late 2023, there are steps you can take to protect your portfolio and your retirement future.

Much of America’s debt is in credit cards. Darlene reminds us that taking a good hard look at our spending habits can be helpful. And with interest rates higher than just a couple of years ago, that opens more opportunities for investment outside of just the stock market.

As always though, the very best thing you can do is work with a financial professional to create a plan that’s individualized to your circumstances, like we do here at LS Wealth. Our contact info follows.

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Timestamps (show notes):0:01:38 Importance of discussing separately managed accounts (SMAs)
0:03:36 Differences between mutual funds and SMAs
0:07:24 Explanation of ETFs as a hybrid of mutual funds
0:08:48 Disadvantages of staying in a mutual fund during market decline
0:10:55 Advantages of separately managed accounts (SMAs)
0:12:14 Tax harvesting potential with SMAs
0:13:54 Core-satellite strategy with SMAs and ETFs
0:14:12 Graduating from mutual funds with a modest retirement portfolio
0:14:47 Tax advantaged opportunities for clients to offset capital gains.
0:16:18 Importance of understanding policy and investing holistically.
0:18:30 Separately managed accounts require active management and engagement.
0:20:20 Letting the managers do their job and avoiding emotional reactions.
0:22:49 Benefits of direct ownership and cost basis of securities.
0:25:34 Graduating from mutual funds to other investment vehicles.

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In this week’s Retirement Talk podcast, with Laura Stover, RFC®, and Michael Wallin, CFP®, we delve into the major advantages of separately managed accounts (SMAs), a topic that doesn’t often make its way into the podcasting world. SMAs can be a game-changer for those nearing retirement or already in retirement.

SMAs offer direct ownership of investments, reduced transaction costs, and the potential for tax harvesting. These benefits set them apart from traditional mutual funds or ETFs, which are more commonly discussed in the financial world.

Mutual funds, for example, are essentially a pool of investments shared among many investors, often with low minimum investment requirements. While they offer diversification, they lack individual control over the underlying assets. ETFs, on the other hand, are a hybrid of mutual funds with lower costs but less active management.

The key distinction with SMAs is that they provide personalized investment options tailored to your specific goals and preferences. You have direct ownership of the securities in your portfolio, which allows for more control over your investments and potentially better tax planning. This is especially valuable in the context of tax harvesting, where you can strategically sell assets to offset gains and minimize taxes.

However, SMAs may not be suitable for every investor due to their higher entry requirements. Typically, SMAs require around $150,000 to $200,000 per sleeve of the portfolio. For those with smaller portfolios, a blend of SMAs and other investment options, like ETFs, can be an effective strategy to achieve diversification and control.

We also touch upon the emotional aspect of investing. Emotional reactions to market news and events can lead to impulsive decisions that may harm your long-term returns. Having a well-thought-out investment strategy, as part of a comprehensive financial plan, can help you stay the course and avoid detrimental emotional reactions.

Lastly, it’s crucial to remember that investment decisions should align with your overall financial plan, which includes income planning, tax strategies, estate planning, and more. A holistic approach to financial planning, as encapsulated in our six-pillar Life Arc framework, can help you make informed decisions and work toward a more secure retirement.

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The post 173. The Baby Boomer Dilemma Documentary Exposes America’s Failed Retirement Experiment appeared first on redefiningwealth.info.

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We all have our own savings goals and dreams of retirement, but difficult markets and high inflation can be quite discouraging. Sometimes it feels like you’ll never achieve what you’ve hoped for. So what’s the secret to building wealth and reaching those goals?

In this episode, Laura Stover, RFC® is joined by Darlene Tucker, CFP® and Kyle Davis who will break down an article about a path to $10 million and what it takes to reach a milestone like that. For many people, that might seem completely unattainable, but there are steps you can take now to maximize growth and get the best returns on your money.

The key to building long term wealth is consistency, having a plan, and identifying a destination you want to achieve. The numbers show that over time if you have an average rate of return that you’re comfortable with and a consistency in investments, the total returns emphatically produce favorable results. There will always be bumps in the road and issues to navigate, but with a good plan, you can overcome those things.

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Timestamps (show notes):6:13 – Inflation is top of mind right now

7:51 – Consistency and planning is key

11:06 – Start with process rather than product

14:09 – The magic of compounding interest

18:51 – Steps to take to reach that $10 million goal

22:17 – The value of having a quality team on your side

29:45 – Shifting your mindset as your approach retirement

33:04 – True planning gets into so much more than retirement accounts

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Being flexible with spending absolutely matters in financial planning and it often gets overlooked when people step into retirement. Most people look at their budget and the assets that they’ve accumulated and that’s where they stop.

In this episode, Laura Stover, RFC® and Michael Wallin, CFP® will examine an article by Dr. Wade Pfau that discusses variable spending strategies. Whether it’s inflation-adjusted fixed percentage rule, floor and ceiling rule, the ratchet effect, or others, we’ll provide a thorough explanation of most of the spending strategies included in the article, but we’ll keep it high level to help you take away the important aspects from what we want to convey.

This show might be a little more academic and in-depth than normal, but don’t tune out because this conversation is critical for investing and distribution. As inflation continues at a high rate and the debt ceiling issues continue to linger, you want to make sure you retirement foundation is on solid ground with the proper income plan.

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Timestamps (show notes):5:18 – ROI becomes reliability of income in retirement

7:25 – Constant inflation-adjusted spending

11:41 – Keeping your spending constant can increase risk

15:46 – Why you might shift more distribution into the early years of retirement

17:24 – The fixed percentage rule

21:50 – Why can’t the government come up with a proper spending sstrategy?

28:29 – Income planning is the foundation of a purpose-based allocation

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The post 157. A Framework for Assessing Variable Spending Strategies appeared first on redefiningwealth.info.

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Our relationship with money is much like the other emotional relationships we have in other parts of our lives. We tell ourselves we’re done making the same types of mistakes but end up repeating those same behaviors the next time the situation arises. The same thing happens in terms of how we invest our dollars and how we act when the market isn’t going up.

In this episode, Laura Stover, RFC® and Michael Wallin, CFP® will dive into a recent article that discusses the behavioral side of investing and share what they’ve seen from people as they navigate the rough economic waters we find ourselves in. They’ll also talk about what’s being done from the Fed to improve market conditions and whether a digitalization of money is coming soon.

It’s important to have a financial professional on your side to help you through the good times and the bad. Understanding how our behaviors play a role in our decisions will hopefully help you avoid repeating those same mistakes both now and in the future.

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Timestamps (show notes):4:43 – What this week’s article says about decisions

7:57 – Understanding portfolio losses

13:02 – Why we feel like ‘this time is different’

18:32 – The investing questions you need to ask yourself

19:27 – The steps the Fed is taking to ease inflation

24:48 – How soon will the digitalization of money happen?

29:45 – The role perception plays in our behavior

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We work with people that have investing questions all the time but there are two that investors often boil it down to. They want to know how long they need to be invested to be sure they don’t lose money and how long they need to stay invested to make sure they do better than an alternative investment.

In this episode, Laura Stover, RFC® and Michael Wallin, CFP® will explain how a successful investment plan has to get measured over the long term to truly evaluate how well it has done. As they discuss, you need to have a long enough duration to let the performance of the solutions you put in place, give you the outcomes you’re looking for.

So how do you do that? Let’s take a look at the historical data and see what some of the bright financial minds have said. Then we’ll talk through the key considerations when building an investment strategy that are aimed at success over the long term.

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Timestamps (show notes):5:36 – How a random walk applies to long term investing
8:54 – Using a football analogy to show how this works
10:20 – What the data shows us
12:58 – Our view on long term investing and the bucket approach
16:07 – The other scenarios you have to consider
19:09 – Why 20 year periods are so important
27:28 – How important are fees?
29:16 – Finding your risk capacity

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The market has shown some signs that it might be turning around, but we’ve seen quite a bit of up-and-down over the past few years. These fluctuations have created some nice gains at times for investors, but a lack of tax planning can keep you from maximizing your financial gains.

In this episode, Laura Stover, RFC® and Michael Wallin, CFP® will delve into the power of tax harvesting and the role it plays in creating a comprehensive tax plan. Throughout the show, they will explain how ex-dividend date, the wash rule, and tax thresholds work and why these things are important for making investment decisions. If you don’t have a professional helping you with this, there are a number of potential pitfalls that we’ll discuss today.

Join us and discover how utilizing tax harvesting can be a powerful tool in your financial planning arsenal, allowing you to make the most of your income and helping you secure a comfortable retirement.

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Timestamps (show notes):2:09 – Is the market turning around?

6:24 – Repositioning assets for tax harvesting

10:37 – How does ex-dividend date fit into this?

13:30 – Understanding the wash rule

18:16 – Tips for avoiding tax thresholds.

25:42 – Expertise needed to execute tax harvesting effectively

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A year like 2022 doesn’t come around too often but those significant market corrections we saw in both equities and bonds made many people begin to wonder about the effectiveness of the traditional 60/40 investment mix. Some people are even saying that there is no longer a use for this portfolio structure.

To truly evaluate whether that’s accurate, you have to first understand how to build a proper investment strategy. In this episode, Laura Stover, RFC® and Michael Wallin, CFP® weigh in on this topic and share their insight on building investment plans. They discuss the limitations of the traditional 60/40 portfolio and how a more dynamic bucket approach can help you better navigate the constantly changing economy.

There are many different tools to help you build the right portfolio, and we’ll explain how the LifeArcPlan puts a process in place to help you determine what rate of return you need and how best to achieve that over time by blending tactical management with strategic management. Hopefully this show will give you a clearer picture of how and why a plan is constructed.

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Timestamps (show notes):4:46 – Why the conservative investor was down so much in 2022,

8:19 – People need purpose-based allocations

11:25 – Diversifying into different buckets of money

16:29 – Why was the 60/40 strategy created?

20:11 – Blending tactical management with strategic management

25:37 – Is the US Dollar getting devalued?

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The post 153. If Not a 60-40 Portfolio, Then What? appeared first on redefiningwealth.info.

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The famous boxer Mike Tyson once said, “Everyone has a plan until they get punched in the mouth.” He meant it about his opponents, but we can apply that same idea to financial planning in the middle of a volatile market. How will you react when things first get difficult? Should you trust your instincts or stick to a well-defined process that you already put in place?

In this episode, Laura Stover, RFC® and Michael Wallin, CFP® will delve into the critical distinctions between risk tolerance and risk perception as it relates to investment strategies. They explore the role of emotions, information consumption, and self-awareness in making investment decisions, and offer valuable insights on creating a comprehensive retirement plan while avoiding common mistakes.

Managing your portfolio through a volatile market all begins the process, and we’ll give you insight into how our Redefining Wealth® process helps you build a plan that avoids these mistakes and helps to secure a stable future for you and your family.

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Timestamps (show notes):5:28 – How do you react when the turbulence first begins?

11:13 – What is the difference between risk tolerance and risk perception?

20:47 – What’s the best way to process all the information and how it applies to you?

25:33 – Putting a process in play and sticking to it.

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The post 152. When It Comes to Risk, It’s Dangerous to Trust Your Instincts appeared first on redefiningwealth.info.

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Reaching retirement doesn’t mean you can put your plan in cruise control because plenty of risks remain. One that all recent retirees are dealing with is the sequence of returns risk. This is an overlooked risk when someone is stepping into retirement that doesn’t get nearly enough attention, in our opinion.

The five years before and the first five years in retirement are the most critical because of the risk that comes from the order (or sequence) from which your investment returns occur. If the market declines a lot in the early years of retirement, your withdrawals could significantly reduce the longevity of the portfolio.

In this episode, Laura Stover, RFC® and Darlene Tucker, CFP® will tackle this risk head-on and explain the impact it can have over the course of your retirement. Plus, they’ll take you through some of the safeguards that can be put in place to protect you from the inevitable downturns in the market to ensure savings can last you throughout retirement.

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Timestamps (show notes):4:06 – What is sequence of return risk and why is it important?
8:52 – What are some of the safeguards you can put in place?
14:57 – You can’t just eliminate market risk altogether
22:11 – Average rate of return vs dollars in the portfolio
28:52 – Segregation of asset types is key

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For many people, the goal in life is to have enough wealth that you can pass it on to people or organizations you care most about, and your advisor should be a key partner in helping you with that estate planning. However, not every financial professional is equipped to help you secure your legacy and give you that peace of mind.

In this episode, Laura Stover, RFC® and Michael Wallin, CFP® will discuss the importance of estate planning and how to ensure your financial advisor is qualified to guide you through the process. Listen to their insights on the consequences of neglecting non-probate assets, the advantages of using a revocable living trust for your IRA, and how to determine the right trust structure for your unique situation.

There’s a lot of great information online to help guide you through this process but if you truly want protection for your estate, you need to make sure you have correct verbiage about how assets go in and when/if they can come out in the future and that’s the role professionals play. Our goal is to help you build a plan that’s effective and efficient, and we’ll share how the LifeArcPlan is designed to help us do that.

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Timestamps (show notes):4:37 – Why the structure of an inheritance is so important.
8:28 – If you receive an inheritance, how do you approach that extra income from a tax standpoint?
12:19 – The benefits of putting a trust in place.
17:54 – Understanding the importance of beneficiaries.
22:32 – The different type of trusts and how they’re structured.

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We spend most of our life saving and investing to accumulate as much wealth as possible before retirement, but there’s not nearly as much thought and research given to how you take that money out once you’re in retirement. Decumulation, in our mind, is one of the most important planning challenges because the fundamental nature of decumulation is much different from accumulating assets.

In this episode, Laura Stover, RFC® and Michael Wallin, CFP® will identify the four unique risks that decumulation presents in retirement: sequence of returns, longevity, taxes and spiking expenses. We’ll take you through each of these individually and explain the potential problems that arise if you haven’t planned for them.

That’s why we make sure our Redefining Wealth® process puts an income plan in place before you step into the decumulation stage. It’s essential to do that before you transition because of these risks and the huge issues they pose. You also want to have the right balance between the different types of investment buckets and the right amount of liquidity in order as you build that plan, and you’ll learn more about that in this show.

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Timestamps (show notes):3:28 – Why decumulation and accumulation are so different
7:24 – Sequence of return risk
12:14 – Longevity risk
14:47 – Tax risk
21:51 – Spiking expense risk

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When things are down, everyone’s risk profile gets much more conservative. Emotions shift as the market does, and we spend a lot of time consulting clients to help them keep balance. One of the products that we discuss more in this type of environment is the fixed index annuity, which people often love or hate.FIAs are designed as competition to banking products, and they’re built to help make sure individuals are not in a position of losing value based upon market conditions. Right now, most people would love to see that hedge of protection around their principle.

That’s why we’re focusing our attention on FIAs for this episode. Laura Stover, RFC® and Michael Wallin, CFP® will help you better understand the role these annuities play in a plan, how they help balance out a portfolio, and the impact market volatility has on this investment.

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Timestamps (show notes):4:24 – Is now the time with interest rates increasing?
8:40 – How bonds and FIAs fit in the same portfolio
13:33 – How volatility factors in to the FIA
18:05 – Floating rate funds
22:25 – Is this the year to add an FIA?

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The post 148. It Is The Perfect Time for Pre-Retirees to Consider FIAs appeared first on redefiningwealth.info.

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Americans have been falling behind on retirement planning for some time now, and the past two years have only increased the difficulty to save money and grow a nest egg. This recent trend emphasizes the importance of proper planning, and we want to share some of the best retirement strategies to consider in 2023.

Much of what Laura Stover, RFC® and Michael Wallin, CFP® will discuss in this episode involves tax planning along with income and investment planning. Some of the planning items we’ll cover are spousal IRAs, Roth IRAs, IULs, and strategies for small business owners, and all of these aim to benefit you over the long-term.

As we’ll explain throughout our discussion today, tax diversification is every bit as important as investment diversification. Understanding how to best utilize taxable, tax-deferred, and tax-free accounts to build that investment strategy likely will prove to be very beneficial in the years ahead. That’s why take the team approach and rely on the strengths of multiple people to build the best plan for you. If you want to learn more, get in touch and start that conversation.

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Timestamps (show notes):3:36 – Taking advantage of the spousal IRA

5:55 – Weighing the tax benefits of a Roth IRA

12:39 – Consider funding an Indexed Universal Life (IUL)

16:04 – Tax diversification is so important

19:35 – Strategies for small business owners and those who are self-employed

21:45 – The Thrift Savings Plan for federal employees

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If you go back to October of 2022, you’ll find the worst 12-month period ever for bonds. With the pressure on the economy, bonds struggled right alongside many other investments.

The last year showed us many investors move to bonds during periods of volatility, and many of those same people couldn’t understand why bonds deteriorated and values declined. Just three years earlier in 2019, the bond market was king and returns were substantial. So these investments are typically thought of as safer, but as we’ve seen, that’s not always true.

In this episode, Laura Stover, RFC® and Michael Wallin, CFP® will look at the recent history of bonds and help you better understand how they work and how they are utilized in a well-balanced financial portfolio. Plus, they’ll share alternative investments that people might choose to reduce risk.

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Timestamps (show notes):3:54 – Bond returns over the past few years

6:02 – How to determine if bonds are a proper investment

11:16 – How bonds actually work

15:21 – Are we in a recession?

23:05 – Bonds as part of a well-balanced portfolio

27:47 – Investments that might be better for you

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For the vast majority of retirees, there will come a time when the IRS comes calling and you’re required to start taking money out of qualified retirement accounts. These required minimum distributions (RMDs) are a great planning opportunity and a chance to have some control over taxation, but you need to be prepared ahead of time.

In this episode, Laura Stover, RFC® and Michael Wallin, CFP® will get back to the basics and provide a great overview on how to plan for your first RMD. With SECURE 2.0 Act moving the age back to 73 this year, there’s even more time to make planning decisions, like moving dollars into a Roth account.

When it comes time to start taking these RMDs, you’ll need to consider the amount that’s required for the year, which accounts you’ll pull that from, and where you’ll distribute the money to. Our Redefining Wealth® process is strategic in how you approach each of these steps to help you get the most out of the money you’ve saved for retirement while limiting the taxes you’re going to owe the IRS. Whether you’re about to take your first RMD or have already started, understanding these strategies will help put you on the best path for retirement.

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Timestamps (show notes):7:17 – Strategies to consider ahead of RMDs.

11:32 – Determining which accounts to pull your RMDs from first.

13:43 – How do you actually take the distribution?

15:18 – Failing to take the RMD results in a costly penalty

19:54 – How this fits into your income plan.

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It’s that time of the year where taxes become top of mind as people look through income over the past year to get their filing in order, but taxes need to be at the forefront of your financial planning throughout the year. The problem is tax planning isn’t simple. It takes years of experience and education to have a thorough grasp on what you owe, especially as your income sources expand.

We want to spend some time discussing taxable income on this episode to help you get a better understanding of what you’ll be responsible for in retirement. Taxes come in many different forms in retirement and it takes more than just a yearly check-up to stay on top of what you owe. Laura Stover, RFC® and Michael Wallin, CFP® will take you through the different types of income sources and talk through some of the tools and strategies we utilize with our clients.

Planning is a key pillar of Redefining Wealth® and something we should be mindful of on an ongoing basis. That’s why we have a CPA on the team that helps with discussions around tax harvesting, life insurance, capital gains, Roth conversions and more. By prioritizing tax planning throughout the year, you’ll be in a much stronger position financially in retirement and avoid a huge surprise each April.

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Timestamps (show notes):5:48 – What is taxable income?

11:57 – How do you get more money in the tax-free bucket?

17:31 – Is it too late to make meaningful tax changes if you’ve already retired?

20:24 – How does the death of a spouse impact income and taxes?

24:37 – The tools we use for tax planning

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A declining market will make any retiree uncomfortable, and it could put your future in jeopardy if you haven’t thought through your withdrawal strategy. Many retirees struggle to shift their mindset from accumulation to distribution so let’s talk about how to determine how much you should be taking out of your accounts each year in retirement.

In this episode, Laura Stover, RFC® and Michael Wallin, CFP® will tell you what the data says and explain the considerations you need to make when structuring a retirement income plan. Maybe the biggest factor you’ll face is sequence risk, which is the risk of encountering different market conditions early in retirement which puts a portfolio in jeopardy of not lasting a lifetime. Once you get into retirement, that sequence of return becomes very important because all that you built could go away just as fast depending on the timing of these withdrawals.

Traditional financial strategies say a 4% withdrawal each year is safe, but how accurate is that? Last year’s suggest rate had reduced to 3.3% but that has crept back up to 3.8% this year. These numbers might apply to you, but you won’t know until you build a proper plan. It all starts with a framework and our LifeArcPlan works with clients to input their data to determine a safe withdrawal rate based on a number of factors. We’ll take you through it all on this show to help you protect everything you’ve worked so hard to build.

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Timestamps (show notes):3:19 – Why this topic is so important right now

6:45 – The silver lining for people about to retire

13:36 – How inflation is gobbling up returns

21:03 – Changing your mindset in retirement away from accumulation

25:33 – What you need to consider when building your plan

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The recent passing of SECURE Act 2.0 brought about a long list of planning opportunities, but the change in age for required minimum distributions will give advisors a chance to think outside the box on RMD strategies.

Now that the age has increased to 73, retirees and pre-retirees have even more time to evaluate options to start reducing retirement accounts in the most tax efficient way possible. Here’s what you should be asking: what strategies can I put in place that allows my money to be working for me and eliminates my future taxation? In this episode, Laura Stover, RFC® and Michael Wallin, CFP® will share a few of the creative solutions that could be on the table for you.

Taking a tax-proactive approach is one of the pillars of our Redefining Wealth® process and RMDs provide a great chance to accomplish that. Our tax team can provide a wonderful walk-through and help our clients evaluate ways to reduce these accounts down based on your goals and what you’re trying to achieve. Let’s use these SECURE Act 2.0 changes to jumpstart the discussion and help save you the most money possible over time.

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Timestamps (show notes):4:44 – Why the tax rates today might give you more reason to take out more.

6:56 – Taking control of your future taxation by pulling money out ahead of 73.

9:06 – Are pre-RMDs a good strategy?

15:36 – When should you consider a Roth conversion?

21:38 – Using Qualified charitable distributions to lower tax rates

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The start of 2023 brought us another round of retirement changes with SECURE Act 2.0 officially taking effect and there are a number of important provisions that retirees need to be aware of.

In this episode, Laura Stover, RFC® and Michael Wallin, CFP® will take you through the changes they’ve identified as being most impactful for retirees and make sure you have a good understanding of what this means moving forward. SECURE Act 2.0 creates additional planning opportunities that you might want and they’ll explain why.

If you haven’t had the chance to look through this new legislation, make sure to listen in to find out more about what’s changing for required minimum distributions, qualified charitable distributions, catch-up contributions, and more. We can’t cover everything in this episode, but this should give you a great starting point for the next conversation with your advisor.

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Timestamps (show notes):3:12 – The required minimum distribution age is moving back again.

7:54 – Catch-up provisions and inflation adjustments

11:04 – An extended RMD credit for qualified accounts

15:45 – Changes to qualified charitable distributions

21:22 – A new exception to the penalty for tax on qualified plan distribution

25:17 – Qualifying for a hardship distribution in retirement accounts

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Investors use rate of return to make decisions and evaluate performance all the time, but they often get misled by the average return. With the market showing some positive signs to start the new year, this is a timely topic to discuss on the podcast and we’ll do that by exploring a Kiplinger article about rate of return that we featured in our Weekend Brief.

Laura Stover, RFC® and Michael Wallin, CFP® will sort out the differences between the average and actual rate of return to make sure investors know which to use when building a properly diversified portfolio for retirement. It’s not what happens in a short duration, short period of time that you need to focus on. Instead, you want to look at your average rate of return for an extended period. That way you can evaluate solutions during a down market that will help you get back on track for the rate of return necessary to make your plan successful.

So we’ll walk you through how we integrate rate of return into the Redefining Wealth® process and show you why the bucket strategy and time horizons also play a key role in determining your investment strategy.

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Timestamps (show notes):5:32 – How is average rate of return calculated?

7:47 – Why average rate of return can be misleading for investing.

10:57 – Calculating actual rate of return

14:32 – Sequence of return risk

19:18 – Millenials have a different perspective

21:36 – Measuring your capacity for risk

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Despite seeing a few positive days to begin the new year, investors are still in the midst of the longest bear market in nearly 15 years and plenty of economic doubt and uncertainty remains in 2023. This sustained bear market has made investors weary and wondering what they need to do to not only survive, but thrive in these difficult conditions.

Laura Stover, RFC® and Michael Wallin, CFP® will lay out a clearly defined checklist that any investor can follow to position their investments in the best way possible regardless of the current market movement. This structure and framework is core to the Redefining Wealth® planning system and we’ll explain how it all fits into the bear market checklist.

Knowing your time horizons and focusing on the returns that you need to be successful is just a piece of the investment strategy you’ll need to weather whatever this year brings, but knowing exactly how to structure your portfolio will help give you confidence in good times and bad.

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Timestamps (show notes):6:58 – Reflecting back on 2022

12:06 – The segmentation of assets

16:32 – Make sure you’re truly diversified

22:05 – Focus on the returns YOU need

25:32 – Investing for the long run.

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No matter how experienced you are with money, there’s always room to grow and learn. It’s a characteristic you’ll find in the most successful people, including one of the greatest investors of all time, Warren Buffett. Today’s show will focus on the life and career of the man born in the years following the Great Depression, who displayed his entrepreneurial drive at an early age and turned that into one of the great American success stories.

So what can we learn from Buffett that anyone can apply to their own financial plan? Laura Stover, RFC® and Michael Wallin, CFP® will look back at the path Buffett has taken during his career and the characteristics that have made him so successful. The things he can teach us aren’t just for the wealthiest investors. Buffett rose up through hard work and strict financial discipline to become what he is today, and that story can benefit us all.

As you’ll learn, Buffett had a fierce desire for independence, and the method for that was money. He chased information and education from a young age and relied on experts to further his knowledge in the areas he was most interested in. That hunger for learning, coupled with his approach to investing that focused on value, compounding interest, and consistent returns, is a blueprint for success that we’ll explore on this episode.

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Timestamps (show notes):5:59 – Buffett’s entrepreneurial pursuits started early

8:06 – It begins with the right mindset

13:44 – His obsession with reading and learning

21:55 – A story of racetrack betting that shows his diligence to be analytical

25:39 – Who was his financial role model?

32:19 – Summarizing the lessons learned

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The extended downturn in the market has given investors a chance to re-evaluate their portfolio and rethink the strategy that best fits their needs in retirement. Dividend-paying stocks are often a popular choice, especially in times like these, because they can help offset poor returns in a down year. One criteria to use when searching for a strong company is the dividend yield, which is how much a company pays out in dividends each year relative to its stock price.

Where we want to help you out on this episode is by putting into perspective how this yield can be helpful for retirees because some companies offer high growth potential but pay out low dividends while other companies don’t grow as quickly but pay higher dividends. The dividend ratio can help you understand what to expect from your investments so Laura Stover, RFC® and Michael Wallin, CFP® will make sure you have a good grasp on what this yield is and why it matters for your retirement.

We think there should be more than one way to garner income in retirement and these dividends could provide a nice compliment to your other income options. We’ll take you through some of the considerations to make when building your stock basket because dividend yield in conjunction with a total return approach can create a strong investment position for your retirement.

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Timestamps (show notes):2:45 – How dividends are often distributed.

5:13 – Understanding how dividend yields change based on stock price

8:14 – Putting together your stock basket

11:26 – Generating retirement income through dividends

14:06 – Top performing dividend yields

16:44 – How we structure a portfolio

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As we prepare to turn the page to 2023, it’s impossible to ignore the state of the market as we close out a second consecutive year with negative returns. Investor concern seems more elevated than normal, which isn’t a surprise because this situation doesn’t occur often. The market rarely sees a down year followed by another down year, but that’s where we find ourselves right now.

We can’t make predictions on the market, but we can extract data from previous down years and try to make educated assumptions. In this episode, Laura Stover, RFC® and Michael Wallin, CFP® will provide context for this investment environment to help you better understand why we’re going through this extended down period. We’ll also take the current data and analyst projections to try to determine whether another year like this could happen in 2023.

We’ll also discuss the investment strategy that will best position you in markets like these because 2022 reminded us that even ‘safe’ investments aren’t always protected from significant losses. This year will also go down as the worst year for 10-year treasuries in modern financial market history. The only other time we witnessed a double-digit loss on the benchmark US Government bond was 2009, but it show us that proper planning is essential. That’s why we’ll tie it all back into our Redefining Wealth® strategy, which makes sure your money is diversified into multiple buckets based on time horizon so your retirement isn’t impacted by consecutive years of down markets.

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Timestamps (show notes):5:15 – Why it’s difficult to predict

7:37 – What past data tells us about bounce backs

10:06 – Making comparisons to the Great Depression

13:10 – Consumer spending now versus past years

18:53 – The string of bad years from 2000-02

22:10 – The worst year for 10-year treasuries

23:37 – Building a properly diversified portfolio

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Are you dreading this upcoming income tax season? It may be time to switch from tax preparation to tax planning. Strategic planning can reduce your overall tax burden, making this time of the year a lot less stressful. You should be working with a tax professional that is a part of your overall financial planning team.

One of the first steps in tax planning is projecting your future income. This means looking at your accounts, tax brackets, and your projected taxes with an as-is scenario. If you are in your earning years you have to understand the impact of earning even on more dollar and what that does to your overall tax plan. In contrast, a lot of retirees are leaving money on the table. Strategic tax planning can save you stress, time, and money.

We also want to be able to make knowledgeable decisions about our future income, predicting where taxes are going to go and how far. Unfortunately, we can’t predict the future, but there are strategies to proactively pay taxes now instead of waiting for higher taxes in the future. On today’s episode, we’ll discuss these planning steps and a variety of planning strategies that can reduce your overall tax burden.

For a copy of our 2022 tax guide please email: info@lswealthmanagement.com or go to https://redefiningwealth.info/schedule/

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Timestamps (show notes): 4:46 – Working with a team of professionals
6:56 – Projecting income for a given year
13:02 – Knowledgeable decision making
19:21 – Software that our CPA team uses
21:10 – Saving a client 58% on her taxation
23:25 – Strategies to reduce your tax burden
26:23 – Managing your income taxes

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Review the Transcript: Ron Stokes :

Welcome to Retirement Talk, the redefining wealth show, your source for financial information specifically for pre-retirees and retirees. We’re here each and every week to help you better navigate during these economic times. We’re here to discuss thoughts and ideas in the field of finance and retirement, as well as discuss trending topics that can impact your bottom line. We’ll break it all down. These discussions can help you make better informed decisions so you can make better financial choices and live the lifestyle you imagined for retirement. Laura Stover is a registered financial consultant and CEO of LS Wealth Management, as well as founder and owner of LS Tax, a consulting firm. She’s been featured in Forbes, CNBC and The Wall Street Journal. I’m Ron Stokes. Our topic for today is from the street, dreading income tax season? Try income tax planning instead. Now, here are your hosts, Laura Stover, along with certified financial planner, Michael Wallin.

Laura Stover :

Hello, hello, hello. It is that time of year where a lot of people have some anxiety and it’s not because of all the snow that we’ve been getting up here in the North. That does give a little bit of anxiety, but it’s that time of year where some people really dread the feeling that someone’s watching or looming over you by the name of Uncle Sam. That not so likable or favorable member of our family called Uncle Sam and it is tax time. And it can be a little bit devastating to some people. There was a lot of tax breaks for 2020 when people went to do their ’21 returns last year. And I think the fallacy is just a lot of times, there’s really a difference between tax preparation and tax planning, and there’s ways to plan for taxes that can reduce your overall lifetime tax burden and really get Uncle Sam to stop be so frightening. So our focus today with my good friend and co-ho, certified financial planner, Michael Wallin, how you doing Mike?

Michael Wallin :

I’m doing great Laura. How about yourself? I heard you’ve been out shoveling snow.

Laura Stover :

I’m obsessed. Yeah. I bought this new, the Snow Plow, 30 inch. It’s a special type of shovel. It makes the job a lot easier, but I didn’t know that it was going to require assembly, which required a few tools that I do not have, but we did get it put together and thank you to my heating and filter guy that takes care of a few things. And I’ll tell you what. I’m ready to go. I just hope we don’t have any more snow. But like I hope there’s no more snow, a lot of people are hoping they’re not going to owe Uncle Sam a big tax bill this year. So Michael, our article is very timely, dreading income tax season, and really the focus should be trying tax planning instead. So we want to cover projecting income for a given year, making knowledgeable decisions about future income so that we understand how the tax code may change in the future. We want to hit that one. That’s a big one.

And determining what, if anything, can be done to lower the overall taxes that you pay depending on your financial situation and taxes may or may not be lower in retirement. And I think more of us are inclined to believe that we’re going to be paying a lot more in the not too distant future. So this is a timely article from the street and it is income tax season. And really the importance of having that proactive tax plan and not just working with preparers. It requires a team. That’s what we do here at LS Wealth. We have our CPA team under LS Tax, and that coordinates right now so much with the investment and wealth management team. This is a service that we utilize specifically for our wealth management clients. We do not have time to just prepare taxes as a whole for everybody, but we busy, busy, busy, and this is an essential part of financial planning. It’s more than just about your investments, this is more important than ever. And I think people are finally starting to realize that.

Michael Wallin :

Laura, the issue that most individuals find that when they are not working with a team of professionals that are all reading from the same book, we’ve just recently came out of the Super Bowl and the Super Bowl, as we watched the game, there was an offense and there’s a defense always on the field. And I think that the listeners really need to assess where they are today because their biggest challenge that if they are not playing both offense and defense and they take a fragmented approach, and they’re working with maybe a CPA to do tax preparation for them. But that person is not in tune with their financial or investment advisor, their financial planner, the idea of using safe money if it’s insurance based, that’s all a part of a holistic plan for them, looking at their health insurance. All of these components have to work together to give a comprehensive structure.

Now, most of the time when people think about taxes, like you just laid out in your opening comments, it’s this looming threat, and they’re looking at taxes as this burden. And they’re trying to find that individual that will minimize the amount of taxation, but it’s not a tax plan. Most tax preparers are historians. And basically what they are doing is writing down what happened last year. They are writing a history book for the client of what occurred in the previous 12 months at a time when other than putting money into a tax deferred account, there is no modification or adjustment of that history. What individuals truly need to be doing is working with a tax professional, a tax coach that is a part of the overall family practice where all facets of a person’s life, goals, dreams, and aspirations are considered because avoiding taxes is not always the best solution in the long term for the client.

Laura Stover :

So to the first point in terms of projecting income. To some, it means avoiding short term capital gains. Now, I think this is an area a lot of people are kind of familiar with, especially if they have not qualified individual or joint accounts, brokerage accounts. Then that word short term capital gains is always going to be looming on that type of tax status account. Others may be looking at tax brackets to determine if it makes sense to own, for example, municipal bonds. And I think tax planning really involves these three key areas.

The first one we want to hit here, projecting income for a given year. Each year, you can show the tax impact of changes in income. Now, financial professionals often utilize various software for this purpose, and there’s a lot of online calculators that can help people if they’re doing their own taxes get estimates. And I’ve seen clients use spreadsheets and model tax situations and compare them, but using the prior year’s tax form, that’s usually a good guideline, but you have to be aware of changes to the law.

Number one, especially if you’re doing your own tax work from year to year in terms of how that may impact the forms. And depending on the tools that you’re using, it may not include state or local taxes. So starting with projected tax for an as is scenario, I think that’s a good step one.

And then using the prior year’s tax return obviously is a logical starting point. And that scenario could include everything you already know and reasonable expectations about the current tax year. That really gives taxpayers more insight than they had previously regarding their upcoming taxes. But having these comparisons, I mean, this is kind of the advantage because taxes come in many flavors, and it does really dictate the tax bill, the projection of income. A lot of people had robust statements. We a good bull market in ’21. The last couple of years has been very good in terms of market returns. People can really get into some tax, not so good scenarios here if they don’t have a good plan in place.

Michael Wallin :

One of the areas that I like to talk, and it really determines if we’re talking as about someone that is prior to retirement, those individuals that are still in their earning years, or is it an individual that is already into their retirement years? If you’re in your earning years, you really need to understand what the earning of one more dollar does from a tax perspective, just like you’re saying Laura. And unfortunately, a lot of individuals, they earn money, but they don’t understand how they move up progressively through the tax rates or through the tax brackets is a better way of saying that. So they need to understand that because as they’re looking to make decisions, they need to have a plan that says, okay, well, if the market contracts, what do I want to do? If the market expands, they should have a written executable plan at that moment, but they also have to base that against the tax return.

Because what you don’t want to do is go into a scenario that you increase your taxation on a dollar by 25%. That would be the scenario if an individual went between a 12% tax bracket and a 15% tax bracket. They can immediately impact themselves with 25% more taxation, opposed to if they were in a tax bracket that say they went from the 24% tax bracket to the 28% tax bracket. At that point, we’re only impacting by about 16, 17%. So it’s important that you understand the tax code.

Now on the other side, that’s it for if you’re an earner. If you’re over in the retirement years, a lot of retirees leave money on the table because of the tax plan that President Trump put in place increasing standard deductions. A lot of individuals do not have enough earned income to actually get to that standard deduction. And they leave excess deductions on the table that they could have utilized to Roth money over. And again, a can consistent theme in our message is to move your money from fully taxable accounts to fully tax free accounts. Because if that can save yourself anywhere between 3, 4, 5% on a tax bracket now, and not even … We haven’t even talked about what future taxation could be. You’re talking about saving against your portfolio anywhere that could be between 5% and 15% of taxation in the future. And that is considerable amount of savings to help you against longevity risk as you are continuing throughout your retirement years.

Laura Stover :

Absolutely. And the US tax code to your point Michael, specifies tier tax rate brackets. Even those whose income places them in the highest bracket can take advantage of all the lower brackets, obviously too knowing really how to utilize that cylinder. We kind of put these tax brackets in a graduated cylinder if you remember that from high school science class, and this is really a nominal cost of what is the next dollar of ordinary income going to be. And it may not include all of the adjustments. And another thing, marginal tax rates, that’s the tax cost of the next dollar of income. And that’s not always listed on the tax return.

Now, the other point we wanted to cover here, the second point of three knowledgeable decision making we know about tax increases, they’re coming in 2026 because of the Tax Cuts and Jobs Act of 2017 sun setting, which lowered income taxes for individuals temporarily. And this is usually where we’re kind of guessing where tax rates are going and how far. For now, you can assess your current tax situation in light of the future increases already in the law. The exact income where each bracket’s going to start is slightly different between the current and the pre-Tax Cuts and Jobs Acts law for most people. The boundaries are very close, but comparable brackets. If you’re are someone in the 12% tax bracket, that may change to 15. I mean, again, we don’t have a crystal ball to know exactly what’s going to happen. That represents a 25% increase in taxes, though. And for those expected to be, let’s say maybe in the future 28% tax bracket, the current 24% tax bracket represents a savings of 16.7%. Any income that can be accelerated into years prior to 2026 represents a significant tax savings.

So it’s really important right now for people to be working with their investment advisor and CPA team together. I know we were very busy the end of last year with the comparison tables that our CPA runs on the software. And Billy puts that together and we had a lot of appointments. Don’t wait until December to start wanting to do all these conversions and contribute to those accounts up. Don’t wait till the last minute. This is really a methodical process to be proactive in paying some of that now, or maybe you’re a single filer, or I have a client in South Florida, beautiful Marco Island area. She makes a little too much money as a single filer. So she’s going to take advantage of a backdoor Roth while it is still available in order to get her maximum contributions in for the year.

Michael Wallin :

Well, and that’s having a plan as you stated earlier. Individuals need to spend as much time building a tax plan as they do their investment plan, their insurance plan, their healthcare plan. Because what we have is every time we’re earning money and since 1974, the bulk, and I think that Laura, most listeners on the call today would attest that outside of their home, the largest asset they have is probably either still sitting in a 401(k), a 403(b) or a 457, or it’s sitting in a rollover IRA. And those plans came out of the ERISA 1974 plan, which was allowing people to defer taxes. And we all want to defer the inevitable, which is the impact of taxation. But the reality is every one of those plans have your rich Uncle Sam as a business partner. And the problem is rich Uncle Sam has the ability to modify his ownership of that account by simply adjusting the plan, the tax plan.

Every time he raises the tax brackets, he takes a larger percentage of your business. And so the goal is build a plan today to inevitably buy him out at the cheapest rates possible. As we talked about on one of our training events last week with some of our clients, the market has contracted. Right now, if individuals are thinking about Roth conversions, now is the time to do the Roth conversion. The account value has gone down. If you transition those accounts now over into a Roth, you will pay less taxes. And as the market recovers, you will experience much greater gains and you paid a reduced amount of taxation on those dollars. And like you said, if you can do that now, and again, that is not advice for everybody to do it. You need to be sitting down with a professional. It needs to be evaluated. So don’t misconstrue. I’m not giving advice broadly to the markets here. But it should be something considered. And you need to take advantage when the markets contract, taxes are on sale. Take advantage of that.

Laura Stover :

And we are going to focus on the third part of this determining what, if anything, can be done to lower the overall taxes that we all pay. There’s several or other strategies we want to discuss when we come back. And if you would like a copy of our 2022 tax guide, email info@lswealthmanagement.com or go to redefiningwealth.infoschedule. No obligation, 15 minute strategy review. We’ll do our very best to help you with your specific questions and situation. We’ll be right back.

Ron Stokes :

You’re listening to Retirement Talk with your host, Laura Stover and Michael Wallin. Request a copy of our 2022 tax guide. Email info@lswealthmanagement.com. That’s info@lswealthmanagement.com. To learn more about how we can help you redefine your wealth, go to redefiningwealth.info, to connect with us, examine your specific situation closer and take this a step further. Go to redefiningwealth.info and schedule a 15 minute strategy review and discuss your unique questions and situation, redefiningwealth.info. Now back to Retirement Talk, the Redefining Wealth show with your host, Laura Stover.

Laura Stover :

So we want to discuss some ways that you can be proactive right before the break. Obviously Roth conversions, everyone’s fairly familiar with that. It doesn’t necessarily mean everyone should do a Roth conversion. I think the scenarios that we’re running and whether or not this deems to be appropriate for you is that software that our CPA team uses really can show how’s it going to affect your Medicare premiums? Because it’s a domino effect, you tweak one thing here, it kind of can affect another area in your life. If you’re already taking social security or you have those Medicare premiums, maybe you’re contributing to an HSA account and dependent upon your age. I mean, I think those are fabulous tools that everyone should be max funding if you have a high deductible health plan.

Typically I believe that’s a $1,500 deductible or thereabouts. And if you are eligible, that’s the key word. That’s tax deferred. You get about a 25% per 1,000 deduction, just on average, I’m going by kind of my situation. And you can max fund that each year and take out tax free distributions for qualified medical expenses or after the age of 65, then it’s tax free. And it’s one thing, hopefully Uncle Sam won’t tinker with because they’re going to come after us. I mean, listen to David McNight, David Walker listen to many, many authorities when we’re at a $30 trillion debt. And I think they’re having to raise the debt ceiling discussion is coming around the corner yet again. Michael, I mean, it’s kind of astounding, people probably don’t realize the highest tax bracket we’ve ever been in was at one time, I believe pre World War II at about 94%. And I don’t think people really realize they may think tax brackets are high now, but 94%. Was that over 70 years ago?

Michael Wallin :

Yeah. Married, filing jointly for individuals over a million dollars of income was nearly anywhere between 92 and 94 cents on the dollar was going to Uncle Sam to pay back that military debt. Now, before we change gears real quick, I want to share a story. I haven’t shared this with you yet. This week had a client walk in the office and you talked about the qualified charitable distribution. Sharing that strategy to the client. And then we did the what if using the tax software saving her 58% on her taxation. A 58% savings by implementing a qualified charitable distribution. Also, was able to give her advice based upon the taxation she was experiencing. What she was having deducted from her social security benefit, she was giving a free loan to the federal government of over $4,600 a year. She did not need to do that. Her actual tax liability was $773. With the qualified charitable distribution, we were able to take her tax liability down to $350. That is substantial savings and that is having a tax plan, not just tax preparation.

Laura Stover :

And some additional, I mean, because we really think to your point using some of these tools we’re discussing, I mean, we, with the debt where it is now, I mean, when we were at a 94% tax rate, I don’t think we owe owed anybody any money. That was the whole point of war bonds and things back then. So I’m not trying to be an alarmist, but I think we can expect fairly robust tax increases after the Tax Cuts and Jobs Acts expire. Some other things that you can do then, the qualified charitable distributions, Roth conversions, HSA contributions. Possible changes to also consider, could be on an as is scenario and you plan often. It could involve some deductions, income or deductions. And examples of that could be, as we stated, the Roth conversions, capital gains and losses, annuity distributions, and employer stock option exercises. Let’s maybe hit on that just a little bit there, Mike.

Michael Wallin :

Absolutely. If you’re wanting to take advantage, a lot of employer stock options, you’re going to be able to execute those at a 15% tax bracket, or it could be 20% based upon what your income level is. It could be based upon certain income levels, you may have zero taxation because you would have no capital gains tax on those accounts. And so there again, it’s exercising those, having a strategy of when to put that in, annuity distributions. We know that based upon putting dollars into annuities, those are tax deferred accounts. So if we have dollars during our retirement years, they’re in annuities, we are not going to be taxed on the gains annually only when those distributions come out.

So for a lot of retirees, they can ladder in annuities so that they’re not being impacted with a full distribution every year, but have a strategy of saying, I’ve got this money here. I’m going to defer some of the gains on this and let this come out at a later point. Mostly if they still have a spouse that is working. They may be four or five years older than their spouse that is still working and they don’t want to generate too much income. Often time, annuities can be used to defer the distribution so that it can lower their taxes.

But you definitely want to understand how the income is going to come out, where does it impact your marginal tax bracket? Is there a strategy of creating some taxes now income today, creating taxes? Is there ability to defer a portion of the taxes so that you’re layering the income in to your benefit and not over impacting, raising yourself up through the tax brackets unnecessarily? And we see that every day, and a good way of doing that is when you’re doing your tax returns, or if you’ve already had them done this year. If you did not have a tax plan provided to you, so you don’t make the same mistakes next year, you need to visit, get a second opinion, work with a family office practice that will take the consideration as we do at LS Wealth of not just your taxes, but your investments, your income plan, everything has to be considered holistically.

Laura Stover :

And another thing to keep in mind after age 72, Roth conversions are not allowed until your RMD is satisfied. And also in regards to the qualified charitable distribution in your RMD, make sure that it happens before the RMD is completely distributed. A lot of people that I work with do it and probably your clients too. The RMD is the QCD 100% in most cases, but in case you’re not gifting with the QCD all 100% of that, make sure that before the RMD is completely distributed to include that QCD. So income taxes are often a household’s largest annual expenditure, and it’s an expenditure that can be quantified, and to an extent managed. Any changes will be unique to every single person, couple or family, and having the comparison plans being proactive as we’re trying to emphasize today, not just going to H&R block or not picking on anyone, but it’s not a plan. A preparation is different from a plan. You have to be able to project marginal changes against your expected future tax rates now.

Everyone has to have that low for me, tax rate, especially when viewed in the context of your larger financial life plan. And that is one of the key pillars of the Redefining Wealth process, the tax planning, and it does go and coincide with the income planning. It’s a very big piece of the whole process and making sure you have the framework in place to be proactive and plan ahead because without a plan, you may be in for a big surprise around the corner.

Ron Stokes :

You’ve been listening to the Retirement Talk podcast with Laura Stover. For a copy of our 2022 tax guide, email info@lswealthmanagement.com. Request your copy now. That’s info@lswealthmanagement.com. Redefining Wealth is a register trademark of LS Wealth Management. Take advantage of a complimentary plan. Know where you stand regardless of the market, walk through the Redefining Wealth process and have a clear picture of the key risks you likely will face and achieve a deeper understanding of how to properly plan for these risks with the Redefining Wealth Framework. Schedule a strategy session now, by going to redefiningwealth.info and click schedule. That’s redefiningwealth.info. Click schedule.

Redefining Wealth is a registered trademark of LS Wealth Management. Investing involves risk, including the potential loss of principle. Any references to protection, safety, or lifetime income generally referred to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier. This show is intended for informational purposes only. It is not intended used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual situation. LS Wealth Management LLC is not permitted to offer, and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the US government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by LS Wealth Management LLC. Investment advisory services offered through Optimize Advisory services and SAC registered investment advisor. LS Wealth Management is a separate entity.

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January ended up being a pretty volatile month in the market. With inflation, geopolitical tension, and rising interest rates we may see more volatility in the near future. What is the danger this poses to our retirement? A fear of outliving your money coupled with recency bias can lead to an unbalanced portfolio. Portfolio failure, running out of money in retirement, is directly related to volatility. However, there are tools and strategies to navigate a choppy market.

Think of standard deviation as a relative risk rating. Lower standard deviation means lower risk or volatility. Using a Monte Carlo simulation spreadsheet, we can forecast the probability of potential failure rates. We have to examine how much risk you are taking in relation to the return you need for a successful retirement. You want to build a plan with the highest probability of success.

How could you still go broke in your portfolio with a 20% return?

If we have two portfolios and put a million in each:

Say Portfolio A made 60% the first year or $1.6 million. In year 2 we lost 40% and our previous $1.6 million is now a net of $960,000.

Portfolio B made 30% in the first year or $1.3 million. In year 2 if we lose 10% our $1.3 million now has is a net of $1,170,000.

Dividing both of these portfolios over 2 years, both portfolios average a 10% return but Portfolio B has more money in it with a gross increase of $210,000. This shows, you could have two portfolios with the same return, but the lower volatility portfolio could mean the difference between success and failure in retirement. Join us as we evaluate standard deviation, the traditional 60/40 portfolio, the benefits of lower volatility portfolios, and more on today’s show.

Email info@lswealthmanagement.com for your guide and report on defending yourself against a bear market.

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Timestamps (show notes): 2:23 – January began volatile, inflation, geopolitical tension

8:32 – Lower standard deviation means lower risk

16:24 – How could you get a 20% return and still go broke?

20:21 – Triple compounding and reverse and preservation income

22:11 – Why the 60/40 portfolio could bring losses

25:58 – Losses with a 40% underperforming portfolio

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Review the Transcript: Ron Stokes:

Welcome to Retirement Talk, the Redefining Wealth Show, your source for financial information specifically for pre-retirees and retirees. They’re here each and every week to help you better navigate during these economic times. We’re here to discuss thoughts and ideas in the field of finance and retirement, as well as discuss trending topics that can impact your bottom line. We’ll break it all down. These discussions can help you make better informed decisions so you can make better financial choices and live the lifestyle you imagined for retirement. Laura Stover is a registered financial consultant and CEO of LS Wealth Management, as well as founder and owner of LS Tax, a consulting firm. She’s been featured in Forbes, CNBC and The Wall Street Journal. I’m Ron Stokes. Our topic for today is The Retirement Killer, the volatility from Forbes. Now, here are your hosts, Laura Stover along with certified financial planner, Michael Wallin.

Laura Stover:

Hello, hello, hello Michael. How are you today?

Michael Wallin:

I am doing. Hello, Laura. Great to be here with you today. I know you’ve got a great show planned for us, so looking forward to going through the material.

Laura Stover:

Well, I’ll tell you what. We had a fantastic webinar with a filled room. I don’t know if there’s a limit in the cyber world to an audience, but it was so good to connect with people. And if you want to stay on our list, make sure you go to redefiningwealth.info to stay in touch with us. We bring you basically the podcast live and we had some great speakers, good music. I mean, as much fun as you could have in a virtual webinar, but everyone has questions, Michael. And that’s why I like this topic because I think it’s important to a lot of people. We saw the beginning of the year, we’re already at the time of love in the season. You know, we’re in February around Valentine’s day and January had the jitters, the jitter bug. I’m in just that mood today from no sleep.

Laura Stover:

And I was at the gym very early this morning. So you don’t know what I’m going to say here on today’s show, but January began very volatile. And I know a lot of people have concerns. We are at what, seven and a half percent inflation. It’s still peaking. Unfortunately, it’s going to go higher. The average American family is paying on average $276 more a month right now. It is costing people more money to put food on the table, gas in the car. I can’t see this not evolving with the geopolitical concerns in terms of Russian troops, why would they have over a 100,000 there if they’re not going to do something? So let’s be realists here. They’re not afraid of our sanctions. They’re not afraid of doing what they want to do. And we know the price of oil is going to continue to escalate, which is going to translate to much higher gas prices coupled with the very, very high inflation, the highest we’ve seen in 40 years.

Laura Stover:

And then if we take all of that and mix it in with the Fed now aggressively, he’s going to start raising interest rates. It’s going to whack middle America every which way, upside down and all around. And that’s just part of the market’s reaction, I think, to all of this uncertainty and what it was reacting to in January. So our discussion today is about volatility. I think this is a timely discussion and actually some of the content came from some years ago. It’s relevant still today, because portfolio failure, meaning if you run out of money during retirement, that is directly related to volatility. And as volatility goes up, that expected failure rate of a portfolio taxed with making the withdrawal that you’re going to need for income, it rises almost exponentially. So unfortunately, I think Mike, too many retirees just don’t appreciate the link between portfolio volatility and running out of money while they’re still alive.

Laura Stover:

And now we kind of have these black swan events going on and over time, if people don’t have the right balance, we talk about this all of the time, and then maybe they’re taking more risk than what they realize. And it’s a really good time to examine volatility. So let’s just, as you would say, unpack this because a lot of people focus on expected average rates of return. They know the market goes out up, it goes down and sideways, but let’s put it into perspective. You’ve got to have volatility intact overall, when you are trying to protect your capital, nearing retirement, there’s a fine line having assets continue to grow, but managing the volatility.

Michael Wallin:

Well, I think you hit on it right there, Laura, with the emotional dynamics. So many individuals are looking at their overall portfolio as one bucket of money. But the emotional dynamic that really drives this is that underlying fear of outliving one’s funds, outliving one’s resources. That has become, and we’ve seen research over the last 10 years, that when these surveys are run, the number one fear, the number one concern of retirees is outliving their money. That is higher than death. They are more concerned about outliving their money than they are about actually dying. And so that coupled with recency bias often times gets individuals into an unbalanced portfolio. Over the last three years, we’ve seen 25% returns in the S&P 500. So when you’re looking at these exorbitant returns that are being driven, everybody all of a sudden starts believing that becomes the normal.

Michael Wallin:

And like last night when we were on the call and we had our research firm sharing a lot of this data, they were talking about what happened to the mindset that a 9% average rate of return was the standard. Now we’ve got individuals thinking that if they’re not making 25%, then the advisor’s doing something wrong. Well, the reality is that was abnormal, the 9% is what is normal. But we have to look at the probability, how much risk is being applied the portfolio? And then if we increase the amount of volatility, because low volatility is basically money under your bed in a box with zero risk, you’re not going to make anything, you’re not going to lose anything, but with inflation, you are going to lose buying power. So we’ve got to expose our money to some level of risk to outperform inflation, to keep up with that buying power in the future so we get into standard deviation.

Michael Wallin:

That’s a metrics that we look at and we start calculating to say, the more we risk, what is the increased failure rate upon that portfolio? So there’s a balance. And like you said, it’s really designing a plan that comes back, that divides the funds out into buckets. And those buckets, if it’s money you’re going to use in zero to 3%, our philosophy is reduce your amount of risk exposure there because you have less time for recovery. But over on the other side, if it’s money you’re not going to use for 15 years, you can absorb a larger amount of risk because you have a recovery time that’s built into that time horizon. So again, it’s having a plan and it’s also having a plan for your emotions.

Laura Stover:

So with that thought, now let’s break that down, unpack that. Almost all advisors define portfolio risk or volatility as you stated, with standard deviation. We get to use some of our big verbiage here today, Mikey, and without getting into that math, breaking this down for our followers and listeners, you can think of standard deviation as a relative risk rating. So lower standard deviation equals lower volatility or lower risk. Now in the absence of a perfect crystal ball, we have to guesstimate both future portfolio risk and returns based on past performance. We’re always looking in that rear view mirror. That’s the only gauge that we can really determine expectations around a portfolio. So using these guesstimates, we can forecast the probability of potential failure rates using a simple spread sheet simulation called a Monte Carlo Analysis. Now, this is common in our industry. It’s a very neat tool to help us evaluate.

Laura Stover:

And it’s talking about outcomes, probabilities, various possible strategies. And if you kind of compare this like any other computer tool, it’s subject to the garbage in and garbage out rule. So we just ask the computer to construct a random pool of numbers, approximating a given rate of return, a given standard deviation. And when we ask that computer to draw numbers from that pool randomly to simulate a single future theoretical type of return sequence, then we ask it to do it again like a thousand or 10,000 times to see what the final distribution of failure rates might look like. Even primitive laptops can do it in the blink of an eye. So why it’s important? Because the test using a pool of numbers with an average 10% rate of return, but then if you have a standard deviation of 10% or 15 or 20, and then you have to look at the withdrawal rate, that’s kind of what this article’s breaking down.

Laura Stover:

If you’re withdrawing 6% per year, but your standard deviations 10 or 15 or 20, if there’s no volatility, if there’s no volatility, then this story would always have a happy ending, right? But you could take out more than what most financial advisors deem prudent every year and your account would grow by about 4%. And you would never face the prospect of depleting the account or running out of money. That’s really kind of the crux of when we’re talking about standard deviation, we’re talking about what is the probability of your portfolios success or failure over time?

Laura Stover:

I really like to look at what’s called the beta, which is a measurement of risks. And I think the important thing from all of this verbiage Michael, people have to examine how much risk are you taking for the return that you need to be successful in retirement, or when you’re forced to take income out of the account, or you need the income on withdrawal rate. And this is where inputting this data into our life arc system, that is crucial because I don’t want to chance everything to a Monte Carlo simulation and just be a number in a computer system. That’s people’s livelihoods, that’s their retirement accounts. So let’s unpack what I just kind of explained there, because we’re talking about sustainability of people’s retirement accounts and the number they need to be successful. How much risk are you taking in the portfolio?

Michael Wallin:

Yeah, I mean, I think it’s a measurement. You know, we look at individuals out there that, and you’ve heard me say this so many times, it’s they live on the island of financial independence, and that’s a unique location for you to have your home. And if you’re out there and you’re living on that island of financial independence and you can buy a U.S. Treasury, which is the risk free rate of return, and it yields you enough income to be able to live the lifestyle that you want to live with no exposure of failure, no exposure. That’s a hundred percent probability of success.

Michael Wallin:

The reality is most people are not in that one-half of 1% of the population that can live there. And so as you start moving down that ladder, you start moving out of that neighborhood into the neighborhoods around it, or even into the state next door to it. You know, the further you get away from the island of financial independence, the more risk you have to have exposed onto your portfolio. And so as you look at that, there’s an acceptable level of failure. I happen to have worked for a company that in 2008, my 401k became not even a 201k, it didn’t become a 101k, it disappeared because the company I worked for at that time, absolutely imploded. Our stock price had went from $115, a share to $2.20 a share there about and so…

Laura Stover:

We won’t talk about the arrogant, ignorant and greedy company. People can figure what that synonym means.

Michael Wallin:

But you know, you get into those and I looked at my 401k, I don’t have the luxury of not having risk in my portfolio, even if I was conservative, I don’t have the luxury of being conservative. I had to be ultra aggressive because I had to try to make up time and time was something I could not dial back. And so, because of that, I’m exposed due to looking at that standard deviation. There’s a possibility that there’d be a 30% failure rate. Now, is that something that is palatable? It’s not something that I want, but I’m trying to achieve a growth number, an account value that I can then dial back my risk and it can then take me through those retirement years.

Michael Wallin:

But again, it comes into really identifying a plan, laying out that information, and then looking at your standard deviation, looking at your beta. Is the amount of risk, is the amount of failure possibility, is that palatable? And if it’s not, you really have to go back and look at your budget and say, this lifestyle that I’ve always dreamed of living, if that amount of risk is not acceptable to me, maybe I have to dial back my expectations. Maybe I have to put more money aside. Maybe I have to work two or three years longer. There are things that can happen. You’re not painted into a corner without any opportunities, but you have to build a plan with the highest probability of success.

Laura Stover:

Well, when we come back after the real quick break, I want to talk about why a 20% return you could still go broke in your portfolio, and how the 60/40 asset allocation of the past has really kind of become obsolete. And we’re going to break that all down when we come back. You’re listening to Retirement Talk, the Redefining Wealth show with Laura Stover and Michael Wallin.

Ron Stokes:

You’re listening to Retirement Talk with your hosts, Laura Stover and Michael Wallin. To learn more about how we can help you redefine your wealth, receive a complimentary copy of our guide on how to defend against the bear market, email info@lswealthmanagement.com if you’d like to make sure you’re on the right financial track and to take this a step further, go to redefiningwealth.info and schedule a 15 minute strategy review to talk more about your unique situation, redefiningwealth.info, that’s redefiningwealth.info. You’ll also be able to get access to today’s show notes. Now, back to Retirement Talk, the Redefining Wealth show with your host, Laura Stover.

Laura Stover:

So right before the quick little break there, I said, you could essentially make 20% and still lose dollars in your portfolio. Well, how has that happened? Because percentages and dollars are two different things. So let’s imagine we have two portfolios and the first year portfolio A, we’ll call it, gets 60%. Because people are chasing some of these meme stocks, AMC, maybe they’re into Cathie Wood stuff, whatever you like, Facebook, whatever the stock is, it returns 60%. You are a rock star. You can brag to your friends. And let’s just say, portfolio B, earns 30%. Mike, help me keep track of the numbers here. So 60%, 30%, well, obviously the 60% sounds like the way to go. Well, let’s just see, because this is about averages. So year two. Oh, you were great the first year, but now you’re 60%. You lost 40 the next year.

Laura Stover:

You’re not quite as smart as you thought, but you still came out all right. And the second portfolio B, we’re down 10. If we take the number 40 from 60, and 10 from 30, and we divide that over two years, the average return it was 20. And then the average return for both is what? 10%, am I doing my math right in my head here.

Michael Wallin:

That’s right.

Laura Stover:

Both portfolios have 10. Now let’s put a million dollars in each portfolio and you can write with a pencil and help me keep track of the math because I have no calculator at all in front of me here, doing this live. A million dollars in each portfolio. So the first year portfolio, we made 60% the first year. So that’s 1.6 million. Now year two in portfolio A, we lose 40%. So now our 1.6 million is a net of…

Michael Wallin:

960,000.

Laura Stover:

Okay. 960, keep that number. Now, portfolio B, we have 1.3 million because we made 30% year one, then year two, we lose 10% of 1.3 million. So our net dollars is…

Michael Wallin:

1,170,000.

Laura Stover:

Now what was portfolio A?

Michael Wallin:

960,000.

Laura Stover:

So divide over two years, both portfolios averaged 10% return, but which one has more dollars in it?

Michael Wallin:

Portfolio B.

Laura Stover:

And how many more dollars are in portfolio B than portfolio one, and they’re the same average return of 10?

Michael Wallin:

You are grossing an increase of $210,000 in portfolio B.

Laura Stover:

That’s my certified financial planner and I’m putting him to work the old fashioned way with pencil on paper. How much was that? $210,000 more in portfolio B. You sound like Einstein in their calculating all of the numbers. Thank you. But that’s what we’re talking about. That is the difference between success and failure in retirement. You can have two portfolios essentially with the same return, 10% was the same average return over the course of two years for both portfolios, but the lower volatility portfolio, you don’t have to have as big highs, but avoiding those lows, losses count more than gains. If this is a crucial component to the mythology and philosophy in terms of how we invest and what the goal is in terms of having a reasonable expectation in determining the return that you need to have to be successful. I cannot emphasize that enough. And I hope that simple calculation, we’ll put that in the show notes today so that you can see the math wrote out. And thanks for doing that on the spot, Michael.

Michael Wallin:

Oh, you’re welcome.

Laura Stover:

That amazingly. That’s huge.

Michael Wallin:

Well, it is. And you know, that’s on an account that an individual’s not taking money out of. You know, if we really want to show some really bad numbers, make that a qualified account for an individual that has forced RMDs and they’re taking their RMD out of an account that had a 40% drop. When you’re taking that, that is a triple compounding in reverse. And that’s what we typically see when individuals go into the retirement years and they stay in the accumulation mindset versus shifting to a preservation income mindset and they leave their income distribution coming out of an equity portfolio and we see a downdraft in the market. You get the triple compounding in reverse. And oftentimes that is irreparable. That is a situation we saw for a lot of individuals in 2000, 2001. We saw that again in 2008, and even for individuals in 2015, 2018, where we saw those downdrafts that were not as big as what we saw in 08 and 01, but if you’re adding an extra five, six, 7% loss in your portfolio on a 5% distribution, and then you throw a 7% inflation increase on expenditures.

Laura Stover:

Yeah.

Michael Wallin:

So your people are taking more money out of their portfolios. That is what we get into longevity risk and the probability of their portfolio lasting because of the way they’re structured, reduces greatly.

Laura Stover:

Well, you can have a fairly sizable nest egg in that analogy be invested wrong, and it’s not just adding more bonds. Bonds, how well did they do in 21 Michael? Bonds did terrible. I mean this was a bad year for bonds. 2019, they had glorious returns. And so that’s huge.

Michael Wallin:

Well, the bond, usually in the equity side of the market, of equity start contracting, we see some tightening, consumer confidence reducing, we see that money flow over to the bonds. But the problem that we’re seeing is bonds are leading the equities to the bottom of the pond. I mean, there’s not a solution there, and now that we’re even hearing that they’re getting so much more aggressive on this hawkish approach of what we’re going to do on interest rates. You know, instead of it being a 25 basis point increase, we’re hearing as much as a hundred basis points of increasing the yields right now. And if interest rates go up by that to offset inflation, that is going to impact families. That goes straight to the bottom dollar of what they have in disposable income.

Laura Stover:

That is exactly why the traditional 60/40 portfolio can bring massive losses. And one of our esteemed money managers I know was recently on CNBC and he discussed this because it’s typically static, 60% equity, 40% bonds. And as rising yields led by higher inflation expectations, that’s going to reduce the market price and consider any a hundred basis point increase in long term bond yields, that leads to about a 10% fall in the market price. That’s a very sharp loss. So investing for retirement, it’s crucial to building a nest egg that can provide financial security in your latter years. And unfortunately, many people who are investing are really just making a big mistake with the money they’re saving for the future. In fact, a recent research piece from Fidelity found around a quarter of all employees who are invested in workplace retirement accounts, they’re taking way more risk than they should.

Laura Stover:

But when you think about it, your dollar cost averaging, your employer is chipping in maybe a match or a percentage, so if the market goes down and you have a time horizon, that works, but you’ve got to change that mindset as you approach retirement or you’re in retirement. If you don’t, then you end up in the situation with the math that we just went through right out of the break, where you could have a good average return and see a big part of the dollars within the portfolio diminish. And let’s face it, on average people are living much, much longer today. This is why these risks we’ve identified, really six key risk for retirees.

Laura Stover:

And it’s essential to have a framework and a process to make sure there’s coordination for income, for taxes, for healthcare costs, for estate, for the liquidity that you’re going to need and for the investment management. And so many people just kind of get into products or they’re shifting into assets they think have less risk when the reality is it’s a static composite. There’s no risk off mechanisms built into the portfolio. And I think that’s just a crucial misstep still in this day and age, most people, that’s a new concept for a lot of people.

Michael Wallin:

Laura, I agree totally with you 60/40 portfolios, oftentimes clients come in and they’ll sit down and I’ll look at the constructs of the investment philosophy that they’ve currently been using or using for the last 10 years. And I calculate very quickly, how much money did you lose over the last 10 years with having 40% of your portfolio underperforming? And you know, when you look at that, it’s like running a race carrying a piano on your back, who wants to carry the weight of that. And I’m not saying that for some individuals out there, 60/40, over a long haul, if you are a strategic investor, a 60/40 probably is the right thing for you. But you know, if you look at tactical management, what we’re looking to do is skate to where the puck is going to be. We’re looking at probability and looking at momentum investing, and we don’t want 40% of our portfolio that is underperforming, or even when the equity markets are positive, we don’t want the bond portion of the portfolio to be negative.

Michael Wallin:

You know, it’s not even like they were complimenting and yielding a positive. A lot of these ETFs or these portfolios were yielding a negative return. And so it was actually counterproductive. So again, I think it begins with understanding how much rate of return do you need to have your portfolio to be successful throughout your retirement years, and then backing into how much exposure do you need to have out of the equity markets. And there’s a difference between the value investing and the growth investing. And that’s where I think a lot of the allocation and balance can take place, but also looking at these companies that pay good strong dividends, and there’s nothing wrong with a bond portfolio, as long as it is something that is complimentary.

Michael Wallin:

For high net worth individuals, the municipal bonds may be a great position because of their high tax bracket and we’re getting favorable tax provisions off of that. So there’re areas like you said, you have to look at all the facets of a person’s life. No one is a single dimension individual, it’s multidimensional. So you have to look at all of those aspects to make sure that you have a comprehensive plan that will give you the highest probability as you go through your retirement years. And if you’re working with somebody that is simply finding a way to get you into the market and they are not truly helping you understand the metrics behind your portfolios, it may be time to have a second opinion.

Laura Stover:

Well, absolutely and understand the amount of risk you’re taking and why. We offer what’s called a stress test. It’s just like it sounds, physically a person gets on a treadmill. I did this for my physical and I didn’t like it because she pushed me really hard, but that’s what we’re going to do. And we’re going to examine the portfolio. We’re going to look back over the last five years, three years, we’re not cherry picking times, but it’s a regression analysis that’s going to take all of the various data that we’ve had in the market and the economy over that course of time. And what is the draw down? What is the beta? What is the amount of risk you’re taking for the return that is being received? This is important information to understand at the very least, you’re going to have a more clear and better understanding of risk.

Laura Stover:

I think that’s something we do do a good job on, and that we take a lot of time explaining to people. Asset allocation is over 92.6%, as far as the success of the portfolio. There’re other tools, hedging tools, there’s other asset allocation that people often aren’t taking advantage of within the proper portfolio construction overall. But the most important thing, I mean that we covered were today Michael, you can have a 10% return and still lose money in your portfolio. It’s about the dollars and preserving the capital and having consistency of return that matters in retirement. You’re listening to Retirement Talk, if you would like a copy of the bear market report that we have, go to redefiningwealth.info and request the bear market report. And we’ll make sure we get that out to you or email info, I N F O info@lswealthmanagement.com

Ron Stokes:

Take advantage of a complimentary portfolio stress test. Find out how much risk you have in your portfolio. To determine the appropriate number you need to be successful, schedule a portfolio stress test by going to redefiningwealth.info. Click review, you can have this information in the comfort of your own home. Redefining Wealth is a registered trademark of LS Wealth Management. Take advantage of a complimentary plan, know where you stand regardless of the market, walk through the redefining wealth process and have a clear picture of the key risk you likely will face and achieve a deeper understanding of how to properly plan for these risks with the Redefining Wealth framework. Schedule a strategy session now by going to redefiningwealth.info and click schedule.

Ron Stokes:

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As we’ve seen in the past month, volatility is back in the market. Why are we seeing this volatility and what can we do to protect our retirement plan? We’ve seen some robust gains in the past few years, but that might soon be changing. With changes from the Fed, interest rate hikes, and geopolitical tension the market is likely to see more ups and downs.

In most cases, people aren’t great at making decisions under pressure, especially when it’s an emotional choice dealing with their own finances. This is the advantage of working with an advisor. You are working with someone that understands volatility and they can keep you level-headed when the market starts to turn. On today’s episode, we’ll explore ways you can protect yourself against a bear market through diversification, risk management, and more.

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Timestamps (show notes): 1:57 – What’s causing market volatility?

14:36 – Avoid emotional decision making

18:26 – What does it mean to diversify?

23:47 – Don’t get stuck on a loss

28:25 – Manage your risk and plan for opportunity

32:47 – Have an adaptive retirement plan

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Review the Transcript: Ron Stutts:

Welcome to Retirement Talk, the Redefining Wealth show, your source for financial information, specifically for pre-retirees and retirees. We are here each and every week to help you better navigate during these economic times. We’re here to discuss thoughts and ideas in the field of finance and retirement, as well as discuss trending topics that could impact your bottom line, we will break it all down. These discussions can help you make better informed decisions so you can make better financial choices and live the lifestyle you imagined for retirement. Laura Stover is a registered financial consultant and CEO of LS Wealth Management, as well as founder and owner of LS Tax, a consulting firm. She’s been featured in Forbes, CNBC and The Wall Street Journal. I’m Ron Stutts. Our topic for today is Volatility is Back, How to Protect Your Retirement Account from Kiplinger. Now, here are your hosts, Laura Stover, along with certified financial planner, Michael Wallin.

Laura Stover:

Well, January 2022, started the year like a big snowball effect, Michael, and we’ve had lots of snow across most of the country, but particularly here in the Northwest Ohio area. I think we had anywhere from 18 to 20 inches of snow, and even though I have someone that comes and helps plow my driveway and everything, I think I was out five or six times and I did a whole bottle of Advil. It was hard work. I just want to say hello. Hello. Hello. We did bring some important information. A couple shows back, Mike, I believe is at March 24th or March 12th until we have 12 hours of daylight. Do you remember, was it March 12th?

Michael Wallin:

I don’t remember. It is in March. I’m not certain on what day that was, but I know we are anxiously looking towards March so that we can get a little more sunshine, and fall out just a little bit from what this winter weather has been.

Laura Stover:

Well, I know you have ice in the Nashville area and the year started with a lot of volatility in the financial market. So that is what we want to address today. We’re featuring an article from Kiplinger called Volatility is Back. We want to talk about some of the reasons we’re seeing the volatility, I think that’s important to understand. What you can do as a pre-retiree or retiree or anybody for that matter, what you can do to protect your retirement account, because we’ve enjoyed some robust gains the last couple of years with the market. It’s been very rewarding, but people tend to get really nervous just with small corrections after they’ve been spoiled with such stellar double digit returns for a sustained period of time. It’s been a little bit of a bumpy roller coaster for a variety of reasons. Number one, the Fed, interest rates, geopolitical concerns, just to mention a few.

Laura Stover:

As I stated, we ended 2021 really at nearly an all time high in the S&P 500, but it experienced its worst month since March 2020, this January. We didn’t hit near the correction levels of March 2020, but we certainly saw some wild rides, particularly, Michael, the one Monday when the market declined intraday over 1100 points. That’s why people should not get excited during the intraday trades. There’s a lot of movement in the markets going on and it ended up doing a reversal and actually eked out a small positive the one Monday there in January. We’ve seen a little recovery since then, but I think it’s good practice to take stock during this time. If you found yourself being slightly nervous, or even if you feel you’re doing well. It is always a good practice in my view to take stock of your entire financial plan. What is your emotional barometer? See if you are positioned to endure potentially long periods of lower stock market returns.

Michael Wallin:

Laura, this morning, I spoke to a client that I think kind of summarizes exactly what you’re looking at here. We really went through a sequence of events. Volatility, the market’s going to go up, the market’s going to go down. We’re going to see sideways markets at times. The market is not something that we can tell you in the future exactly what it’s going to do. But what we look at when we’re looking at an overall strategy, we’re looking at a plan with the client, is for them to say, “What amount of my money needs to have a certain amount of risk to return the numbers that we want?” Because there’s going to be events that’s going to happen. You mentioned some of the agenda that has been pressed from the White House. We have seen Jerome Powell come out with the Federal Reserve and spoke both hawkishly and dovish.

Michael Wallin:

That’s what really drove down that January 24th numbers on the S&P that day, because there was some ambiguity that came out. That they sit there and said, “Well, are we going to rapidly try to start increasing the interest rates? Or are we going to do this more dovishly over a long period of time?” Because his words were so uncertain, it left individuals and the market wondering what’s going to happen, and we saw a major correction and that correction happened throughout. As you mentioned, we would come back up that then we would bob back under the water. Then, before the end of the day, we would find that there was some stabilizing in the market and we would come back above certain thresholds. But for our organization, we were very close to triggering looking at some of our algorithms to taking our clients from a risk on to a risk off position, simply because of that draw down.

Michael Wallin:

But again, the methodology worked just like it was supposed to because we stayed fully invested. We have seen about a two and a half percent increase back in the market this week. But as I told the client this morning, when you’re investing for the long term, you cannot be looking at what happens in a week to make your long term decisions. That you need to have a good strategy but if you find that those dips in the market causes you a little bit too much heartburn, you may have to dial it back and realize your risk tolerance level is not what you thought it was.

Laura Stover:

Well, isn’t that the truth. I think that wild intraday trading with the huge swings is more of an acid reflux thing, more than heartburn, because it’s just all over the place. The Fed, honestly, he was very ambiguous, as you stated. We’ve heard fairly conclusively, but it’s always subject to change. I mean, the bottom line, I think he’s a little uncertain with what he may or may not do, and it depends on economic conditions. So that’s essentially what his consensus was, and he cannot dictate with absolute certainty. A lot of it depends on job growth. It depends on some of these supply chain and bottleneck issues that are causing some aspect of the inflationary environment that we are in, passing over. Was it set 7-7.1% in December of 2021? So we’re seeing oil prices, $90 a barrel now, and that’s about the highest since 2014.

Laura Stover:

That sector incidentally has one of the few sectors that’s done very, very well recently. So people’s perceptions. It always comes down to perception, and you stated it exactly right. I think Warren Buffet has made, he talks about volatility and essentially if you can’t stomach it, you shouldn’t be investing at all, is the bottom line in terms of what Mr. Buffet has to say at about that. So short term intraday volatility is normal. It was long overdue and people’s perceptions are indeed what it comes down to Alliance, incidentally did a market perceptions study, Michael. They found that people are more worried that a big market crash is on the horizon than they’ve been all year.

Laura Stover:

So at the same time, nearly seven in 10 people, that’s about 69% say they are worried that the increase in COVID infections will cause another recession. So those concerns are really partially to blame and really where the impact of the market volatility on retirement security that worry that people have over inflation being very high, many believe is going to get at worse and affect their retirement plans. The study found that 78% of Americans expect inflation to get worse over the next year, and 69% think that it’s negatively going to impact their purchase power in the coming months. That’s fairly significant.

Michael Wallin:

Yeah. Some of those things that you’re looking at there, we see that negative side. I think it’s partly part of the American persona today is to always as good as things have been, we’re looking for that other foot to fall. But we had some great news came out this morning. One of the reasons that I’m not looking at a recession is that we just saw the 10 year yield come up to the highest point it’s been during the pandemic. Typically a recession has an inverted yield curve, and we are seeing the 10 year yield on the treasuries, very strong are increasing at this point. Another thing is we have jobs reports. Part of what happened on January 24th was that we were sitting there looking at what the volatility of happening in the market. We looked at what Jerome Powell was saying, but we also was hearing out of the White House this kind of the softening of the effect of where the White House was saying they didn’t expect the jobs report for this month to look good.

Michael Wallin:

They were saying, look at about 125,000 new jobs being created. Well, the report this morning came out with 467,000 new jobs were created, and that is tremendous. That’s a four times greater impact than what we were really expecting from what the White House was telling us. So there’s positive, and I think it’s so important that you’re not getting the news or off of one of the medias, whether it’s a TV site or you’re reading an article or you’re reading these things. You have to really look at the data sets and the data is not supporting a recession. The data is not supporting a major correction because we also have a trillion dollars that we have not released out of the treasury. We all saw the impact in 2021 of what happened when we released all of that extra capital into the market. We saw the market respond very favorably.

Michael Wallin:

We still have a trillion dollars sitting there. Many people may be familiar with Brian Wesbury. Brian Wesbury was doing an analysis the other day. He’s a chief economist for First Trust portfolios, and he was not being so bullish to think that the market was going to get to this level. But if you do the mathematics behind it, the market could expand all the way up to 6,100, where we are today and we’re sitting at about 44. As of recording today, we’re sitting in that 4,400 to 4,500 corridor on the S&P 500. So we have opportunity to grow. But the key thing is, like you said, look at your barometer. Don’t be so knee jerk reaction to move so quickly out of the market, because if you do, and then you try to get back in the market. That is that timing of the market that is emotionally driven, and that’s typically going to reduce a per person’s returns by two to 300 basis points a year. Compound that over a 15, 20 year period for your retirement, and that is substantial loss because individuals are being emotional.

Laura Stover:

If you’re very fearful at those times, then I think you need to, again, take a look at your barometer and your risk capacity. What amount of risk do you need to have, number one, to be successful? We’ve spoken about this on past shows. What do you need? What is your capacity for risk? What is your attitude, and if you are getting all in a tizzy every time the market has a bit of volatility? Because it’s going to happen. If you’re that nervous every time that happens, then I think you really need to reevaluate what you’re doing to begin with in the structure of your portfolio overall. Now, as you stated, Michael, yeah, the news headlines, people and individual investors, they kind of like a little bit clearer direction. Even if we managed to score a magical newspaper from a year in the future, we wouldn’t necessarily be able to invest well off the back of it because we’d need the money pages is definitely not just the news.

Laura Stover:

So some of the tips that we want to cover here on the show today, five in particular. Ways that you can cope with the ups, the downs and be better prepared when volatility does rare its ugly head. First one here, Mike, is don’t feed the beast. I like that verbiage. One of the things that we aren’t very good at is making decisions under pressure. I don’t think, some people do and have to be able to make decisions under pressure. I would say as advisors, certified fund analysts, people tend in hospital emergency rooms, you have someone coming in from a catastrophic accident. They follow protocols, they follow procedures, they follow rules to deal with crisis, and that’s the advantage of working with professional money management. Because fear brings excitement and anxiety, and a host of other emotions into the investing process at a time when they’re not welcome. If you look before 2022 gives our pulses cause to race, remember volatility really is a normal part of investing.

Michael Wallin:

Yeah. It’s a very interesting you say that because as clients come in, it’s often a phrase that they’ll say is, “Oh, I don’t want to see my portfolio do like it did in 2001 or 2002 or 2008,” and my question to them is, are you using the same strategy now? Have you not made any adjustments to your philosophy? Are you exposing yourself to the same kind of planning or lack of planning that you had at that time? Have you not made any behavioral changes? Because where we are today, you should not be feeding the beast. You should not have all of your assets in one bucket of money, looking at it from one approach that every dollar you have is being viewed as this is my money I’m depended up on this year or next year or the next year. You have got to tranche your money set, operate your money into different buckets.

Michael Wallin:

That way, when the market has volatility, it doesn’t affect you. Because if you’ve got money you’re going to be dependent upon for zero to three years. There should be very limited amount of volatility on that money. The counter of that is if you’ve got a bucket of money you’re not going to use for 15 years, well, you shouldn’t be concerned about whether the market goes up or down, because you’re not going to be dependent upon it for a long period of time. It’s the same thing when you were working 15 years from retirement, you probably weren’t sitting there worrying every day over what your 401k was doing. I think some of those emotional dynamics is to take a picture of what the market does over a longer period of time and say, has the market moved from bottom left to upper right over a longer period of time?

Michael Wallin:

If it’s consistently doing that, you should embed some of that philosophy in your approach. Don’t feed the beast. Don’t feed your fear, and be so concerned that you’re losing value. Like I told the client this morning, Laura, I said, “You haven’t sold off any shares. You own the same amount of shares. You’ve not lost any money. All you have is, right now, you’ve had a contraction on the price and when it expands back out, you’re going to have the same number of shares. And you’re either going to have the same value or it could be more, but it’s about trusting the process.

Laura Stover:

Absolutely. And not reacting rashly, take a step back, take a chill pill, I guess is the old term there, right? Does that date me in the eighties or nineties? Remember, this is what we all signed up for and help you to understand that now means you are less likely to rush into emotional decisions later. That’s really the key. Now, the next one here diversified, this certainly a overuse sentiment. Because people, I think don’t really understand what it means. How do you separate out your safe assets from your risk assets is really how I define diversification, and people really confuse diversification I believe with asset allocation. Asset allocations immensely important, it’s like 92.6%. I remember the books that I read. I remember numbers, 92.6% of how well your portfolio is allocated really is going to determine how well it does over time. You have to be diligent in that.

Laura Stover:

That’s why it’s important to have, in my view, money mangers responsible for those things. Because they provide all of the very deep layers of research, they have intellectual property in terms of how they go risk off, make an exit and rules to reenter and come back in. Your 401k plan is completely different than that type of money management. The idea when you’re investing in your 401k, I did a good show on this last week. I said that it was really a disaster. It was never intended to be the sole source of retirement income for individuals. You know what the elimination of pensions and set, when you’re dollar cost averaging and you have money going in. Yes. When things decline, you’re buying more share prices and that’s great, but you cannot continue with that same investment philosophy. Now, if you are nearing or in retirement, it becomes a whole different agenda in terms of dollars and percentages.

Laura Stover:

You also don’t want to hold investments. You want investments across different asset classes. That’s part of diversification. Understanding fixed income has many different cousins. It’s not all high grade corporate bonds. There’s many other types of asset classes that can help with yield and provide diversification. There can be cash. There can be tips. There can be real estate. There’s options based things that provide hedges in people’s portfolio. There’s structured notes. There is a whole tool chest of vehicles available, and being able to diversify across industries and national economies by holding investments in global facing companies or multiple companies in different countries and categories. There is many flavors of risk, but to understand diversification is best to focus on, I think specific versus systemic risk.

Laura Stover:

Anyhow, we don’t want to get too deep in the woods here with economics, but reducing your exposure to any particular stock or industry. You reduce your vulnerability to that unpredictability with problems that can occur and that certain companies can face. That’s really, really important. I still see people today very concentrated, even if they have a larger size portfolio, they really are taking much more risk than what they realize and what they really have to take.

Michael Wallin:

They’re still individuals that we are seeing that are invested into emerging markets. A lot of those emerging markets have had the shutdowns due to COVID. They can’t get goods and services imported in that their consumers need out of their citizens, that they need to have their quality of life. When you’re starting to look at that, I believe that you want to look at the countries that are opening up. But when you do have a risk, such as what COVID did with shutting down economies, there’s still people that are invested. Their advisors have never modified their positions, changed them out of it and that is an anchor dragging down their returns on their portfolio. Simply because those areas are being impacted due to the COVID dynamic. You talk about the United States having a supply chain issue. Some of these other countries are even greater impacted because of importing goods and services in.

Laura Stover:

Again, proper diversification, we’re spending a little more time on this one because I think it’s probably the most important of all of these five things people can do. Again, separating out assets. It’s not just, if you put more in safe money, where there’s more safety, what I would call a contractual guarantee, then you’re going to have a lower return. So there’s a fine balance. Markowitz won the Nobel Prize. He figured out that 50% bonds, 50% stocks has about the same risk as bonds but higher return, bonds can also be risky. A lot of people equate them as safe. They’re maybe safer, but not completely safe. So part of this overall diversification for income is what you really need to solve for, and then segmenting assets. That can make absolute sense and that is why having a written income plan, understanding these decisions through a process.

Laura Stover:

That’s why I created the Redefining Wealth Process. Also, not getting too distraught or sunk into. There’s a behavioral finance here, a loss, a good investor’s going to try to measure no matter what’s happening around the world in their portfolio, you don’t want to be sunk into the cost of the loss. Oh, I can’t do anything now. I’ve got to wait for it to come back. I mean, I hear that on the flip side and that sometimes can be an anchoring position. If it’s a dead horse, so to speak in the portfolio, sometimes you have to cut a short term loss if it makes sense to do so and make a change for the long picture overview.

Michael Wallin:

Yeah. Wayne Gretzky, famous hockey player said, “Skate to where the puck is going to be.” It’s a misnomer to think that, well, I went down, the stock price went down and I’ve got to wait until it comes back to its all time high before I can change. Well, if there’s another stock or another company, another position, another strategy that could make you have a quicker return on your money, then pivot. Because there’s no guarantees that any company is ever going to make it back to its all time high. As we’re recording this today, we’re seeing that Meta is having a major issue. Facebook is being impacted.

Laura Stover:

I hate that name. Why do they name it meta?

Michael Wallin:

We’ll cover that in another show. But Meta, it’s a technology term as it deals with websites and how they capture information about a person. Those are those little meta files that’s out on the internet that were there constantly capturing information about you.

Laura Stover:

We’re talking about Facebook for anyone that’s not familiar with Meta, it is Facebook.

Michael Wallin:

Yeah. There’s a major correction in that. So as we look at this, Laura, one of the things I think that you brought up that is so powerful here is as we look at the allocation, we look at where people are putting their money. But it goes back to not discounting any product right off the bat, have a comprehensive plan, a strategy that puts it together with an open mind of all financial products. Then, using those products that make the most sense to give you the highest probability of success is really that diversification. But I think diversification first comes with open mindedness on what are the options that’ll give me the highest probability.

Laura Stover:

Well, keeping those behavior economics in check, do not let your emotions be held ransom, so to speak. Having a balance on this, having a defined process and understanding the purpose of your portfolio, that is the groundwork that number one has to be achieved. Making sure there’s a coordination between income and tax and healthcare planning, estate planning and investment planning and enough liquidity in the portfolio. When it’s all tied in together, those are the key risk in one way shape or another that we’re all going to face. That’s the whole jigsaw puzzle to manage in retirement. You’re listening to Retirement Talk, the Redefining Well show with Laura Stover and Michael Wallin.

Ron Stutts:

You’re listening to Retirement Talk with your host, Laura Stover and Michael Wallin. To learn more about how we can help you redefine your wealth. Receive a complimentary copy of our guide on How to Defend Against the Bear Market, email info@lswealthmanagement.com, that’s info@lswealthmanagement.com. If you want to make sure you’re on the right financial track and take this a step further, go to redefiningwealth.info, schedule a 15 minute strategy review to talk more about your unique situation, redefiningwealth.info. You’ll also be able to get access to today’s show notes. Now, back Retirement Talk, the Redefining Wealth show with your host, Laura Stover.

Laura Stover:

So we’re talking about volatility, some things that you can do to put your risk gauge and perspective, and how to navigate your retirement portfolio during a little bit of a volatile year. 10% corrections are not uncommon. It was long overdue. They’re common every 15 to 19 months, and many of our research team does a lot of studies on this. A 10% correction is really nothing to get in a panic over, from our perspective, if you’ve aligned your portfolio properly to begin with. So managing risk is number four here, by managing risk, you can plan for opportunity, and that’s a good chance to finally build a position for the long term. A lot of price conscious, professional investors have a wishlist ready so that they can access any downturn, depress prices. They can quickly decide if it’s time to invest in something else or walk away.

Laura Stover:

It also applies in terms of stocks that you currently hold as well. Let’s go just a little deeper on this. We’re in favor of blending strategic and tactical management, diversifying by segmenting out this safe assets that you need for income with segmented assets that you have to have. It’s essential for growth and long term growth through the duration that one’s going to be in retirement. People are living much, much longer. If you haven’t look lately, things are costing a lot more money. As the old adage goes, not putting all of your eggs in one basket, not taking more risk than what’s necessary. It’s about risk adjusted return. Being smart with the risk that you’re taking in the portfolio, that’s a little bit to unpack. We haven’t said that word for a while, but we like a variety of things when it comes to the management style.

Laura Stover:

I like a lot of the concentrated stock portfolios. If you are someone looking for a lot of growth and have a long time horizon, or you have Roth IRAs to fund. Let’s talk about some of those focus beta, concentrated stock portfolios that can, I mean, those companies are going to do well. There’s a big story, do you want growth? Do you want value? Having the right mix is really, really important. Just like a chocolate chip cookie, right? It’s got to taste perfect. Then the ingredients have to be just right, I’m not a baker. So I got myself in trouble with this analogy. But having the right balance in the portfolio, being able to taper some of those concentrated stock portfolios with maybe taking risk off the table at the same time, that’s where we’re going with a blended approach.

Michael Wallin:

Yeah. A lot of those growth companies that we’re looking out that have performed exceptional over the years, and growth has by far outperformed value over this last 10 years. But that’s where you’re also going to get the greatest potential for negative volatility. So one of the things that as we look at volatility, volatility is not a negative or a bad thing per se. You want volatility because volatility is actually where you see opportunities and you get growth on it. It doesn’t always mean something negative. You’re taking advantage of volatility when you’re seeing the gains happening in your portfolio. But value, a value is a nice core platform to be in because if you’ve got a basket of say 30 to 50 stocks and they are good dividend paying stocks, you are receiving a share of that company’s profits being spread back out to each of its equity owners.

Michael Wallin:

When that happens, you’re able to kind of buffer some of that downdraft when you see that normal volatility, you see that drawback of that five, six, 7%. You’re seeing if a portfolio’s yielding you three, 3.5%, you’re not really seeing the overall impact. If that was a growth stock you would absorb all of the loss. So those are some things that I like to see, plus value based companies are companies that have been around much longer, they’re more established, they own market share. Where you’re seeing opportunities and growth there is where they’re either increasing on the service or the products that they’re offering to the consumer. But consumers have already shown confidence in those companies. So those are more of when you’re looking at investing, diversifying, as you’re saying inside of it. Look at what do you have in a value basket. Look at what you have in the growth basket. But if it’s growth, tilt that more towards those latter years where you’ve got a longer time for recovery.

Laura Stover:

As an investor, you should expect these bumps in the road, and spreading viruses, that’s very scary. Market fluctuation isn’t necessarily all negative. Volatility isn’t just markets dropping, its movement. Markets can and have moved down, but volatility means they can move up too. Again, it’s about having the right plan in place from the very get go, and adapting your plan and adjusting it, not just having a plan a few years ago and never adapting or making changes or adjusting. That’s why we want the Redefining Wealth Process, making sure that we’re adaptive with that plan and having a structure in place so that all parts of the plan are working together. You have to interrogate your stocks now. Now is a great time to evaluate your barometer. Remember, Warren Buffet, he’s always advocated that if you aren’t ready to see your portfolio drop, now he says 50%.

Laura Stover:

We like to keep things to maybe 10 or 15% on moneys you’re not going to be dependent upon today. But if you’re, according to Mr. Buffet, not ready to invest, if you’re not prepared to see some market movement. So you have to be able to not panic, write yourself a clear, concise reminder and a conversion of what you want and take a good look at what you’re comfortable with and really get a second opinion. You hear this on a lot of shows a lot of times, but truly, if it makes you a little nervous or if you’re wondering a little bit about some of the stuff that Michael and I are talking about. Go to redefiningwealth.info, take advantage of a 15 minute strategy review. You can also email info, I-N-F-O, info@lswealthmanagement.com, request the Volatility Bear Market handout that I have, that you can read up on that if you have a 401k and you may find some of the information helpful.

Ron Stutts:

Take advantage of a complimentary portfolio stress test, find out how much risk you have in your portfolio. Determine the appropriate number you need to be successful. Schedule a portfolio stress test by going to redefiningwealth.info, click Review. You can have this information in the comfort of your own home. Redefining Wealth is registered trademark of LS Wealth Management. Take advantage of a complimentary plan. Know where you stand regardless of the market. Walk through the Redefining Wealth Process and have a clear picture of the key risk you likely will face and achieve a deeper understanding of how to properly plan for these risks with the Redefining Wealth framework. Schedule a strategy session now by going to redefiningwealth.info and click Schedule. Redefining Wealth is a registered trademark of LS Wealth Management. Investing involves risk, including the potential loss of principle. Any references to protection, safety or lifetime income generally referred to fixed insurance products, never securities or investments.

Ron Stutts:

Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier. This show is intended for informational purposes only. It is not intended to use as the sole basis for a financial decisions nor should it be construed as advice designed to meet the particular needs of an individual situation. LS Wealth Management LLC is not permitted to offer and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the US government or any governmental agency. The information and opinions contained here and provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by LS Wealth Management LLC. Investment advisory services offered through Optimize Advisory services and SEC registered investment advisor, LS Wealth Management is a separate entity.

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For many of us a 401(k) is our primary saving tool for retirement. So, why is the 401(k) now being considered a disaster? Most people don’t have a lot of background in investing when they start saving, defaulting instead to the guidance of their employers. Originally developed to be a bonus in accordance with a pension, the 401(k) was not designed to be a stand-alone account to depend one’s retirement on. However, that’s where many people’s financial plans stand today.
Consequently, 401(k) plans were never analyzed as a replacement retirement vehicle, therefore, no one scrutinized the long-term practicality of using a 401(k) in this way. As we’ve seen more and more companies step away from pensions, we’ve also seen more investment in this type of account. For big companies and wall street the 401(k) was a big win, for the average American people, not so much. It’s been a poor substitute for a pension plan. On today’s episode, we’ll explore the history of the 401(k) and whether it can be considered a disastrous retirement vehicle.

The book mentioned in today’s show >> Wealth Unbroken

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https://podcasts.apple.com/us/podcast/retirement-talk-podcast-with-laura-stover/id571347188

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Timestamps (show notes): 1:11 – Your 401(k) in perspective
5:44 – How did the 401(k) provision start?
9:35 – Not designed to be a stand-alone
12:16 – Is this the right retirement vehicle?
14:44 – 401(k) is a pre-tax contribution plan
15:23 – Pension is a defined benefit plan
18:54 – Loss of wealth during the recession
20:14 – A 401(k) doesn’t ensure anything
21:15 – Market volatility and its impact on a 401(k)
24:09 – There is a lot of volatility in our current market
25:53 – Losses impact your overall lifetime wealth

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Review the Transcript: Ron Stutts: Welcome to Retirement Talk, the Redefining Wealth Show. Your source for financial information for pre-retirees and retirees. We’re here each and every week to help you better navigate during these economic times. We’re here to discuss thoughts and ideas in the field of finance and retirements as well as discuss trending topics that could impact your retirement. We will break it all down. These discussions can help you make better informed decisions so you can make better financial choices and live the lifestyle you imagined for retirement.

Laura Stover is a registered financial consultant and CEO of LS Wealth Management, as well as founder and owner of LS Tax, a consulting firm. She’s been featured in Forbes, CNBC, and The Wall Street Journal. I’m Ron Stutts. Our topic for today is the 401(k) has been a complete disaster for Americans. Based off the book Wealth Unbroken, we provide a background for the 401(k) and its inception, which is a key element to this topic for today’s show. Now, Laura, the 401(k) has been a primary savings tool for millions of people. Many of us will be relying on it. In fact, what is it? Are you saying it’s a disaster?

Laura Stover: Well, hey Ron. Hello. Hello. Hello and nice to have you back this week.

Ron Stutts: Its great to be with you.

Laura Stover: Michael is not with us today, but Ron, yes, this book is quite fascinating. A tax attorney, investment advisor, and I think a lot of us in the industry that really know more potentially as far as the history of the 401(k). It’s the primary savings tool today for most Americans. And I think to set the backdrop, as you stated in the intro, it’s important for listeners to understand the inception of the 401(k), because that contributes greatly to this contention that she outlines in the book Wealth Unbroken, and it starts around chapter 70 or page 70 or so in the book for anyone that’s interested.

But the 401(k) by default, as she states, it became a disaster and it’s become the primary savings tool for virtually every American and it’s a very important topic of discussion. So I think it’s relevant to do a little bit of review on the history of the 401(k) in order to properly put this into perspective. Now, when you began your first real job, Ron, your career, do you remember what did you know about retirement planning?

Ron Stutts: Well, that’s so long ago, I don’t even recall the name of the company that I was working for. But no, I knew absolutely nothing about 401(k)s.

Laura Stover: Most people have no prerequisite, no background. If you start investing younger or whatever age you are when you begin, we just naturally do these things. And our employers are kind of our guidance when we go to work for a company, aside from the salary you make and how much PTL you have. And your retirement plan, your health plan, those are very important components in terms of the benefits. So you’re not alone. Most people know zero, absolutely nothing about retirement when you begin your first job. Now we’re not taught about this in school for the most part, as far as retirement or financial topics or anything about building wealth. And believe it or not, the development of America’s main method for saving for retirement, the 401(k) indeed happened by accident. It is the Revenue Act of ’78. And that was really a corporate tax dodge.

Ron Stutts: Really? How so?

Laura Stover: Originally it was designed for highly compensated executives and it became then a permanent part of the IRC or the Internal Revenue Code with the Revenue Act of 1978. The 401(k), the provision and its birth, and it was a way to reduce modified, adjusted gross income for highly compensated executives on top of a golden parachute, the pension. Remember you could retire with a pension, a gold watch and-

Ron Stutts: Oh yeah, I remember what those were.

Laura Stover: And that’s part of why it’s a disaster. It was intended to be for people that would have access to professional money management initially. And it certainly was never tested or even thought of as a mainstay retirement vehicle.

Ron Stutts: Well, that’s a key point it seems. And the reference to professional money management, most people if not all, lack professional money management on this plan and any kind of plan for the most part, thus the industry integrated target date funds to try and address that problem. Or if it has a lot of company stock that could pose to be a problem, people really are not getting a high level of money management, cherry picking returns and making fun selections. Many times they don’t rebalance or possess the skills to make informed decisions on the allocations. But what you just stated with the 401(k) happening by accident, it’s a real tax situation. So let’s continue this story of the 401(k)’s inception. How did this all start?

Laura Stover: Well, some reports revealed that the law firm of Hughes Aircraft Corporation recommended they start to amend their savings plan to utilize the new 401(k) provision as early as 1978. I think I was in the eighth grade. But at first, this new tax provision was mostly ignored and most employers had savings plans that allowed employees to put after tax money and which was then matched by the employer. So we all know if you have a 401(k) and you want to know what your employer matches, so this is kind of the starting point. But in September of ’79, it all changed.

This man by the name of Ted Benna, he was a benefits consultant who worked for a small firm in Philadelphia, the Johnson Companies, not Johnson & Johnson, different Johnson. And they needed to come up with a way for a bank client to replace their cash bonuses with tax deferred profit sharing plans instead and one that employees wouldn’t be able to access until they left the bank’s employment.

So Benna had the idea to use the new 401(k) provision to allow employees to defer their cash bonus pre-tax with a corporate match. The bank client decided not to use the plan Benna developed because they didn’t want to implement something that was never used before. But it didn’t change the fact that many employers were looking for new ways to offer employee benefits and retirement plans. New funding reserve requirements had been mandated in the meantime under ERISA, which is the big entity that oversees 401(k) plans, it’s the Employee Retirement Income Security Act, to prevent employers from underfunding their employees’ pension plans. So companies essentially were looking for alternative ways to their defined benefit pension plans at that time and under the new law now had to be much more heavily funded.

So the bank’s refusal did not stop Benna from pioneering the way for his new plan. And he didn’t think it was fair for 401(k) plans to only be offered to highly paid corporate executives, but that they should be available in fact to everyone. So at this time then it became known as the Revenue Act of 1978. So now putting money aside that you were not accessing until you were either vested, we all know these terms today, or when you leave the company, terminate at a certain age, you would have to then pay taxes immediately. So that would be taxes on phantom income and the IRS would in fact honor the pledge that it wouldn’t be taxed until the funds are accessed.

Obviously, once that was rolled out and an actual retirement plan, it caught like wildfire. And if you remember back at that time, Ron you know this is a time when many corporations were severely underfunding their pensions. So on the defined benefits side, they were responsible for putting the money away, investing the funds, having enough to honor these pensions and make obligations and meet these obligations. So if you had the 401(k) provision come out, it basically was shifting the burden to the individual to one where they first had to elect to make the contribution. So you have to choose to participate in the plan. So they wanted to shift the burden here of responsibility more or less.

Ron Stutts: So then now you’re on your own. It’s not designed or meant to be an actual standalone sole retirement plan.

Laura Stover: Well, even Benna recounts how his plan was just meant to replace annual cash bonuses rather than the employee’s actual retirement plan. Ironically, that’s exactly what happened because the 401(k) was originally designed only to act as a bonus on top of a pension. No one looked or analyzed it as a replacement retirement vehicle. So consequently, no one did any due diligence, no one ran statistical analysis or performance simulations to verify and ensure the long term practicality of a 401(k) as a retirement plan vehicle when it was first introduced.

Now today, yet some of these rules have changed a little bit, we have to do means tests. I’m just saying that as a business owner, and I think there’s been a little more oversight introduced. But before that was decided and the way America changed essentially the way it retires, you’d have to calculate mathematical, statistical and scientific probabilities to determine whether a plan would adequately provide for your retirement.

And most of these places, testing and when the plan happens by accident, quite honestly, the modern way, the last as long as I can remember, what we do when we’re investing nowadays is these Monte Carlo simulations and we want to be able to run a lot of simulations. Most companies can run over 5,000 simulations simultaneously because you really want to test the longevity of a portfolio against the market highs and lows.

So instead of just putting money aside, enough funds to guarantee, or an actuarial’s eyes, they’re going through and saying, “This is how much you need to put away for a person this age with this sort of pension level benefits, 75% of your base or projected to be this much by the time you retire.” You have a lot of actuarial math going on into all of these requirements and they were severely underfunded.

So at that time, Congress is starting to really crack down and say, “You guys really need to start funding these pensions because you’re not going to be able to bring the money out of thin air.” A problem that we’re facing now at the state level, we have been for many years, it’s a crisis, the crisis of the pensions. And most companies had pensions, as you can recall from years ago and they’ve become fewer and farther between. And the goal of a pension is really a guaranteed paycheck. A 401(k) is a completely different concept.

So we can stop funding pensions. We can make the onus on them and we only have to match with some God awful small percentage when you look at a 401(k), compared to what the responsibility is, as far as a defined benefit side. So you can see it’s just a seesaw. It’s a change shift to define contribution. And when this happens and there’s no testing, there’s no analysis, there’s no white papers, there’s no mathematics, this vehicle happened by accident.

Ron Stutts: The 401(k).

Laura Stover: Really the vehicle that we should be leveraging, and we are leveraging as the mainstay American retirement vehicle for all of the country, throughout all job levels, throughout all cuts. Is this the right vehicle? Of course. Wall Street, do you think they like it? They’re a huge fan, because think about it, the concept of dollar cost averaging. Think of all the millions of workers that now all of a sudden have access to funnel money into Wall Street that, years ago, we’ve got to take our mindset back to when the late ’70s was a… Everyone has access today, Robin Hood, and all of these apps. It’s very easy for people that are unsophisticated investors to have access to things. But we’re looking at 1978, 1980, when this all started and ultimately gradually replacing pensions.

So if we go back to those timeframes, high net worth people had access to private banking and all of that. And I’m talking specifically just about main street America not directly investing in the market. Now Wall Street has massive million dollar cost averaging, and this is a way Wall Street just exploded to the size of the indexes that we are now. It’s a windfall street really for Wall Street and it’s a win for companies. And I think over time, certainly with what we’ve seen in terms of the retirement gap, the wealth gap, the savings gap, it is actually kind of a loser for the American people because the 401(k) was introduced to America. It changed the way most of us retire. And as a whole, the rise of the 401(k) has really led to the demise of the dinosaur in the room, which is the company pension.

Ron Stutts: So the 401(k) was a big winner for big companies and certainly for Wall Street, but definitely not for the American people. For listeners, not sure what the difference is. A 401(k) is a pre-tax defined contribution plan, right?

Laura Stover: Yeah. So that means that the employee contributes pre-tax dollars into a company sponsored investment account. Then these accounts are typically tied to market performance and cannot be touched. Most people are familiar with that 10% tax penalty until the milestone age of 59 and a half with some exceptions. But when withdrawals are made, those withdrawals are subject to taxes.

Ron Stutts: And a pension on the other hand is a defined benefit plan and is typically financed by the employer.

Laura Stover: And it guarantees an individual a retirement payment when the employee retires. The size of the pension typically depends on length of service, your seniority, earned income. And one of the main differences between the two plans is the 401(k)’s managed by the employee. The pension is managed by employer. So in the 1960s and ’70s, most Americans retired via corporate America’s private pension system. And as soon as this 401(k) was introduced, the percentage of workers covered by traditionally defined benefit pension plans had started to decrease.

Ron Stutts: In fact, it’s been declining consistently ever since then. In just over two decades, private sector pension coverage fell by over half.

Laura Stover: So Ron, in 1975, 87% of qualified private workforce employees were enrolled in a defined pension plan. In 1998, that number dropped to 12%. This data and those numbers represent the workforce as it was almost 20 years ago. That’s the most recent data reported based on the way pension enrollment was dropping in the late ’90s. So imagine what percentage of workers are enrolled in a defined, a benefit pension plan now. The demise of the pension if you think about it, pensions are mostly a thing of the past, kind of like the 8-track tape. How many people do you know that currently have a pension?

Ron Stutts: Not very many that’s for sure.

Laura Stover: Companies do still offer pension plans, but many of them offer lump some buyouts to reduce their long term cost exposure. So unless you know someone that worked for GM or another major American corporation with over 20 years or more, or the government, including those in federal and state and local levels, along with members of the military, you are probably coming up short. That’s because pensions have been steadily declining since the mid, I’d say mid 1980s.

Ron Stutts: To learn more about how we can help you redefine your wealth and make sure you’re on the right financial track, again, go to redefiningwealth.info, schedule a strategy review. To talk more about your unique situation and how we can help you. Redefiningwealth.info. Schedule a 15 minute strategy review with our team of experts. You’ll also be able to get access to today’s show notes. Now back to Retirement Talk, the Redefining Wealth Show with your host, Laura Stover. Laura, pensions are virtually disappearing as we just talked about, making way for the 401(k)’s total dominance as America’s main retirement vehicle since the early 1980s. So what’s the big deal?

Laura Stover: I am going to digress a little. I believe it was right after the recession of 2008 and 2009, which seems like a very distant event now, since all the pandemic and everything that we’ve been through the last couple of years. That’s kind of like a distant afterthought at the moment, but time magazine even did a big a cover story and I got a copy of it in my office. There were jokes at the time the 401(k) became a 201(k) because a lot of people lost a bulk of wealth at that time. It really delayed if they had just stepped into retirement, if they were a year away from retiring. If you recall some very bad things happened to some folks at that time. Simply put as a retirement strategy, pre-tax defined contribution plans like a 401(k), a 403(b), if you’re a teacher, typically they have 403(b)s, maybe you work at a hospital, so on have utterly failed because they’ve turned out to be a terrible substitute for the defined benefit pension plan.

Now I think one of the things that needs to be made clear in addition to Wealth Unbroken, the book that we’re kind of taking the research and some of the analysis from on this topic, and I think it’s very well done as a whole, but two different purposes. A pension really about income, guaranteed income. When you retire, every day is Saturday. So you want a paycheck for life when you retire. A 401(k) does not guarantee anything, right? It doesn’t guarantee a payment. Now they’ve made some provision since the ’08 crash in terms of how money market accounts are funded. And they’ve improved a little bit some of the menu choices, but these target date funds were supposed to help with people not being very savvy about… There’s a lack of investment choices within here.

So over the years, economists, analysis, mathematicians alike have criticized the 401(k) system as a means of retirement, but why are they failing? I think due to four main reasons. We are seeing since the first of the year now here in a brand new year, 2022, some market volatility. That is reason number one, emotional investing. Now yes, when the market goes down, when we’re talking volatility, buy low, sell high, of course. But when we are maybe nearing retirement, just like in 2008, if we have that sudden shift because no one has the crystal ball, we know the market is very moody. It’s kind of like trying to deal the manic person. You don’t know when it’s going up, when it’s going down. And so if you’re going to be stepping into retirement, that’s where it can be problematic if we seen anything reminiscent of a big dive like in ’08 or ’09.

I personally think this is a little blip. The market’s not comfortable with some of the FED uncertainty right now and interest rates. So he’s ambiguous market like certainty. So that’s where we’re seeing volatility. Emotional investing. Nine times out of 10 clients are their own worst enemy when it comes to the market and reacting to short term volatility. The retirement savings gap. Tax policy is probably the biggest one. Most of these… Now some companies are implementing Roth 401(k)s, but most people, most people have the tax deferred 401(k). You put money in now, you’re deferring it again off of your adjusted gross income, and you’re going to what? You’re going to pay to tax later when you take a distribution. Why is that problematic, Ron? We are in historically low tax brackets now, but are we going to stay there with the deficit where it’s at? Absolutely not. There’s no way.

Ron Stutts: Taxes are going to be much higher.

Laura Stover: Yeah. So right when you’re in retirement and you have to take that income now out of that tax deferred vehicle that maybe it’s grown and done well, you’re paying a much higher tax. It’s a domino effect because taxes come in many different flavors. So a lot of people do not take this into consideration. And I think the other reason that it’s problematic, there’s a loan provision on a 401(k), you should not borrow against your retirement account. The country as whole has been borrowing against our future generation’s wellbeing. It’s like stacking credit card debt on top of credit card debt. And just because the bank keeps finding you new lines and you can take out a couple different mortgage lines, is that usually a good idea?

Ron Stutts: No, not at all.

Laura Stover: No. And so I think there’s a few people that have some issues there controlling the urge. They see, oh, I’ve got 500,000 or a million in my 401(k). I’m going to tap in. And I want to buy the second house in Florida right now because real estate’s a good thing. I want to flip some houses. When the stock market is full of high volatility, it has been. That’s a little bit the new normal. Right now the S&P’s up substantially since the great recession of March 9th, 2009. But high volatility doesn’t only mean intense market increases, but it can have devastating market lows as well. If we look at the time period between 2000 and 2016, the S&P 500 returns averaged only 4.5%. The last two years, we’ve gotten accustomed to 15, 20, 30, 40% returns. But for the longest time, the market really was kind of average. And this was due to three consecutive years of losses in 2000, 2001, 2002, during the bursting of the dot-com bubble.

If you remember that, then we had the great recession, 2007 through 2009 with a 57% drop from the October 2007 peak. And then March 2009, we hit a bottom again. The S&P 500 has had only three consecutive years of losses, three times in our history. The great depression, during world war II, during the technology bubble at the turn of the millennium, and our new normal since the ’90s, there’s just been a lot of volatility. So uncharacteristically high highs, followed by extraordinary low lows. So these vast changes have a severe impact on our wealth and loss money is a real opportunity cost. For every dollar you lose, it’s a dollar that’s also no longer earning interest. Market guys tell you, “Buy and hold through volatile times,” that investing is a long term strategy and that your account will recover and grow back. Is that true?

Well, yes, if you hold long enough, your account value will eventually return to its former highs, but that is a function of your reduced balance continuing to grow and any additional funds you continue to invest. So during the great recession, it took the S&P 500 over four years to completely return to its pre-crash levels. So keep in mind, if you want to replicate this recovery in your own portfolio, you have to take no, I repeat, no portfolio withdrawals during that same time period. So these losses in your retirement impact your overall lifetime wealth building strategies. And then the best example I can give here. If you have a $100,000 loss at the age of 55, that’s equivalent to 168,948 at a retirement age of 66, assuming the 100,000 grew at 6% per year. So if a person loses 100,000, they die at the age of 88, the real dollars lost in wealth in that person’s lifetime is like 608,810, assuming the 100,000 loss would’ve grown on an average 6% over a 31 year time period.

So summing that up, emotionally, we buy high because everyone reacts to current successes of the market. We sell low because we get to the point we can’t afford to lose money. Then we take risk and we gamble hoping we’ll get our money back. According to the average investors’ long term growth rates, it’s obvious that the risk aren’t paying off, we aren’t saving enough. Pre-tax defined contribution plans are simply failing because people are not saving nearly enough. This lack of savings is called the retirement savings gap. Pensions were designed and controlled and funded by the employer. Contributing enough to fund the pension was the responsibility of the employer. But the 401(k)s, they were designed to be controlled by the individual contributor. That Ron, is part of the problem.

Ron Stutts: And these days you’re on your own, and that is a real problem for so many of us. I’ve certainly learned a lot by listening to what you had to say today, and I know that all of our listeners have as well. Remember, Redefining Wealth is a registered trademark of LS Wealth Management. Take advantage of a complimentary plan. Know where you stand regardless of the market. Walk through the Redefining Wealth process and have a clear picture of the key risks you likely will face and achieve a deeper understanding of how to properly plan for these risks with the Redefining Wealth framework. Schedule a strategy session now. All you have to do is go to redefiningwealth.info and click schedule. That’s redefiningwealth.info.

This show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual situation. LS Wealth Management LLC is not permitted to offer, and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the US government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by LS Wealth Management LLC. Investment advisory service is offered through Optivize Advisory Services, an SEC registered investment advisor. LS Wealth Management is a separate entity.

The post 90. Why Has the 401(k) Become a Disaster? appeared first on redefiningwealth.info.

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There is no perfect portfolio that will fit everyone’s needs. Instead, we must ask ourselves what the perfect portfolio looks like for our individual lives. The market is a risky endeavor, so you really need to understand how much volatility you are comfortable with and how much is necessary to support the longevity of your retirement. Not everyone will look at risk in the same way. You’ll need to think about the entire framework of your plan, updating it when necessary. In order to start building the perfect portfolio, experts suggest focusing on your principles, process, and path.

Do you need professional assistance to help with your plan? This will depend on what they bring to the table, professionals can certainly help prevent blind spots in your plan. Can you pinpoint your comfort zone when it comes to financial gains and losses? Doing so can certainly be difficult if you are used to making emotional decisions. On today’s episode, we’ll explore 7 principles that are necessary to consider when building your perfect portfolio.

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TIMESTAMPS (SHOW NOTES) 2:22 – Does the perfect portfolio exist?

3:56 – Finding the right amount of risk

5:23 – The checklist to the perfect portfolio

7:58 – Do you need professional assistance?

10:35 – What can go wrong without a professional?

13:41 – Can you pinpoint your financial comfort zone?

15:36 – Does everything in your portfolio have a defined purpose?

22:55 – What are your current and future financial needs?

27:32 – Collecting products off emotional viewpoints

30:35 – Having a thorough process not just a product

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Review the Transcript: Ron Stepp:

Welcome to Retirement Talk, the Redefining Wealth show. Work source for financial information for pre-retirees and retirees. We are here to help you better navigate during these economic times. We’re here to discuss thoughts and ideas in the field of finance and retirement, as well as discuss trending topics and the impact of major legislation that can impact your retirement. We will break it all down.

Ron Stepp:

These discussions can help you make better informed decisions so you can live the lifestyle you imagined and make better financial choices. Laura Stover is a registered financial consultant and CEO of LS Wealth Management, as well as founder and owner of LS Tax, a consulting firm.

Ron Stepp:

She’s been featured in Forbes, CNBC and The Wall Street Journal. I’m [Ron Stepp 00:00:58]. Our topic for today is seven principles to help you create your perfect portfolio from Barron’s. Now, here are your hosts, Laura Stover and certified financial planner, Michael Wallin.

Laura Stover:

Hello. Hello. Hello. And Michael Wallin, my co-host and good friend, certified financial planner, how are you today?

Michael Wallin:

I am doing wonderful. I’m probably a little bit like you. I am ready for old man winter to find a path down to the Key West and bring us a little bit warmer weather. How about you in Ohio?

Laura Stover:

Yes, absolutely. And before we started recording two days episode, we have determined, folks, some important information. And you heard it right here on the Retirement Talk podcast. Is it March 21st, Michael, that we determined daytime goes to 12 hours? So March 21, right? That’s our day to-

Michael Wallin:

March 21, 12 hours and nine minutes of sunshine. So, we will start tilting back towards some sunnier days and longer sunshine.

Laura Stover:

Well, that’s important to know because winter can become a wearing time of year, getting dark so soon. And I was all excited just the other day. I think we had 15 more minutes of daylight here where… I am in Northwest Ohio, and we’re talking to clients all across the country. And today, our show is focusing on an article from Barron’s, and it’s called basically The Perfect Portfolio. Does that even exist, the perfect portfolio?

Laura Stover:

And I think this conversation is so incumbent. We speak with clients weekly, who listen to the show. They’re taking advantage of that 15-minute strategy call. They have questions, and it’s been a bit tiresome, that’s why we’re looking forward to that March 21st date. Because we’ve been in this pandemic for… Is it two years now? Two and a half years?

Michael Wallin:

Two years and it feels like a decade.

Laura Stover:

Everyone has varying opinions on the pandemic and we’re not going to detour into a discussion on that. But it is wearing on a lot of people, because we still are going through, I think, some isolation in some cases. Other people are dealing with sickness. Other people are dealing with a little bit of an experience from the market being a bit rocky right now, as we are into 2022 and January has definitely started bumpy.

Laura Stover:

So, I think we have a timely discussion. And I’ve mentioned before, it’s study and true, there is no perfect portfolio. But what’s the perfect portfolio for you, is the question. Now, that’s a distinguishing factor. I’m going to let your philosophy start right there, Michael. There’s no perfect portfolio. What is a perfect portfolio, more or less? What is the perfect portfolio for you? And how do people want to frame that?

Michael Wallin:

Yeah, I believe it. You got to start with analysis. You have to really understand that you are exposing your assets to risk. The markets are a risky endeavor, and you’re going to expose your money to risk. And what you need to understand is, how much risk is actually necessary to make your portfolio perform in the way that you need it to, that allows you the highest probability of success that those assets will last not only today, but all the way throughout your retirement years, providing you the quality of life that you’ve come accustomed to enjoying, but without over risking those assets, not being there, and also structuring.

Michael Wallin:

How those assets are set up to make cash flow analysis so that you have the cash that you need. You’re not having to sell off at times when the market may not be favorable to you. But it begins and ends, as Stephen Covey always says, “Begin with the end in mind, and to understand and know what that end in mind is, you’ve got to start with the analysis.” And that’s part of what we do through the LS Wealth process, is really, as my grandfather would say, measure twice and cut once.

Laura Stover:

That’s good advice and that is so true. A lot of people’s perceptions though, they think they may have the perfect portfolio. Maybe it’s the perfect portfolio at a certain point in time, but maybe they have not made significant changes, like a couple years down the road, a year down the road even. That duration really has no end in sight as conditions change. Maybe they experienced a bad market downturn in 2008. So now, we are taking on new types of risk, like erosion of purchase power.

Laura Stover:

In 2008, even though we had a very volatile market situation, Michael, we did not have 7% inflation, in 2008. So, things change. So, according to the article, we need to incorporate the three P’s of investments, principles, process, and path. Are Redefining Wealth process covers the key risk that retirement age, and retirees, and investors as a whole need to be thinking about the entire framework?

Laura Stover:

And as we cover these principles on today’s show, I want to also provide some key takeaways that we think should be a part of your process and framework when it comes to your portfolio construction. So, some things to think about, and in order to begin introspectively thinking about out what your ideal portfolio looks like. Well, experts recommend going through a seven-step checklist amongst some other items. And some of the most noteworthy points to consider that we want to point out, determine, first and foremost.

Laura Stover:

Maybe you are one of those do-it-yourselfers. Maybe you’re very proactive with your own portfolio, and making the investment decisions, determining all of the aspects of it. Well, how much time, energy, and expertise do you really have? You may be an avid reader. You may listen to a lot of podcasts. You may be an information person. I like to think I’m always looking for coaches. I’m always striving to learn.

Laura Stover:

I don’t care what college degrees you had, maybe 15, 20 plus years ago. We need to continuously evolve and learn, because things do change over time. So, the first lesson here on those P’s, really regarding a perfect portfolio, do you need professional assistance? How does one determine that, Michael?

Michael Wallin:

When we’re looking at that professional assistance, I think the biggest thing is, does that professional… Are they able to bring you current research? One of the biggest differences… And I had this discussion this morning with a client that was asking me about some of the models that we have built, and how much influence did they have on the underlying holdings.

Michael Wallin:

And I asked, I said, “Well, where would you be receiving your research to make the proper due diligence and determination on asset allocation inside of it?” I said, “Now, if you’re using your local news, or you’re reading an article that you may have read in the newspaper or a periodical,” I said, “I want you to think about how old is that data by the time that you’re actually receiving it.”

Michael Wallin:

Because there’s a big difference between a firm, that actually has a research team or an independent practice like ourselves, that may have multiple research firms, that is providing us information as information is being created. And then, I told her, I said, “One of the things that you have to look at is, how fast is that information being provided to you?”

Michael Wallin:

Because when you look at hedge funds that have large computer systems, and they pay millions and millions and millions of dollars for these high speed systems that trade in nanoseconds, and then you’re reading a piece of information that, not only was the writer, they had to be exposed to it, but then they wrote the article, then it had to get published, and then a distribution place had to submit out the magazine and it ended up on a shelf at a grocery store that you just happened to buy.

Michael Wallin:

I said, “Did that take two weeks, three weeks, four weeks? How old is the information that you’re trying to react on when a hedge fund traded in nanoseconds?” And that’s like a lifetime difference. So, a lot of people are out there trying to make decisions on stale information. And that professional, if you’re interviewing a professional and you want to determine what they’re going to be able to help you do, first of all, start with where do they get their research?

Michael Wallin:

What makes their knowledge base or their application superior to what you’re doing? I think that’s the first step in evaluating what type of professional you want to use.

Laura Stover:

And some of those research firms, which also manage, at least on our platform, and many of these research firms are creators of products. They’re going to adapt products, algorithms based on the research because the market is not static composite, volatility changes, sectors change, some of the technical and fundamental analysis, they go into analyzing all of this. The whole approach.

Laura Stover:

So, this is where the innovation of different tools become available. And I’m… There’s a lot to keep up on. So, I give [inaudible 00:11:18] or some people that manage or self-manage relatively well, but I always see shortfalls at some point in that process.

Michael Wallin:

One of the things, Laura, last year, our family went on a little family vacation. And we decided we were going to do a little bit of white water rafting. And so, it mirrored a lot of what we do. We got into the water in an area which was very calm. And for those that are listening today, if you think about the stock market over the last 10 years, what has been your experience?

Michael Wallin:

It’s not been bad. There’s been a couple of contractions, but the last 10 years, you putting honey in and you’ve been making money, everything was pretty calm. And that was like when we started on the white water rafting. We’re starting down through there, and there’s eight of us in the boat, and we’ve got a guide that’s sitting on the back of the boat. And you really are sitting there thinking, “Hey, this guy’s dead weight. Why do we need this guy? I mean, we’re all paddling. We’re doing great.”

Michael Wallin:

Now, I’ll tell you when that guide earned his money, is in the event, when the water started getting rough and it became the white water, and we all put our paddles up in the boat, and then he guided the boat to safer landing. And I think a lot of times for investors, they find themselves in that same scenario. They look at, “Well, what’s the value? What’s the value add of this professional?”

Michael Wallin:

Well, anybody can paddle the boat in the calm water, it’s who can navigate you when it gets rough. And that’s what that professionals going to do through that research that is being provided to him.

Laura Stover:

I don’t know about you, but I would be thrilled if I was in a raft going down all those bumps, curves, white. I would want somebody that has experience. He does that multiple times through the day, with every type of person. He’s heard all of the screaming in the world, I’m sure. And someone with experience, who’s been down that path before. And they always say, when you do mountain climbing, you have a Sherpa, which is kind of similar to the person and the raft, the guide.

Laura Stover:

And they always say the most difficult part is not making it to the top of the mountain, but coming down is where most of the deaths occur. So, in addition to that thought process, analyzing your current and future financial needs, and being able to pinpoint your comfort zone when it comes to financial gains and losses, I think people have a very hard time not being emotional and objective.

Laura Stover:

How do you determine and pinpoint? You have to have a process that you agree to when it comes to financial gains and losses.

Michael Wallin:

To your point that you said earlier is, it has to change. I look at portfolios that we had constructed for clients, six years ago. We didn’t have a strong position and energy at that time, because we did not have a strong inflation rate. I mean, inflation has been non-existent for a period of time. But when we look at, in 2021, what is one of the strongest sectors of the market? And it was energy.

Michael Wallin:

So, your portfolio has to constantly being modified based upon, as Wayne Gretzky said, “You skate to where the puck is going to be.” In our line of business, we look at, where is momentum? Where is the dollar going? Where is the opportunity? And that’s where you should be restructuring. That’s why you need to have an investment committee that is constantly adjusting the underlying models that you’re using, that allows you the highest probability of success.

Michael Wallin:

And unfortunately, a lot of people go into a buy and hold strategy, and they could be in favor this quarter, but for the next 18 months, 24 months, they may find themselves that their investment strategy was underperforming because it did not move as momentum would direct the guidance. And that’s one of the biggest issues that I have with a strategic approach versus a tactical approach.

Laura Stover:

Well, lastly, on this part of the perfect portfolio discussion here. It talks about in the article, navigating that process. You can begin your path to the perfect portfolio in this phase and pinpoint your portfolio balance. I’m often talking about balance. We evaluate a lot clients who really the balance part is really drastically off. Nine times out of 10, I would say 85% to 90% of the time, that is the case.

Laura Stover:

They’ve had a fear in the past, so they’re heavily weighted too much to one type of whether it be fixed income, whether it be annuities, whether it be bonds or on the flip side, were they taking more risk than they should. And they’re too heavily correlated to the market. But the proper balance and the article highlights four levers, which can be utilized to help you reach your desired outcome, and it’s all about perspective.

Laura Stover:

The bottom line, you’ll benefit from being open to strategies and concepts. They may not be right for you today, but they could be in the future. And I think there’s a lot of weight in that perception and viewpoint. Maybe you’re not even appreciating if you’ve had this well thought out through a process, rather than a product peddler. Just at the moment, something sounds good with a feature, and now it’s in a part of your portfolio.

Laura Stover:

But really making sure there’s a framework in place where this can adapt and have the aspects to it over time with changes that need to occur, but having that proper framework and being able to really appreciate that down the road. Maybe you’re not taking income today, but you don’t just flip a switch and turn it on in a week. So, you have to do the big picture overview, so that everything has a defined purpose and a reason. Let’s expand on that thought process a little bit.

Michael Wallin:

Yeah. When you’re looking at retirement… Let’s just say you’re at that section or time period in your life, and everything becomes cash flow. Am I going to be able to have a sufficient amount of income? Whether it be from my investments, if I happen to be fortunate enough to have a pension, or if it’s through social security. Do I have enough cash flow to be able to make my monthly needs?

Michael Wallin:

Well, that’s great. As you start looking at your portfolio and you think, “Okay, I’ve got a sufficient amount coming in under today’s circumstances.” But what if the market changes? And we see a contraction in the market that moves by 20% or 30%, and your portfolio is impacted at equal pro rata share that… Well, are you able to go down to your utility company and say, “Hey, I’m sorry, but my portfolio reduced by 20%, so I need you to cut my bill by 20%”? That doesn’t happen.

Michael Wallin:

You can’t go to the grocery store and tell them, “Hey, cut my expenses by 20%. My portfolio isn’t doing as well as I thought.” And so, that’s one of the reasons we come in and really identify the assets. You have your growth-producing assets, and you have your income-producing assets. And we try our best to get as much of our income-producing assets out of the equity markets. We do not want those assets to be 100% dependent upon the equity side of the market because of volatility.

Michael Wallin:

But then, the same thing, we’re not going to treat our growth-producing assets in the same way we do our income-producing assets, because the growth needs to be able to have equity exposure, to be able to outpace inflation or keep up with inflation, so that we have longevity in our portfolios and we avoid the longevity risk that comes into it.

Michael Wallin:

But again, it goes back to identifying, doing a comprehensive review, knowing what we’re trying to solve for, then backing into the solution that gives you the highest probability of success.

Laura Stover:

Well, there’s some bright minds around this concept of the pursuit for the perfect portfolio, and Professor Andrew Lowe has a book. He’s a professor at the MIT Sloan School of Management. And along with his colleague, Stephen Foerster, a professor at Western University’s Ivey Business School, it’s titled, In Pursuit Of The Perfect Portfolio.

Laura Stover:

And 10 of the world’s most prominent figures in the finance world, including Harry Markowitz, Bill Sharpe, which we refer to a lot with the Sharpe Ratio in our industry, Bob Merton, Jack Bogle, just to mention a few. And Jack Bogle, of course, founder of Vanguard Funds. And what was he famous for? He made everyone conscientious about fees.

Laura Stover:

And I think one of the key things from these brilliant minds in terms of their contributions to the science of modern investing, each of them had a focus on a particular aspect of our financial lives. And we actually need all of these different perspectives and aspects when we’re looking at designing a perfect portfolio. And we need many different perspectives, as many as we can get quite honestly, because we never know what circumstances we’ll be in, and what particular ideas could be helpful.

Laura Stover:

We’re going to continue this discussion and dive into the seven investment principles that you need to have the perfect portfolio. All here on the Retirement Talk podcast.

Ron Stepp:

To learn more about how we can help you redefine your wealth and make sure you’re on the right financial track, again, go to redefiningwealth.info and schedule a strategy review, to talk more about your unique situation and how we can help you, redefiningwealth.info. You’ll also be able to get access to today’s show notes. Now, back to seven principles for a perfect portfolio with your host, Laura Stover and Michael Wallin.

Laura Stover:

If you would begin the process of creating your perfect portfolio with a checklist, I’m all about list, all about writing down goals this year. They say, if you actually write things down, not just even typing it on the notes in your iPhone, but actually writing it down, it may not be a reality now. But you write your goals down, something about that manifestation, maybe to think a grow rich book and those types of things, but it helps people to change their habits.

Laura Stover:

And when we wrap our minds around the portfolio construction, in terms of what is a perfect portfolio, you really have to cover principles of investing. And there’s seven in particular. The first is the way you think about what it is you’re really trying to accomplish? Are you trying to do it yourself, or do you need professional help? And we kind of address that in the first part of the show.

Laura Stover:

And the second would be, determining what your current and future financial needs are. That one, is one of the most important, I think, principles. You’ve got to determine where you are today, and what are you trying to achieve? That’s a measurement and a metric in everything that we do.

Michael Wallin:

Yeah. When you’re looking at the interdependency between your earning power or your cashflow, and your expenses, this is one of the reasons I really like to use the financial software life arc plan. Because what it does is, it is very budget centric. And once you start understanding what your income needs are, then you have the ability to back in to how much cashflow. And then, the most important aspect, is it will come in and actually tell you what rate of return is necessary to make your plan successful.

Michael Wallin:

And that magic number, Laura, I think, is critical. Because as we talk about the perfect portfolio, as we look at these things, so many people come in and they chase the market. Everything is recency bias. And a person will come in and say, well, I’m aggressive, or I’m conservative, or I’m moderate, whatever their emotional bias is, and the reality is, it really doesn’t matter what your emotional position is. It only matters to how much risk exposure to your money.

Michael Wallin:

Because if you don’t make enough money or you don’t expose your money to enough amount of risk, you have a shortfall, then you’re going to have failure in your retirement plan. And the best analysis that I could say about understanding current and financial needs is… Let’s just say we were flying out of Atlanta, Georgia, and we wanted to fly to Seattle, Washington. And so, we decided we were going to get on a plane. And the airline decided that they would put half the amount of fuel in the plane necessary to make that trip. Well, no matter-

Laura Stover:

I’m not going on that flight.

Michael Wallin:

Well, unfortunately, there’s a lot of people in the investment world that are, in portfolios, that are in that scenario. They get on that plane, and it takes off flying, and the result is, they’re going to land somewhere, maybe Denver, but they are not going to make it to their destination. Because if they tried to make it work, they’re going to crash.

Michael Wallin:

And it’s the same thing is, how much fuel is necessary to make that airline flight a success, is the same approach of how much risk in your investment portfolio do we need to have, to make sure that we have a safe landing in retirement? And that’s probably the best analysis that I can think of.

Laura Stover:

Well, the fourth principle here, thinking about your investment philosophy. What you believe about the markets? What do you believe about the market? I think that’s a big one. They’re all big ones. Maybe, at the time I made an investment decision, I went to… Maybe this was pre-COVID. Maybe I went to one of those great seminar presentations. The person speaking was a fabulous speaker. I really enjoyed it. And the steak and chicken was really good too.

Laura Stover:

But, part of what was said, maybe we were in a market correction, a little hiccup like we’re going through now. And I like that concept about not losing my principle, and participating in market gains. Boom! Do I move all of my investment philosophy now over to that concept, in and of itself, that may make some sense? Maybe it makes sense for the proper balance. We come back to balance again.

Laura Stover:

But that doesn’t necessarily mean we change where we have no planning or process behind… If we don’t have a process, we’re making emotional decisions too many times that are not in our best interest. And in and of itself, there may have been some truth in that program and what was said, but we’re taking it out of context.

Laura Stover:

And that’s the concern that I have oftentimes, that people are not really going through a thorough process, like with our proprietary life, our planning system. Because if you don’t have the cash flow worked out, if you don’t have the budget, if you don’t know the future expenses, if you don’t understand rate of return that you need to be successful, if you don’t have the risk-off built into that, and planning for the income, I believe income should always be guaranteed, there’s a mismatch far too often.

Laura Stover:

And people have collected products and things that sounded good at the time based on their emotional viewpoints at that time.

Michael Wallin:

Several years ago, and I don’t do this anymore, but when I’d have clients come in, my oldest daughter today, she used to have these puzzle boxes, Laura. And each of the puzzle pieces were the big pieces, and there was four pieces that you had put together. So it was the very elementary version of these puzzles. And we had four of these different puzzles at home, and I was going to throw them away and I thought, “No. I think I’ll take those to the office.”

Michael Wallin:

And what I would do is, clients would come in, I would set those four boxes up on the table there. And each of them have four pieces in them. And I’d say, “Now, take four pieces and let’s put a puzzle together.” Now, what would typically happen is, the client would come in and they would select one piece out of each of the four boxes.

Michael Wallin:

And I’d say, “Okay, put them together.” Well, sometimes they would fit together, sometimes they don’t. But even if they fit together, it didn’t give you the right picture. And then I would ask them, “Why did you take four pieces, one piece out of each box? Why didn’t you take all four pieces out of the same box?”

Michael Wallin:

And there’s two things that happens there. One, is that’s the same way as if we’re buying financial products that you think they fit together, they may or they may not, but they’re never going to give you that picture that you’re hoping for at the end of retirement, because it wasn’t the design.

Michael Wallin:

If you took all four out of one box, “Oh, here’s a beautiful picture of Cinderella.” But you may have one piece of Cinderella, and one out of Jasmine, and one out of the frog and at end of the day, they fit together, but it’s not the right picture. And it’s the same thing when you’re emotional, and you go out there and you go to the chicken dinner seminar, and you get sold because you heard on the news, the market’s down and you say, “Oh, I’ve got to abandon this.”

Michael Wallin:

The one thing that none of those professionals that you mentioned earlier, Harry Markowitz, Bogle, none of them would ever say abandon your process. The market expands and the market contracts. But overall, when you stop looking in the microscope and step back a little bit, the picture looks great. The market has went from the bottom left to the upper right. You just have to trust that the process that’s been put in place is going to get you to your destination.

Laura Stover:

And that indeed is part of having a process, a thorough process. Not just a product, not just a narrow perception. You have to be able to identify the characteristics of your degree of risk aversion. The magnitude of your current and future wealth, and your earnings power. How is that going to play out going forward. The magnitude of your current and future financial needs, and really what’s the investing environment and that all comes as part of a risk criteria.

Laura Stover:

And the income, and the spending, and the environment that you talked about. And the article beautifully lays out a lot of this. And a lot of people appreciate some complexity, but there’s so much available on Google these days, or an app like Robinhood, that’s so limited.

Laura Stover:

And what again were your garnering information. I think Google has eradicated the era of the encyclopedias, by all means. It has been a good technology, but maybe people are very much over using it now because we’re all becoming doctors, we’re all becoming attorneys. We are all experts, with the click of a button and all of the information that’s so accessible.

Laura Stover:

And so it becomes very complex and a little cloudy. Know where your source of information is coming from. And you have to have a process, and a plan that goes a little deeper, that peels back some of these layers, and making sure that the path, for instance, whether your portfolio should be equity dominated, or balanced, or roughly equal in stocks and bonds, and based on your willingness to take risk, you have to know through proper due diligence, what is your portfolio?

Laura Stover:

What does it need to look like? What’s best for you at the moment? And what’s best for you in the future? And how adaptive is it over time? You never step in the same river twice. You’re changing all of the time. And the way you get to where you need to go, it really actually matters. And where all just a product, not just our times, but our histories, our experiences.

Laura Stover:

And you need to take into account both the previous path that got you to where you are, as well as the future path that you’re going to take in order to try to reach your goal. Life is a path dependent on, therefore investing. And it has to be dependent upon a path as well. And we hope that you’ll take advantage of… We’d love to speak with you for a few moments, answer any questions that you may have.

Laura Stover:

You can go to redefiningwealth.info, schedule a call with Michael and myself in the convenience of your home or virtual meeting. We’re happy to answer any questions from the show. You can also obtain show notes and more information. Again, that’s redefiningwealth.info. And if you’d like a complementary copy of the Art of Wealth Management, reach out to us through redefiningwealth.info.

Ron Stepp:

Redefining Wealth is a register trademark of LS Wealth Management. Take advantage of a complimentary plan. Know where you stand regardless of the market. Walk through the Redefining Wealth process, and have a clear picture of the key risks you likely will face, and achieve a deeper understanding of how to properly plan for these risks with the Redefining Wealth framework.

Ron Stepp:

Schedule a strategy session now by going to redefiningwealth.info, and click schedule. That’s redefiningwealth.info, click schedule. Redefining Wealth is a registered trademark of LS Wealth Management. Investing involves risk, including the potential loss of principle. Any references to protection, safety, or lifetime income, generally referred to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier.

Ron Stepp:

This show is intended for informational purposes only. It is not intended to use as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. LS Wealth Management, LLC is not permitted to offer and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with, or endorsed by the US government or any governmental agency.

Ron Stepp:

The information and opinions contained herein provided by third parties, have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by LS Wealth Management, LLC. Investment advisory services offered through optimized advisory services and SEC registered investment advisor. LS Wealth Management is a separate entity.

The post 89. The 7 Principles of a Perfect Portfolio appeared first on redefiningwealth.info.

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Everyone has worries in life, especially when it comes to money. Does money have the power to change your life? It certainly can take care of our basic necessities. However, worrying too much can lead to questionable decision-making and unhealthy levels of stress. An obsession with your bank account may be a sign of deeper anxieties that money can’t solve. If you feel this way you are not alone, especially in today’s world.
People may react to returns in their portfolio by taking on more risk. But is this wise? It really depends on where you are in your retirement planning journey. Perhaps you had a bad experience in the market and now you are a conservative investor. Do you really know how much risk you are taking on though? We want to avoid making those emotional decisions when we can, that’s why having a financial advisor is so important. On today’s episode, join us as we discuss the correlation between money, happiness, and our financial future.

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TIMESTAMPS (SHOW NOTES) 1:31 – Are you worried about money?
6:34 – Why taking on more risk may be dangerous.
11:11 – What does it mean to be a conservative investor?
15:19 – Money helps us meet our survival needs.
21:44 – Basing happiness off of your bank account.
24:35 – When are fees worth their value?

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Review the Transcript: Ron:

Welcome to Retirement Talk, the redefining wealth ship. Your source for financial information for pre-retirees and retirees. We’re here to help you better navigate during these economic times. We’re here to discuss thoughts and ideas in the field of finance and retirement, as well as discuss trending topics. And the impact of major legislation that could impact your retirement. We will break it all down. These discussions can help you make better-informed decisions so you can live the lifestyle you imagine and make better financial choices. Laura Stover is a registered financial consultant and CEO of LS Wealth Management, as well as founder and owner of LS Tax, a consulting firm. She’s been featured in Forbes, CNBC, and The Wall Street Journal. I’m [Ron Stutz 00:00:56]. Our topic for today is what you’re really worried about when you’re worried about money. Now, here are your hosts, Laura Stover and certified financial planner, [Michael Whalen 00:01:06].

Laura Stover:

Hello. Hello. Hello. There are financial planners, then there are financial planners, and no one, and I mean, no one has the wisdom or experience. And I know a few smart ones and I’ll say, Michael, great to have you back this week. And you are my favorite certified financial planner. How are you doing, Michael?

Michael:

I am doing great. I thought my mom was given that intro there for a minute. I’m certainly glad to be back with you this week, Laura, and hated to be out for the last couple of weeks, but glad to be back in the [saddle 00:01:43].

Laura Stover:

Well, our featured article from this week is from The Atlantic. And I did a rather technical show last time with my [feeling 00:01:53] cohost [Ron Stutz 00:01:55], who is [stellar 00:01:56]. He’s part of the show here. You noticed his beautiful voice on the intro before we come in. And Ron and I had a very robust discussion last week about market volatility, the fed rate hikes, the quantitative easing because of the reduction of bond purchases, and really what to anticipate in 2022 in terms of investment trends. And if you want to get a copy of that show and you’re listening today, it was very insightful for the year ahead. If you have questions about volatility, go back and check out episode 87. You can hop on over to redefiningwealth.info for archives of all of the shows or go to wherever you hear us on Apple or Spotify, Alexa, there’s all, any platform you can imagine we should be there.

Laura Stover:

So today’s discussion, Michael, I think is a refreshing down-to-earth discussion for our listeners based on this article. And I believe sometimes the conversations really need to be simple. And how does it impact because how does it impact this as people, everyone has worries in life. Now I am blessed, week to week things come up, but I don’t think other than the pandemic. And there’s a lot of people, very worried, some don’t care, they’re going to live their life, but I do think it’s a more stressful time as a whole. You always have the exceptions out there, but I think as a whole, it’s a more stressful time for individuals, whether it’s health, life, relationships, and probably the only thing as important as those topics is the topic of money in terms of worries that people may have. And if you survey most people, the question this article poses is does money truly have the power to elevate your life?

Laura Stover:

Does money truly have the power to elevate your life? It certainly can take care of the most basic necessities. And we know with this 7% inflation, we’re not going to start hitting political aspects of this. We want the life impact, but that inflation, yes, I’m [feeling 00:04:10] it. Everybody’s [feeling 00:04:12] the inflation. But when we look at Maslow’s hierarchy of needs, if you haven’t heard of that before, it’s basically that pyramid of needs that we all have for food, shelter, and so on, and so forth. Money certainly has a limit on the amount of happiness it creates. And once you’ve met most of those basic needs, an obsession with your bank account may be hiding deeper anxieties.

Michael:

It’s very interesting on this topic because as we look at a lot of businesses, you see operational resilience. We hear that word a lot, but I think it also applies down to individuals, and there’s operations of your life, there’s different functions of your life. And then what level of resilience, you talk about the pandemic, one of the biggest issues that companies have had has been the resilience of employees going back to work, it’s operational resilience. And for individuals, as you stated, one of the biggest areas is money. And as we look at it, money is one of the things Americans worry about most in the world. And even in 2018, Laura, when the economy was expanding, everybody was looking at almost kind of the expansion that we saw in the 80s where all this growth was happening.

Michael:

Expansion of the markets were happening and consumer confidence was approaching all-time highs. There was a survey by life insurance company, Northwestern Mutual that found that more than half over 50% of Americans felt anxious or insecure about money sometimes quite often or all the time. That was really the three different degrees they looked at is it, sometimes are you worrying about money or insecure about it [inaudible 00:06:02] do you find yourself often, or is it all the time? And during the pandemic, another survey found that workers were almost five times more likely to worry about money than their health. As we saw companies being contracted and people starting to work from home, we saw layoffs that were happening. People were having to invade their retirement accounts or their bank accounts. They were truly displaying a discomfort and a lack of resilience against that operational change in their personal lives.

Laura Stover:

Well, it’s quite interesting. And indeed, I think, the pandemic, everyone’s so sick of it. There’s one thing we can all agree on. We all have to be so over it, but we’re not over it because there’s many people still getting sick. But I saw on Fox Business, recently, a report came out 55% of workers want to continue working from home. So it is definitely changing the landscape of how we interact with one another and how we do things. And I think it’s about perception to some degree. And when we’re looking at our, when we worry about money, it’s not necessarily a reflection of if your basic needs are being met, but in fact, it has alluded to in this article that it is an anxiety that reflects deeper concerns that money can’t solve and kind of flipping that perception because perception is if you have anxiety, it’s your perception about something, in my view, that, and I’m not a doctor, but that creates the anxiety, so people perceive things with their investments.

Laura Stover:

And we were speaking before we went on air today, you had a client, a sizable investment account, and this probably applies to many people. The discussion was, I want to take a little more risk with my account. The 2021 year ended up [what over 00:08:05] 27%, 28% with the S and P. So people will look at the numbers. Then they will look at their statements. They determine in their mind if they’re being successful by looking at the numbers only. And why is that a flaw? She didn’t know what she didn’t know. So she tells you, she wants to take more risk to have better returns, put that into perspective, and how there was really a disconnect there with what she thought she wanted.

Michael:

Absolutely. Well, one of the things that we do through LS Wealth in following our process is that we want to make sure that people begin with the end in mind. Do you have a comprehensive plan that holistically looks at all the areas of your life? And so once you take all of those puzzle pieces, so to say, and you put them together, you have a really good idea of what in the highest probability your retirement is going to look like. But what happens as individuals start receiving information, they start receiving anxiety, they start breaking the puzzle piece apart, and then they start fragmenting elements of the puzzle and then taking that fragment and modifying it. So it now displaces the whole comprehensive strategy, and basically, it’s creating a whole new plan. And so when you are looking at that and then having other people that come in and maybe not, they mean to give good advice, they mean to give you good recommendations, but if they do not take a comprehensive reflection or they may not be looking at the area of planning that you’re in.

Michael:

And again, to go back to what our previous shows we’ve talked about is you have your accumulation period of life. Then you have your preservation and income. And then finally, the third phase of the financial life cycle is distribution. So if you happen to be in retirement or approaching retirement, and you’re moving from accumulation into preservation, you got to be very mindful that the advice you’re taking is based upon the financial life cycle you’re in at the time and not getting advice, for instance, if you’re a retiree, don’t take advice from your children that are in a different phase in your life that is telling you how they invest, because it’s completely different for the goals, the concerns, the desires that what you’re looking for in retirement, in most cases.

Michael:

So those are the things that, what we look at, make sure that you don’t fragment back out your plan. Because like we mentioned earlier before this call, the client that I spoke with, I had started fragmenting the approach, and had they been left on that strategy, not looking at all of their assets comprehensively, they would have a shortfall due to rising inflation. They are not going to have the cash flow means to offset future expenses, 10, 15 years down the road in retirement, because they have now diverted their allocation process.

Laura Stover:

So the redefining wealth process that I created some time back because I saw for pre-retirees, retirees a lot of these risk that we are all going to face. So many people do have fragmented financial planning, or they’re looking at everything at face value. And this is not necessarily a topic that is always black and white, numbers are black and white, math, your returns, percentage returns are black and white, but that’s very different from dollars and preservation. And so let’s continue developing this part of the conversation a little further. I think it’s very important when clients want to be conservative. Their definition that they have been taught means you reduce equity, you invest more in bonds. If you want to be conservative, you either have cash or funds at the bank, or you have a heavy bond portfolio.

Laura Stover:

What did we see this past year because of rising interest rates and that inverse relationship with interest rates and bond rates, if you are a ultra-conservative, maybe you had a bad experience some years ago with a brokerage account, then [inaudible 00:12:31] came along. Now, you’re going the other extreme thinking that you are being ultimately very, very secure and safe with your decisions, all municipal bonds or various types of bonds. Why is there such a disconnect with the word conservative and what people perceive as safe really often in times when we evaluate the portfolios is not as safe as they perceive, or if they’re not just all bond heavy, they are taking way more risk than necessary. We’ve had this conversation with clients recently, way more risk than necessary than what they need at this point in time in their life.

Michael:

Well, I believe the domino that really sets that in motion starts with the consumer. So for those that are listening to the show, I would advise two things. One, have the trust, find that trusted advisor that will do the comprehensive planning for you, and allow that individual to give you that guidance. And in two ways if you’re out there and you say, “well, I’ve got someone that is working with me, or this firm represents me.” Are they, salespeople? Have you narrowed their ability to help you down to you buying products from them? Or are you truly allowing them to do the full capabilities of their job, which is to recommend, do analysis, make the recommendations and truly be an advisor? Because a lot of times, Laura, as we know, we’ll meet with prospects and clients and they really, they’re asking us, well, what are you going to sell me?

Michael:

Well, we don’t sell anything. That’s not what we do. And when it begins that way, I think it’s the establishment of the relationship and the rapport, but really having an understanding of what is my role that I can provide to you. And the second part of that is for the consumer to truly disclose all of the resources that they have, met with the client the other day, we build a plan, and then come to find out. They said, well, I’ve got another account over here, it’s a half a million dollars.

Michael:

Well, the strategy that we put together for them, would’ve been completely different had we known there was another half a million dollar account that needed to be in consideration. So I think it begins with the consumer because that’s what then leads the advisor into identifying what are the resources that you’ve told me about. And then what amount of risk exposure do I need to have on those monies to give you the highest probability of success? So if you narrow my ability, you paint me in a corner of what I can do for you, or you don’t fully disclose what your resource are, it makes it very difficult to give you the best retirement plan. And that’s part of what we’re seeing the new regulations looking at as well.

Laura Stover:

Well, there’s a lot of changes that many people are not aware of with the SECURE Act, if they’ve purchased annuities in the past with some carriers executing that 10-year rule now. I think this is a vitally important process to go through. Our process, quite frankly, can be detailed sometimes. Maybe we’re even told we’re too detailed, but that’s the way as a fiduciary based firm, we have to be very detailed with every aspect of knowing the client, and having that 15-minute strategy session can be so impactful because as the old saying goes, you don’t know what you don’t know. And worry has a nearly infinite ability to make our lives worse. There’s plenty to worry about. And in the 1948 book, How to Stop Worrying and Start Living. One of my favorite authors, Dale Carnegie wrote those who do not know how to fight, worry, die young.

Laura Stover:

The data supports this claim and our featured article today states that researchers have found that psychological distress from sources, including worry, is associated with early mortality. Daily worrying can lead to clinical anxiety, Michael, depression, physical ailments, such as lower back pain, breathing difficulty, stomach pains. By contrast, money has only a limited power to make our lives better. I think these basically saying in this article, I mean, obviously, money can make things more secure. It can bring us some temporary happiness, but it’s not the ultimate goal to happiness. Abraham Maslow believed that people tend to focus on meeting their needs in a particular order of urgency. We start with survival needs such as food, shelter, safety. Once these have been met, then we turn our attention to social and emotional needs such as love and belonging. Finally, we focus on higher-order needs, such as self-actualization and transcendence. In other words, looking for life’s meaning.

Michael:

And of those three levels, Laura, money is only truly helpful in the first one. When we’re really looking at what is the value and what does money do for us, it’s the first, it’s looking at that survival needs such as food, shelter, and safety. Many economists often find that well-being doesn’t improve much, once a person reaches the relative modest financial means that meets those goals. The middle needs of love and belonging, family, friends, romance can’t be met with money, and pursuing money with too much gusto can even cause people to neglect those relationships. So when that gets so money-focused-

Laura Stover:

Obsessed.

Michael:

They are obsessed. I used to work with a guy that his license tags and this was back in my retail days before college, before getting into it, his license tag said into money. That was his license tag. And I thought that was just so shallow and so narrow that he was so focused on everything in his life was about making money. And as you’re looking to build friends, those personalities, aren’t really the ones that attract people. So focusing too much on money is actively opposed to Maslow’s highest level needs because doing so can lead people into a trap what the researchers call financial contingency of self-worth. And we all know those type of individuals that their whole self-actualization is based upon what amount of income they make. And that’s a really, when you define yourself [if 00:19:07] only thing that you can define is how much money you make, that’s really not a good fulfillment or what I would call that you’ve found your life’s meaning when your only line of your definition is what your income level is.

Laura Stover:

Today’s conversations. And many of the gurus out there, the 10Xers, which I love some of the concepts, and we were having a private conversation about this about a week ago, I think Michael. I think there’s some good truth to some of that, but when it becomes the obsession, and that’s basically what we’re saying here today, it does not fulfill some of the most meaningful things in life. It’s not all about, as the article is alluding to, your net worth. Do you have a true jet? Do you have two jets? Do you have the helicopter on top of the two jets? And putting things into perspective, we’ve made a lot of millionaires.

Laura Stover:

I give red roses to clients that have become millionaires, and it’s all about growing and making sure that a financial plan is in place because so many people, as you alluded to, have products, but not a plan, but it all embraces the redefining wealth process income, how that connects into the healthcare, escalating cost and protecting some of these assets that we’ve accumulated and worked for many years and sacrifice to obtain, missing some things maybe with the kids through the years to build our nest egg, to someday be able to retire, having the right type of investment plan, the [estate 00:20:42] plan so that when we pass from here, that our fortunes are passing in the most tax-efficient manner to our beneficiaries and having a tax plan.

Laura Stover:

Today, so many advisors only focus on the investment component and no tax component is even being discussed with the client. So if you’re a millionaire and you’re still worried about money, you clearly do not have a real financial planner. There’s a lack of understanding and perspective as we’ve discussed. You are listening to Retirement Talk with Laura Stover and [Michael Whalen 00:21:17], we’ll be right back.

Ron:

To learn more about how we can help you redefine your wealth and make sure you are on the right financial track. Again, go to redefiningwealth.info and schedule a strategy review to talk more about your unique situation and how we can help you. Once again, that’s redefiningwealth.info. It’ll also be given access to today’s show notes. Here, once again, are your hosts Laura Stover and [Michael Whalen 00:21:43].

Laura Stover:

Not surprisingly basing self-image on your bank account can lead to unhappiness. In a 2020 study, [Ashley Willens 00:21:56] ask four authors, a sample of questions of 345 adults to react to statements such as my self-esteem is influenced by how much money I make. And I felt bad about myself when I feel like I don’t make enough money. Those who agreed were more likely to be lonely, socially disconnected. They also not surprisingly spent more time working alone than average. What do you think about that study, Mike?

Michael:

I think it’s sad. I think it’s truly sad. And we come across individuals like this quite often. I had one of a client several years ago that they were approaching their mid-70s, had a net worth of approaching $5 million. And there was a disconnect between the husband and wife. The husband was all about making more money, had never really left the accumulation phase of life, and was all about making money. But every time the conversation turned to her, all she cared about was spending quality time together. And he would not really, he would not spend money for them to travel and vacation and do the things that needed to be done, because he was so focused on continuing to make money on that [inaudible 00:23:17] just was really this obsession. Unfortunately, she passed away. And then later on now he’s sitting out there with the $5 million and was like, “well, what am I going to do with this?”

Michael:

Part of the LS Wealth process is we start looking at people’s money as we look at the tranches of when are you going to need this money? And if you’ve got, and you find that you have a sizable amount of money that is over in a tranche that is really going to be left to the kids, why are you taking so much risk on the other elements of the portfolio, if you have already got more money than you will ever spend in life, why are you still applying this level of risk to your portfolio that is unnecessary to make your plans successful. Really, it’s time to modify and change your approach and create the greatest wealth transfer to the next generation if that’s what’s important. But again, it’s this mentality of my self-esteem is influenced by how much money I make. At some point, you have to leave accumulation and realize where you are today or diversify your approach and really look more at creating the most effective and efficient transfer of wealth in retirement.

Laura Stover:

And I think this also goes to perception. I might be digressing slightly, but sometimes very wealthy individuals, [now 00:24:46], they look at fees. Now, if you have the net worth of Warren Buffett, and if he’s even offering to be your advisor, now he may know a thing or two about money. And I certainly wouldn’t shy away from the opportunity to work with Warren, Warren if you’re listening to the show, give me a call.

Laura Stover:

But in 2008, if he was free as an advisor to you, Michael, or anybody for that matter, and he’s investing your money for free, but you lose 50%. Most people, if he loses 50%, he’s not going to be happy, but he’s certainly not going to go hungry. He’s still a very wealthy individual, most middle class or upper-middle class, or even multimillionaires, they lose 50% of their portfolio that really defines their life. And they do not have the means or time horizon to make that back. So when we solely focus on fees, we believe fees are very important to have a comprehensive concept around that. It’s important to understand and know what your fees are, but if you disproportionately focus on that and you have a buy and hold portfolio that can lose too much, 30%, 40% or more, sometimes the fee is worth its value if you have risk-off built into the overall plan.

Michael:

I think Laura, one of the things kind of is the, there’s a statement out there that says, in the absence of getting a return or the absence of value, price really starts mattering. And when it comes to fees and I think it’s very important as a person looks at their overall returns, if you’re paying 4% in fees and the person’s getting you 30%, 40%, 50% returns, is it worth 3% or 4% or 5%, absolutely. But if you’re paying 1% and somebody’s losing your money, then they’re not getting you any value. They’re not worth the 1%. So I think oftentimes clients put too much focus on what the fee is and not really applying or taking a look at what the fee is against what should I expect, what am I going to get for the value or the price that I’m paying, am I getting a value that is worth it?

Michael:

And then sometimes individuals go out there and they’re so worried about the loss of money that they’re persuaded by individuals that are salespeople that are there to simply sell a product, could be an annuity, could be life insurance could be a mutual fund, could be an ETF, whatever that tool is, but they’re making a commission and it really needs to be looking at, are you fragmenting your plan, again, going back to what we talked about in the first half of the show, are you fragmenting your plan because of a lack of [expense 00:27:44], but in the lack of [expense 00:27:45], you’re also losing the value, the return value of those assets, which is going to impact you and cause you not to have enough assets for cashflow in your retirement years.

Laura Stover:

Great discussion today. And I think really assessing your life circumstances, very honestly, that you’ll find that you’ve passed through a zone may be in your life where you are now, are you still trying to get out of debt or perhaps your parents have always put a lot of pressure on you to succeed financially, or you tend to be insecure about your self worth and rely a lot on social comparison. One way or another, you may be measuring yourself in money and implicitly hoping that at some point you’ll be expensive enough to earn others love and respect. And your instincts may be telling you to earn more, more, more, more in order to find peace and satisfaction while your instincts are lying. And you could get much happier by reassessing your priorities. If you would like to speak with Michael and myself, go to redefiningwealth.info. You can schedule 15-minute strategy review in the comfort of your home. Thank you for joining us today, as always have a blessed week

Ron:

Redefining Wealth is a registered trademark of LS Wealth Management, take advantage of a complimentary plan. Know where you stand regardless of the market, walk through the redefining wealth process and have a clear picture of the key risk you likely will face, and achieve a deeper understanding of how to properly plan for those risks with a redefining wealth framework. Schedule a strategy session now, go to redefiningwealth.info, and click schedule. That’s redefiningwealth.info, click schedule. Redefining Wealth is a registered trademark of LS Wealth Management, investing involves risk, including the potential loss of principle, any references to protection, safety, or lifetime income generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims-paying abilities of the issuing carrier. This show is intended for informational purposes only. It is not intended to be used as a sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual situation.

Ron:

LS wealth management LLC is not permitted to [offer 00:30:11] and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the US government or any governmental agency. The information and opinions contained [herein 00:30:22] provided by third parties have been obtained from sources, believed to be reliable, but accuracy and completeness cannot be guaranteed by LS Wealth Management LLC. Investment advisory service is offered through Optimized Advisory Services, an SEC-registered investment advisor, LS Wealth Management is a separate entity.

The post 88. What You’re Really Worried About When You’re Worried About Money appeared first on redefiningwealth.info.

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As we are settling into the new year, a lot of economic movement is already happening. The markets are off to a rocky start. We were probably a little spoiled in 2021, especially with the S&P ending the year a little over 28%. Now we are going through an adjustment period. So, what can investors expect in 2022? As a result of supply chain shortages and subsequent inflation, we’ll probably be seeing higher interest rates.

Inflation is going to get worse before it gets better. Furthermore, COVID could still play a big impact on investments in the new year. We just don’t know what the future holds. Managing volatility will be crucial to your long-term retirement success. On today’s episode, we’ll take a deep dive into the investment outlook for 2022 and what you can do to keep your retirement plan on track.

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https://podcasts.apple.com/us/podcast/retirement-talk-podcast-with-laura-stover/id571347188

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Schedule a Review: https://redefiningwealth.info/schedule/

TIMESTAMPS (SHOW NOTES) 2:34 – The fed chair has made some new announcements

5:40 – What interest rate hikes will we see in 2022?

9:06 – Purchases made by the central bank

11:29 – The S&P has doubled since 2020

13:00 – Is the market due for a correction?

15:23 – Being hedged in our portfolios

16:36 – Who pays the annual interest charge on the national debt?

18:24 – Will the markets calm down at the end of the month?

21:12 – What investment trends should we look out for?

22:52 – Stocks do well when the fed keeps rates low

25:30 – Inflation is going to get worse before it gets better

28:08 – Should people invest in big tech in 2022?

32:50 – What can we expect with midterm elections?

35:16 – Don’t be a spectator, have a plan!

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Review the Transcript: Ron Stutz: Welcome to Retirement Talk, the redefining wealth shift. Your source for financial information for pre-retirees and retire. We’re here to help you better navigate during these economic times. We’re here to discuss thoughts and ideas in the field of finance and retirement, as well as discuss trending topics and the impact of major legislation that could impact your retirement, we’ll break it all down. These discussions can help you make better informed decisions so you can live the lifestyle imagine and make better financial choices.

Laura Stover is a registered financial consultant and CEO of LS Wealth Management, as well as founder and owner of LS Tax, a consulting firm. She’s been featured in Forbes, CNBC and The Wall Street Journal. I’m Ron Stutz, our topic for today is from Forbes, The Best Investing Trends for 2022. Now here is your host, Laura Stover.

Laura Stover: Hello, hello, hello, Ron. How are you? And happy new year.

Ron Stutz: It is great to be with you here at the beginning of a brand new year.

Laura Stover: New? Some things will be new and some things may continue on.

Ron Stutz: Exactly. Laura we’re just in the new year and already so much is happening. After closing out a very nice year, the markets are off to a rocky start. It’s been up and down, back and forth. What can investors expect here in 2022?

Laura Stover: Well, that’s sort of what I alluded to probably a little bit of this, that and everything. But yes, indeed, the first couple of weeks of the new trading year seem to, I think always are a little volatile and they have very little direction. And it’s primarily, there’s one key person that we’re going to spend a little time talking about the Fed. And as we record today’s show, he’s actually in his confirmation hearing today to continue on. I suspect he will be reconfirmed. No new news there.

But also some of this volatility is primarily caused by fund managers, institutions, hedge funds. They’re readjusting their portfolios for the new year, but really the catalysts that we thank for our new year’s bumpy ride thus far is really some uncertainty. Some things that we know are forthcoming with Fed policy.

Ron Stutz: Well, the Fed chair has already made several announcements. And Laura, talk about some of those, if you would.

Laura Stover: Well, obviously January 5th, we saw some market pullback, the 10th just recently we saw some pullback. Every other day, it’s a little bouncy, but some good news here. The S&P, it’s only down about 4%, and yes, it’s some of this uncertainty regarding what the Fed’s going to do in anticipation of raising interest rates. That makes the market a bit bumpy. And we’re likely going to see this begin from what we know thus far, starting in March and ending by June with tapering as well with the bond purchases, which will discuss a little bit more here.

But growth stocks in particular, the tech sector, these have been bouncy. But if we look back at 2021 run, the S&P ended the year was actually up a little over 28%. We had like 70 all time highs in ’21, so people are a little spoiled. It’s like getting really good results in the gym and you slack off for a week or two. Now we’re going through some adjustments and getting used to the new year. Very focused on my goals this year, the gym, gym, gym.

And so we look at the huge volatility primarily around FANG stocks. Remember that word from a few years ago? Companies like Apple, Microsoft Alphabet. They surged last year, respectfully 65, 52, 35% returns. That spoils people a little bit, and it makes up a good percentage of the market cap. So unemployment is at about 15%, now, granted, this is the great error of resignations, no jabs, no jobs. I hear all kinds of things out there going on.

But when that rate is at, and we are seeing a slowing GDP at only 2%, and then this big surge with the Omicron cases, we’re still peaking here early to mid-January in terms of cases. My area, a very hot seat, don’t come to the Northwest area right now. It’s this way across the country, and so I think we’re going to see a little volatility for a little longer, but nothing to get too upset over, nothing to be radically concerned with in my view.

But keeping an eye on the Fed lowering interest rates. He did this in an attempt to stimulate consumer demand, and they’ve been low for very long. Go back to Greenspan in 2001, we have been in a low interest rate environment for almost two decades now.

Ron Stutz: Yeah. There are a couple of layers to all this, and they would begin to unwind some of the largest and most unprecedented market intervention in the history of our country in the wake of the pandemic. They started in November actually, started tapering bond purchases and increments. That’s the plan in the amount of $15 billion a month, a reduction from the previous $120 billion a month they were previously buying.

They also announced they would keep interest rates at zero. We know now, however, there will likely be maybe two, maybe three interest rate hikes starting in March of this year.

Laura Stover: That’s the news thus far, and then ending sometime in June. And how is this going to affect retirees, pre-retirees? Well, if you’ve been a conservative investor, if you’ve been geared in fixed income, you’re seeing durations on some of these longer term bonds because they have an inverse relationship with interest rates. And when an interest rate goes up, a bond value goes down. So we’re seeing some of that, 2021 was not a good year for bonds in general.

But they have to try to reduce inflation. Now, this is what is top of mind, we’re seeing some shortages. My sister texted me last night, our local stores are out of toilet paper again. I don’t know that this is going to be a rampant shortage on toilet paper again, but we definitely see shortages on certain types of products right now. They’re not suspecting this supply chain thing to be resolved until the end of the year. It’s still causing some significant problems.

But inflation is continuing to peak, and this is part of the market reacting to those interest rates being raised. Then it only becomes more of an expense to the consumer. It slows the curve of growth in the economy in general. So listeners to the show, investments with rising interest rates, that does affect markets. And it really depends on what stage of life you’re in, where you’re at in that stage.

I recently, Ron had a review with a client, a prospective client. She had a sizable nest egg. She’s done very well, but I warned her that her current allocations are very tech-heavy. Now we did a five-year analysis and we do a stress test. Her draw down over the last five years with previous market corrections was over 30%.

Ron Stutz: Wow.

Laura Stover: Too much risk. So the question becomes, it’s a good time to really look at your portfolio, do you need to take the amount of risk that you are subject to? Oftentimes people don’t even realize the amount of risk they’re subject to. Most people think bonds are safe, that is not always the case by any means. We’re seeing mild negative returns. It might be less than one per cent or 1%, but that’s still a negative rate, so we have to put it into perspective.

And the big takeaway in my view with discussions with folks having balance, I believe so strong having rules-based processes. You’ve got to have a plan to manage volatility. It’s different from just being conservative. Managing volatility is a crucial component to long term success.

Ron Stutz: Now, the Fed his take is this, inflation is all transitory and caused by the supply chain disruption that has contributed the big price increases in some parts of the economy. Now, since June of 2020, the central bank began purchasing $120 billion in bond purchases, $80 billion in treasuries and 40 billion in mortgage bank securities. Every month they did this to add liquidity and keep the financial system working efficiently, right?

Laura Stover: We know how to spend money, don’t we?

Ron Stutz: That’s for sure.

Laura Stover: And we’ve been doing this for some time. I’m hoping to have some very esteemed guests on the show this year to discuss our nation’s debt. Yes, we had to at certain points, prop up the economy with some of the quantitative easing that’s been done. But now in hindsight, was it really the right thing to shut everything down in 2020? I can’t really blame anyone. When you have a new Black Swan event, this is something we’ve never, no one’s ever seen before. You make the best judgments, I guess, at the time.

But who would’ve ever thought anything would occur that we were all trapped in our house? Some people are still there and two years in. And there’s a lot of fear out there with some people, other people, no, they’re going to do their thing. And I think they’re again, is balanced. So they did have to add liquidity, but this has substantially, the bigger picture it’s added to our debt substantially. Now we’re going to see an environment where these interest rates are going to start to rise.

And that’s only going to add to the debt and the bottom line, we don’t want to worry about having a crystal ball. We’ve had a robust extended bull market. You have to stay invested, not get scared, go to cash just based on emotion and try to market time. You do need, however, I believe a volatility buffer, build into your portfolio and overall plan around the income you’re going to need, because you don’t want to risk income. And you have to have a plan for keeping up with your expenses with inflation.

And that’s why I designed The Redefining Wealth Process so you can coordinate all that framework, especially if you’re nearing or already in retirement.

Ron Stutz: Oh, for sure. And there’s so much uncertainty, as you said, and certain things you need to keep in mind. The fact is, market declines of 10% or greater. We might call that market corrections occur roughly 0.5 times per year. That’s not a lot. Declines of 20% or greater, which we might refer to as a bear market occur on average about every seven years which is certainly not very often.

Laura Stover: Well, the market, the S&P’s doubled in value since 2020. Now, I wish I had a crystal ball last year right at that 34% low. March 23rd, 2020 was the bottom. Now, when you’re up to Zoom and know exactly what to purchase and have that forecast, it would make quite the difference. But in the last 19 months, the sell off to the tune of 10% is not uncommon. Typically, we just… Because of all of the liquidity, because of the infusion of money, we have not been in the typical type of market cycles that we normally see.

But every 19 months, a sell off of about 10% is common. In the 29 of the past 50 years, the S&P 500 experience, this type of market decline, it happens. A correction of 10% happens about every 19 months on average, going all the way back to 1928.

Ron Stutz: Wow. So in theory, for 2022, we’re due for a correction now.

Laura Stover: Interestingly enough, the S&P is only less than 1% below its most recent all time high from September of 21 and bounce back from a slump of about 5.2% earlier in the month last year. Now, that’s a very small pullback, especially when compared with the 14.2% average decline that has happened during the year since 1980. I wasn’t even out of high school then. Now, out some naysayers, such as Harry Dent, who I think his research is spot on in terms of cycles, demographics.

But he says, whether he is right or wrong, he said, “A lot that’s been wrong,” but he says, “There’s going to be a huge setback toward the end of this year.” I’d rather weigh in the side of caution to credible sources because I believe earnings are still very good for many companies, and we’re going to continue to see good returns. I don’t think it’s going to be typically as huge as what we’ve grown accustomed to maybe the last year or year and a half, two years, but I think we still have some good days ahead.

Again, no one has a crystal ball. We’re tapering with the eminent interest rate hikes, with the pandemic still lingering, high inflation and slower economic growth. We are going to see some bumpy days though.

Ron Stutz: And this pandemic just keeps going on and on and on. You’re so right about inflation and slow economic growth. Goldman Sachs said, “The first quarter GDP is only going to about 2%.”

Laura Stover: Yeah, and with that said, we may see a correction contained five to 8%. Any pullbacks probably I think would be in this range. We’ll see. I’m not trying to predict the future. I do a lot of research, one of those early morning people and do a lot of reading. This seems to be the consensus, maybe five to 8%. That’s going to feel kind of scary to people when it’s happening, because we’ve been in such a bull market.

But we have to understand this is normal. The market’s not guaranteed. Your plan needs to be guaranteed, but the market is not guaranteed.

Ron Stutz: Yeah, that’s for sure. No question about that. Now, you need something bad to happen, you mentioned to have a meaningful correction. The right planning you can hedge, you can segment assets and you can take a look in general the main risk. Is the Fed raising rates faster than they have to. For us, we’re about being hedged in your portfolio, right?.

Laura Stover: Yes, and that’s the philosophy, being hedged, and Powell did say, they’ll begin, reducing those purchases, 10 billion, five billion starting… No, they started this already November 21st, and they’re going to continue to do it in increments and adjust things based on the economic outlook. The Fed’s really been in a tough spot. They have to fight this inflation, they’re ending that bond purchase.

. They’re signaling, they’ll raise interest rates in March. I think it’s the right move. They are late to the decision. Quite a few opinions. Believe they’re a little late to the party. Fashionably late, but late indeed. I believe they have a little breathing room, but again, U.S. debt approaching 30 trillion and growing at two trillion a year. By 2030, on this project will be at 50 trillion.

Ron Stutz: Wow. Debt is a drag on future growth. Laura, who’s going to pay the 1% annual interest charge on all that incredible debt?

Laura Stover: I think Dan, our engineer said that he was up for donating. No, we are, all of us are. Dan Will. We’re all going to pay, our future generations are… Every one of us are going to pay. But we don’t really see it, it’s not coming like an invoice in the mail where people can really connect with the problems we have here. One of our managers, well, let me just back up a little, the U.S. government, if we’re taking in a trillion a year in tax revenue, 1% on 50 trillion, let me do some interesting math here. That’s 500 billion a year.

Half of current tax receipts, the math simply can’t work. I know a lot of managers believe this is going to be the period of what we call the great reset. The point in time, where we’re focused to deal with debt, the entitlement problems, ultimately higher taxes. Michael and I have been speaking of that on numerous past shows. Reduced pension benefits combined with debt monetization. That’s our future. I don’t mean to sound grim for 2022, but John Mauldin, he says by 2028.

I think it may be sooner if we have any other crisis. So we have this huge debt, we have to always have those emergency funds we talk out on an individual basis. So wonder if the United States has another Black Swan event or a crisis of any type. This could really start to become very concerning. We have no way of knowing, but I believe it’s very unavoidable.

Ron Stutz: Laura, so it’s been a bumpy start to the new year. But what you’re saying is, it should calm down by the end of the month.

Laura Stover: Well, I expect markets to sell off a bit more before we find a short term bottom in all the slop going on here the first part of the year. But investors should expect at least one 10% correction this year, that’s normal. After a big three years, it should not be a surprise. And 2020, we had that rapid sell off of 34% and equally rapid recovery. So doubling returns, we need to hedge portfolios.

That ability to go risk off speaks volumes because you’re preserving capital for the percentage returns to compound on when the market rebounds. I sit down, I go through simple analogies with clients on this all of the time. You have to have growth in the portfolio, it’s important to manage that volatility. Hedging is very, very important.

Ron Stutz: Bonds will be a very difficult place to make money this year when the Fed starts to raise rate, and that gives stocks a brighter outlook. Are you in agreement with all that, Laura?

Laura Stover: Yes. I still think bonds are going to be a little bit speculative though, because the treasury’s at all time highs. Like I said in ’21, because of the rise in interest rates, that’s an inverse relationship with bond. So everybody was ready for a booming economic recovery in 2021 all made possible by the COVID vaccines. Now, some were saying the end of the pandemic was in sight. I wish that was the truth.

I was hopeful there for a while too, then Delta is turning into a dominant strain Omicron now. 2021 drew to a close, the uptick is peaking with infections. The virus is surging, the pandemic is generating a mixed signal, one after another greatly complicating the global economic recovery.

Ron Stutz: An area meaning investors don’t distinguish is the fact that the market and the eco are really two separate entities.

Laura Stover: That’s very true. And I think, Ron, at the most basic level, the economy is the… Look at it this way, it’s the production and consumption of goods in services. So encompasses all individuals, companies and the government. The stock market, however, is an exchange where the buying, the selling and the issuance of shares and publicly held companies take place. That’s our economic lesson here on the show today.

So yes, two different entities. So one can do poor, one can do well. They don’t necessarily have to be correlated.

Ron Stutz: There are signs tempered by other indications that investors still have money to make in 2022. What about the in investing trends to watch out for in the new year, Laura?

Laura Stover: Markets are still being driven by the COVID-19 pandemic. Now, which way will this go? There’s hope that 2022 is the year with normalcy. Highlight that word, Ron, say normal. Is anything normal anymore.

Ron Stutz: Not really.

Laura Stover: Sending travel, commercial, real estate, tradition retail stocks higher, but then again, we’ve heard the story before the Delta virus wreaked havoc in ’21. And as the calendar turned, now Omicron’s emergence offers some short-term and long-term worries. And even if this variant doesn’t produce an indefinite amount of surges, we’re seeing right now in deadly infections, what is the next variant around the corner? I’m going out on a limb. I have a trip planned, I was just invited yesterday to New York City Times Square for an interview on the set in the middle of New York City. So I’m hoping by mid-June. I can’t take it anymore. Two years is long enough.

Ron Stutz: It is.

Laura Stover: I’m going to go for it. We have to live, we can’t just stay in fear indefinitely. And I think have to be smart. I’m not advocating one way or another, will stay neutral on what the right choice is for people as an individual, but wear your mask out in public, wash, keep some distance. These things do help.

Ron Stutz: Yeah. The way I look at it, you have to do everything you can to stay safe and stay healthy. Basically what you’re saying is mother nature, not humans gets write the end of the story. And principally, investors should realize that the post COVID market rally is already here, even if the pandemic isn’t over yet. That’s because stock markets have likely already priced in most or all of the gains that can be expected from a fully reopened economy. So we already discussed this, but Federal Reserve rate hikes are likely in 2022 according to our expert, Laura Stover.

Laura Stover: Wow. Stocks do well when the Federal Reserve keeps interest rates low. Let me repeat, stocks do well when the Fed keeps the rates low. We know that zero interest rate policy, those days are numbered. It’s likely going to start to increase in March as we’ve stated several times. The only question investors should be asking themselves is how many rate hikes will happen in 2022? Now the FedWatch Tool predicts at least two. Quantitative easing will be over by Spring. I saw actually June, so starting into the summer, but as far as the reduction in those bond purchases and QE and rock-bottom rates, that has absolutely helped to prop stocks up since early 2020.

So it’s like a blood transfusion, if you have a disease like leukemia, my father did, and you can get normal readings when you have a transfusion. And that’s essentially what has happened with our economic and market scope. I think the fundamentals are still relatively strong, consumers are spending. We just have this supply chain thing that’s really messing up certain sectors and the tech sector. If you’re heavily weighted there, as I told my perspective client, don’t put all your eggs in those big growth companies.

Some of them are huge, Amazon’s due for a stock split any moment. I mean, 3,000 over 3,000 a share price. So don’t focus just on the hot returns. Again, a plan, hedging, preserving capital. It won’t matter what happens in 2022 if you have a rock solid plan. That’s the idea to deal with uncertain times, you need to have certainty within your investment portfolio.

Ron Stutz: One thing to keep in mind if you’re tired of hearing about inflation, and we all are, I know that, the course, it is going to get worse before it gets better, right?

Laura Stover: It’s undeniable, the course of inflation is going to be a bigger story in 2022, I believe.

Ron Stutz: And if the current trends aren’t reversed soon, there’s going to be some market turmoil, some bumps along the road.

Laura Stover: The higher interest rates, higher inflation are absolutely a recipe for a Wall Street Retreat. And it might however signal opportunities in the bond market at that point. So that’s why we don’t throw out the peas with the carrots. We have to have a well-balanced meal when we’re putting portfolio allocations together. So there’s potentially some higher APYs. I know some of the savers, they’ve seen dreadful bank rates for many years. Now, that’s still not the area where you want to have the bulk of your retirement accounts.

A bank is where you should have emergency funds, savings and checking accounts, not an over abundance of money in retirement at those APYs.

Ron Stutz: And retirees need to be mindful of the erosion purchase power with inflation. It’s 6 to 7%. You don’t see it on a statement, you pay it in the transaction, so the rule of 72, the years to double an investment, you have to earn more. This rule tells you how fast you can expect growth to come when you’re saving for retirement or other goals.

Laura Stover: Yeah, divide the interest you’re receiving into 72, and that’s how long it’ll take for your money to double.

Ron Stutz: So my math says, and I’m certainly not a mathematician, but my math says a 12% return on your money will double every six years. Same thing with credit cards, a 25% interest balance would double every three years. You’re listening to Retirement Talk with Laura Stover. If you want to speak with Laura directly and schedule a 15-minute strategy review for 2022 to make sure you are on the right financial track, go to redefiningwealth.info and schedule a review.

We’re discussing investing in 2022, to learn more about how we can help you redefine your wealth and make sure you’re on the right financial track. Again, go to redefiningwealth.info, schedule a strategy review. And to talk more about your unique situation and how we can help you, redefiningwealth.info. You’ll also be able to get access to today’s show notes. Once again, I’m Ron Stutz, and here is your host, Laura Stover.

Laura, some people are wondering, should they keep investing in Big Tech for 2022? Have the FANG stocks as you call them lost their bite? I like that word by the way, FANG.

Laura Stover: Yeah. Sounds interesting. If you want a real sign that the stock market could be in for a slowdown in ’22, look at those FANG stocks as I mentioned at the first part of the show. The Wall Street nickname for the five tech giants that’s been driving, a driving force and a good percentage of the market return actually the last couple of years, it’s been very much the force behind the bull market. That is including Meta. I still don’t know that name, that’s Facebook now. Remember when they changed their name, was it last year?

Ron Stutz: It seems kind of silly, I don’t know.

Laura Stover: Meta. I don’t think anyone remembers their Meta. Amazon, I told you before the break 3,300 and some dollars a share price. It’s going to fluctuate a little by the time listeners hear this, but that’s huge. Apple, Apple’s been hot, Netflix, Alphabet, the parent company of Google, Microsoft, sometimes substituted for Netflix, making the acronym FANG. So last year many managers predicted a rotation out of FANG, because the tech giants had run so far and fast during 2020. We turned out to be only partially correct because Microsoft and Google gained even more in 2021.

And I think that’s a lot because of the software and just more people working from home and relying on some of these companies to operate. More modest ’21 gains though, Facebook and Amazon actually underperformed the wider market. And according to Morningstar’s U.S. large mid-index, 2020, the FANG stocks contributed to about 25% of the total market return. So this year through late November, FANG stocks contributed barely 3%. That’s a big turn. That is a big turn.

So we’re eyeing that and some of that also is a little bit of the health of the economy, certain sectors, but these FANG stocks were not a bad bet in ’21. But they came very close, and some analysts say it’s inevitable that investors are go looking elsewhere for returns in ’22, which benefits names like Tesla. And this is the thing, Ron, we’re stock pickers. I think you can make and lose a lot of money. Stocks can bring immense wealth.

I’m all for, I have some of my own stocks and I’ve done really, really well. But when it comes to preserving your retirement account, we want to think more in terms of how endowments invest. They’re not going to go out and buy the hot stock of the week. And investors, retirees, pre-retirees need to have consistency. Consistency in avoiding large losses is rule number one. I can’t claim credit to that whole rule, is Warren Buffett, who knows a thing or two about investing says, “Rule number one, don’t lose money. Rule number two, don’t forget rule number one.”

Ron Stutz: Absolutely. And listen, by the time you hear about a hot stock, it’s probably too late-

Laura Stover: It’s not so hot anymore.

Ron Stutz: … because everybody else has heard about it as well. So concentrated stock allocations blended with tactical allocations strongly balance, is what you’re talking about. You mentioned that earlier in the show, balance is the key.

Laura Stover: Yeah, it’s critical to defend against the devastating impact large drawdowns can have and the long-term growth of an investment portfolio. So therefore, we develop and implement investment strategy specifically geared toward our client’s unique investment goals, but you’ve got to focus on that tolerance for risk. I’m having a meeting coming up after we’re through recording here. She’s very conservative, so when you don’t have a lot of equity in your portfolio right now, you’re not going to have the same returns as the market.

So investors always want what they don’t have. They want no loss and the 27% returns or 40% returns. It’s about balance, real diversification, how you diversify today. It’s much more interconnected, the market is much more sophisticated. So combining strategies to minimize the downside risk, that’s really the key. And the way we approach this, Ron, each strategy has its own mythology and our main goal is to make competitive returns, but limit large scale losses.

Ron Stutz: Well, I want to bring up something that we have not talked about and it’s going to have a huge effect, mid-term elections. Perhaps the biggest uncertainty of 2022 are the mid-term congressional elections. And I feel pretty confident that that’s going to have an impact.

Laura Stover: Oh goodness, it seems like we never get a breather. I know the last election, it was good for my waistline. I think I lost five or six pounds. We didn’t know the answer as to who won the election. And then we still had all that controversy after. I hope that we don’t have a very tumultuous 2022, but who knows what lies ahead in terms of typically it’s common for when an incumbent, whether it’s a Democrat or a Republican in the White House, usually the mid-terms go to the opposite party. That historically is just always the way it works, regardless of do you think he’s doing a good or bad job.

That typically is how the sitting president’s party usually loses seats in the mid-terms. The fight seems poised to be hyper-partisan, which might lead to unpredictable news and stability, maybe violence. I’m not trying to be a naysayer. I think it’s kind of something that could spook investors slightly, but it’s-

Ron Stutz: True.

Laura Stover: … also new because when you have the run up to the mid-terms, that does rail stocks a little bit, particularly when you’re looking at a power shift in Washington, which could be anticipated. And the Greenbush Financial, they did an analysis of stock returns between ’94, 2006, 2010, and the last three times congressional body switch parties provides a clear warning, according to that study. And in all three of those years where a shift of power was in the cards, the stock market was either down or flat, leading up to mid-term elections in November.

So the analysis found that, but all is not lost and all three years the market churned higher after the election. So don’t become fixated on one event, keep your approach just like keeping form when you’re in sports and the pressure is on. Again, it comes down to a plan.

Ron Stutz: We talked about a lot of things here, Laura. How about some closing thoughts for our listeners?

Laura Stover: Well, Ron, I think the moral of the story is having a plan, aim at nothing and you surely will hit it. Don’t be expectator. Try not to jump on the next hot stock, the get-rich-quick-schemes, there is a lot of those out there today. Everyone can hop on a webinar, take a class, have multiple streams of income, cash is trash. I hear this on all of these webinars. Now, there’s always some truth in some parts of the information, there’s a lot of noise out there, but Warren Buffett says, “Being greedy when others are fearful and fearful when others are greedy.”

The plan is having a blueprint for income, having a hedge and keep in mind with this inflation, if we look at 1970s, that was the era, Ron of the great inflation that you probably remember. I was just a kid, I’m sure you were too. And that was caused by the supply curve shift, primarily falling oil production back then. So that inflation rate didn’t fall, but it continued to march higher. And then Paul Volcker, he was Fed chair back in that late decade, and I believe the difference between the ’70s and now, Fed actions allowed money supply to accelerate steadily during the ’70s.

Unlike currently, it’s about the velocity of money, was stable, although not constant. So demand curve shifted and this allowed inflation from the supply side disruptions to become entrenched. Currently, the decline in money growth and velocity indicate that inflation, induced supply side shocks, they will eventually be reversed. So yes, I think inflation’s going to continue for a while, but at the end of the day, we’re going to at some point get back to a little bit more normal.

Ron Stutz: So what you’re saying is basically there is a little light at the end of the tunnel, there is an end in sight to all this inflation.

Laura Stover: I hope so and I believe so in this environment. Treasury bond yields could temporarily be pushed higher in response to the inflation and some sporadic moves will not be maintained. And the trend in longer yields remain downward, but fundamentally, all signs point to a slowing global economy in the first half at 2022. So looking forward, a lot of the problems of ’21 will remain in ’22, including those supply chains, the pandemic, and inflation. None of these three, I wish these people would go back home, but it’s not going to change immediately here, and these problems are not insignificant.

And they’re being addressed though by the private sector, the government, the Fed, and it will likely not be long-term problems though. So in spite of the challenges that have plagued the economy for almost two years, equities have persevered and flourished, recording excellent profitability, improving their adaptability. Hopefully the wounds from this pandemic and the lockdowns continue to heal, markets advance even higher in 2022. And when stocks struggle to gain traction, other asset classes, I’m not going to even get into the Bitcoin thing.

Gold, Ritz, U.S. treasury bonds can prove to be more stable and flashy news headlines can make it very tempting to make knee jerk decisions. But sticking to a strategy, maintaining that consistent portfolio philosophy with your goals, your risk tolerance, it can lead to smoother returns and a better probability for long term success. So have that balance, defend against devastating impacts that large drawdowns can have on long term growth, diversifying. Don’t be completely correlated to the market, minimize downside risk. Have mythologies within strategies to limit those downside and large scale losses that can happen for

Ron Stutz: For both performance and protection. Laura, I know that you’ve said many times that you believe diversification across multiple risk controlled strategies is absolutely critical to successful wealth management.

Laura Stover: And that investment approach, I believe, Ron seeks to preserve and grow wealth across market cycles. So we can’t always predict what’s going to happen the next day, news happens very quickly. This approach seeks to preserve and grow wealth across all types of market cycles, and it considers each client’s risk their goals, their focus. And we want to focus on strategies that manage risk and attempts to limit those large losses and utilizing strategies with a low correlation to broader volatile market activities.

This is a framework that making sure you’re growing your accounts over time with that proper plan in place to manage volatility. That will in turn, regardless of what 2022 has a head for us, that will provide confidence to live your life and have some certainty during uncertain times.

Ron Stutz: Well, Laura, let me say, it’s been a pleasure spending time with you today. And I feel as if everyone listening to this probably got a great deal of benefit from it.

Laura Stover: Thank you, Ron. Likewise.

Ron Stutz: Redefining Wealth is a registered trademark of LS Wealth Management. Take advantage of a complimentary plan, know where you stand regardless of the market. Walk through the Redefining Wealth process and have a clear picture of the key risks you likely will face and achieve a deeper understanding of how to properly plan for these risks with the Redefining Wealth framework. Schedule a strategy session now by going to redefiningwealth.info and click Schedule. That’s redefiningwealth.info, click Schedule.

This show is intended for informational purposes only. It is not intended to used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual situation. LS Wealth Management LLC is not permitted to offer, and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the U.S. government or any governmental agency.

The information and opinions contained here and provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by LS Wealth Management LLC. Investment advisory services offered through Optimize Advisory Services, an SEC-registered investment advisor. LS Wealth Management is a separate entity.

The post 87. Investment Trends and Predictions for 2022 appeared first on redefiningwealth.info.

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Opinions can be pretty split when it comes to annuities. Some people love them and some people see them in a less favorable light. Especially with the onset of the pandemic, we’ve seen a lot of people with insecurities about their retirement. Having too much faith in one product or one type of investment can be dangerous. We want to help you put perspective on this vehicle and investment tool.

There’s a place for everything when investing, but balance is important. Annuities can be used to meet specific needs. However, we need to look at it from an honest point of view. For example, they don’t always keep up well with the pace of inflation. On today’s episode, we will discuss fixed index annuities, their features, and what role they can play in your retirement plan.

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Review the Transcript: Ron Stutz:

Welcome to Retirement Talk, the redefining wealth show. Your source for financial information for fee retirees and retirees. We’re here to help you better navigate during these financial times. We’re here to discuss thoughts and ideas in the field of finance and retirement, as well as discuss trending topics and the impact of major legislation that can impact your retirement. We will break it all down. These discussions can help you make better informed decisions so you can live the lifestyle you imagine and make better financial choices. Laura Stover is a registered financial consultant and CEO of LS Wealth management, as well as founder and owner of LS Tax, a consulting firm. She’s been featured in Forbes, CNBC, and The Wall Street Journal. I’m Ron Stutz. Our topic for today is the case for fixed index annuities.

Laura Stover:

Hello. Hello. Hello, Michael. And how are you today?

Michael Wallin :

If I got any better, it’d have be two of us, Laura. I am super stoked. 2021 is coming to a close and we are looking forward to 2022 and helping the clients. So, and those for that are listening onto the show. Super excited.

Laura Stover:

Well, this topic is one that I will say I feel we’re pretty well versed on. And I believe it will provide amazing insight for a lot of our clients that have questions about annuities, annuities, annuities, annuities. It’s a bad word in some people’s vocabulary. In other people’s vocabulary, they can’t get enough of them like Oreo cookies. And I think we want to put perspective on this vehicle. It’s a tool, one of many different investment vehicles. We can talk about options on a show. We can talk about cryptocurrency. We’ve highlighted discussions on gold. We talk about managed money and we do speak with a lot of clients that have had a lot of annuities in their portfolio, and there’s a place for everything. But when you see an imbalance, which we’ve often seen in a lot of the analysis’s that we’ve done with clients, that imbalance is what concerns me the most.

When you have five or six annuities or a million of your portfolio lopsidedly invested in an annuity with no income plan, then it can become a little concerning or where an advisor wants to chip away at what little money’s left when you have five annuities and try to tell you to buy yet another annuity. So we want to make sure that that’s not happening to you, and that you’re equipped to make smart choices. And if you haven’t updated your annuity or you really don’t understand how it works, you can reach out to us and we can do our best to help you as Michael says, unpack all of the details around what your situation may entail. Just go to redefiningwealth.info. So the case for fixed index annuities, it comes from an article from thinkadvisor.com. And smart retirement portfolios Michael, is going to include a proper mix of different investments and products, but the whole idea is that everything needs to work together.

That’s why we have our redefining wealth process. What are we trying to accomplish with the overall portfolio? We have to understand our cashflow. We have to understand our growth buckets. We have to understand the need for healthcare and the things that we’re trying to protect and what’s our purpose with everything that we’re doing. That’s really simplized verbiage, but so many people really work so emotionally, I have found in most cases when the market seems unstable or we have a global pandemic, and we see some volatility then right away, some of those bad actors are out there knocking on the door. You need to buy another annuity. So let’s put it into perspective. There’s a strategic need. There’s a strategic need and we’re going to kind of focus on what’s called the fixed indexed annuity, most specifically the tax deferred fixed indexed annuity. So let’s hop right in. COVID definitely highlighted some insecurities and concerns a lot of Americans have about their retirement. So go ahead, Mike, what say you about the strategic need for FIAs?

Michael Wallin :

It’s the same thing I say to our clients all the time. There is no such thing as a bad product. There is bad actors that wait a product or use a product in the wrong time, under the wrong situations, but there’s not a bad product out there. Products are designed to meet a specific need. And if we were out there and we were on a job site, Laura and I go over and I get a shovel and you say, I want to dig a hole to put my swimming pool in the backyard. And I go grab a shovel. I probably don’t have the most effective tool. The backhoe is probably going to be a much better tool to use at that time. But it’s the same thing. If I was just going to put a post in the ground, I’m not going to use a backhoe.

That’s where I’m going to use the shovel. And it’s the same thing in our industry, that individuals try to take a product and make it be the use for something it shouldn’t. We’re in a high level of inflation right now with the uncertainty about the duration of what inflation’s going to be. Many indexed annuities, when you’re starting to look at how those are paid out, or if it’s a annuitization out of an annuity, many times those do not have inflation adjustment. They become a baseline of income. And unfortunately many insurance agents will go out and really highlight the one dimension of how fixed index annuities really protect against any principle loss. And that is a great feature of the product, but they also talk about those products being used for income planning. And if you don’t truly consider the erosion power of what inflation’s going to do against that income stream, then two years, three years, five years, 10 years down the road during retirement, the consumer finds the burden of where inflation has out driven the cost to what their daily income or cashflow needs are.

And they realize I shouldn’t of have had all of my money sitting in an annuity that gave me a static income stream without truly considering the inflationary adjustment I needed on my cash flow down the road. And I think that’s one of the biggest issues. And that’s why people need to go through the LS Wealth platform that we’ve laid out there, looking at those five pillars. Truly understanding how every single element that can affect your retirement is going to impact you. And then now how best to align your dollars so that you’re properly structured against inflation, against expenses, against corrections in the market. All of it has to be a balancing act.

Laura Stover:

And that’s the key because many times I see, and you do as well, there’s such an imbalance. Those annuities, all those annuities that some clients have, and there was never a plan. None of those things were addressed. And incidentally COVID-19 has highlighted the insecurities and concerns really that Americans feel about their retirement because an interesting survey included, it was from the Indexed Annuity Leadership Council. Their latest report found that 30% of US workers who plan to retire at some point delayed their retirement plans because of the pandemic. And this number rises to 33% among those planning to retire in the next five years.

In addition, 45% say that post pandemic saving for the future is more of a concern. And 42% are more worried about running out of money in retirement. So we have the economic ebbs and flows and research from the Brookings Institution found that millennials face an economic future with projections of lower rates of return and economic growth than in the past. This means they’re going to have a harder time than previous generations accumulating sufficient funds for retirement. So the data is clear, Micheal. Americans are stressed about their financial futures.

Michael Wallin :

And this is kind of the climactic point in our society. That since we went away from the pensions, individuals have been seeking ways to create that same effective pensions that we had from corporations and businesses for many years. And we all know from the studies, the happiest people are the people that have guaranteed structured income, and there’s plenty of reports and we have those available. Anybody that would like to have a copy of that information, go to redefining wealth. Send us a message and we’ll be happy to send that out to you. And because there are ways that you can create your own personal pension, but also still have the ability to make your overall plan work. And the problem is when there is that imbalance, individuals that come along and if one dose of something is good, Laura, there’s some people out there that says, well, if one dose is good, three doses is even better.

Well, sometimes it’s really not. One dose is all you need. And now you may need a dose of something else to go along with it. But sometimes it’s the imbalance that comes in and really causes the problem. And what is the consumer really trying to accomplish? The consumer is trying to say, I want to make sure I don’t make a mistake and that what I have saved over my accumulation period, is going to be sufficient to take me throughout my retirement years. I don’t want to have more life at the end of my dollars. I want to have more dollars at the end of my life. That’s what they’re looking for.

Laura Stover:

So the case for the fixed index annuity, the FIA in particular, we’re not talking about variable, or SPIAs, or MYGAs. There’s a whole family. They’re like cousins with different types and they’re all very, very different. There’s longevity annuities, all types. We’re talking specifically about fixed index annuities on today’s show and really the synopsis. Then clients may have to take some risk to earn better returns, but that doesn’t mean when we are segmenting portfolios out, we’re blending tactical and strategic management and segregating this for monies you’re not dependent upon right now that needs to be there for the growth that you need for a variety of reasons. And then maybe guaranteeing the income using something like a good uncapped, maybe it even has a living benefit rider on it. That can be very valuable in terms of how that increases the income opportunity down the road.

So the guarantee side, but used in conjunction with the overall plan and like you said, not taking three pills because three is better than one. Although, three doses of the vaccine is recommended to be fully vaccinated Michael, just so I’m getting my little plug in there, because I know we think a little different on some things even though we’re very, like-minded on many things. So that’s good to have that in perspective and how it should be part of an overall well drafted and crafted plan. We’re going to break down what you need to know in terms of how these products work, some of the features, and a little bit more on of the structure. And how to know if you have too many annuities or if you need one at all when we come back.

Ron Stutz:

Thanks for listening to this episode of the Retirement Talk podcast. To learn more about how we can help you redefine your wealth and make sure you’re on the right track, go to redefiningwealth.info and schedule a review. To talk about your unique situation, schedule a 15 minute strategy session with Laura and Michael. Speak to our host directly. Go to redefiningwealth.info. You’ll also be able to get access to today’s show notes, redefiningwealth.info/podcasts. That’s redefiningwealth.info/podcasts. Now back to this episode on the case for fixed index annuities. Once again, here are your hosts, Laura Stover and Michael Wallin.

Laura Stover:

Features of a fixed index annuity. So Michael there’s a lot of annuity carriers. A lot of them have actually been paying a high price for some income riders that they had on maybe even five or 10 years ago with roll ups and now no one would’ve anticipated a pandemic and zero interest rates. So now some of the products offered today maybe are a little less attractive. It just really depends. I think you really have to search, but some of the basic characteristics, let’s just break it down for those that really don’t know what a fixed index annuity is. Typically, in most states it’s a 10 year surrender charge. So just like if you have a CD, there’s a length of time that you have to stay in the product. In most cases, you get a free, typically 10% free withdrawal. That’s one of the characteristics.

So the idea is to go into this for income, letting that also guarantee the recipients principle. So the attraction that most people have is they like the idea that is contractually guaranteed by in this case, the insurance carrier or company, issuing company. So principle protected, it’s guaranteed from any market loss, but then that means it’s going to be linked to a various index. So you have a participation rate. So depending on how the market goes through the year, you can receive any number I suppose, depending on how you’ve allocated. Typically, it’s a lower number. It’s not designed to be competitive with market returns, but if the market is bad and it averages out where the market actually, or the index had a loss, you could receive a zero in a bumpy year, zero is your hero. You didn’t lose any principle, but you received a zero interest credit.

We have seen that in fact, several times. Or you have a participation rate, depending if you’re in a monthly average or an annual. Let’s unpack that in a way where they can understand how is interest credited. And this does allow you though to earn a little more than what the bank CD’s going to offer. And that’s some of the attraction depended upon how you’re going to use it inside your portfolio, to try to have a little better rate of returns. We’re looking for base hits, not home runs as I’ve heard it described before in the past.

Michael Wallin :

When you’re looking at those strategy options that most of the insurance companies will come out and they’ll share with you a variety of different strategy allocations that you can set the plan up. It could be a as you said, a monthly point to point. It could be taking on the monthiversary of every month, it takes whatever the value is and takes it, adds it up and then divides by 12. And then you get the average for your return. Or it could be an annual point to point. So you look at the date the contract was issued and let’s say it was on the 21st of the month. Well that month a year from now, it’s going to look at that 21st and it’s going to say, did the market go up or did it go down? And if it went down, like you said, you’d get a zero.

But if it went up, you’re going to get a participation in the performance of the market. The problem that you run into and the reason why having too much of this can be a really bad thing, is for a lot of these products are sold with an income rider. It’s an additional rider, separate feature added to it. And those riders are around 1%. And then let’s say that your cap rate on your performance is 3%. So you net those together and really the most you can make on the return on your money is 2%. But what if the market yielded 12% that year? We’ve just came out of a huge bull run for the last decade. And so a lot of people have seen the 10%, 12%, 17, 20% returns.

And what if you had a 2% or a 3% cap? What was the real cost of that product to you? And that could be anywhere from 15 to 17%, that that consumer actually lost for the benefit of having downside protection. And that’s why when we’re meeting with clients, we look at those type of products for one element, and that becomes distribution, not for accumulation and long term planning. We’re going to use investment strategies for that because the investment world, if you’re going to participate in the investment world, you want to get the benefit, but not have the situation where the carrier has at their discretion, the ability to raise or lower that cap rate on an annual basis.

Laura Stover:

And that was the balance portion that we’re really talking about. So there’s a pros and cons, but when things are out of balance, that can be problematic. That can be an added risk. And so I know you and I both, we like those annuities. If tax deferral is going to be beneficial to the client, that’s potentially a good thing that you wouldn’t get with a CD or a bank type of product because you get the 1099 every year, but it’s taxable. But the income, you really want to solve for the income that you’re going to need. So some of the strengths that we’ve seen on these annuities is if you need X amount of income at a specified period of time, three years from now, five years from now, immediately, the income is the strength typically of the value, in my opinion, of having an annuity for guaranteed income purposes so that it’s not at risk.

Then it doesn’t really matter so much what the market returns are year in and year out. And if your income’s covered, then you can segment the rest of the assets and have it invested in a variety of other types of vehicles. So it’s an asset class, having the index there for a portion of the portfolio, but not too broad base. Be diversified. Don’t have all the eggs in one basket. The income writers today also can provide home healthcare doublers. So this could be considered an advantage on an income writer. Not all of the income writers and not all the carriers offer that. So you have to make sure that you are analyzing that and asking your advisor questions. Does this have a home healthcare rider? That essentially means whatever the income amount would be at a future specified time based on the annuitant of the contract.

Well, if you can’t perform two of the six activities, a daily living, then whatever that payment is allotted to be, it would essentially double in most cases for maybe up to four years, roughly every contract might be different. So that’s a way to leverage your money at a time of need. Maybe you have a health condition where you’re not going to qualify for a traditional or hybrid long term care policy. So that could be a favorable, still doesn’t mean you put 20 annuities necessarily in your portfolio, but an income rider with a home healthcare doubler can be a very positive attribute.

Michael Wallin :

Well, and for those individuals that throughout the years have went out and purchased annuities on those non-qualified and so if they liquidate them, they’re going to have a lot of capital gains inside of it. There is an opportunity to do a 1035 exchange. If you’re not getting the return on those annuities that you want, there are annuities that are on the investment side, they sit on a custodial platform and you can do a 1035 exchange and move those funds over out of that insurance product you’re in now into the same structure. You eliminate the taxation. Currently you continue to have tax deferral, and those can be very effective too. If you’re not getting the return you need and you’ve seen those cap rates continue to shrink, and shrink, and shrink, but you still need to have performance greater than what those are, you may want to give our office a call. And let us sit down and show you a solution about being able to move those over without creating taxation, keeping it into the annuity wrapper, but also giving you better links to better performance.

Laura Stover:

Yes. And so don’t do anything without complete researching it, have an evaluation of your unique and specific situation. You can reach out to info@lswealthmanagement.com, info, I-N-F-O@lswealthmanagement.com or go to redefiningwealth.info. Click schedule, review, or click on the 15 minute strategy session. We can evaluate what you have, help you sort it all out, and understand what you have better. And remember no changes should occur until you have fully researched all of your options and make sure that you understand every aspect of what you’re invested in. What is the purpose? What is the reason? What is the outcome that you are hoping to achieve? And is it within the scope of balance that you need to be successful to and through your retirement? Thank you for listening to Retirement Talk. I’m Laura Stover and with Michael Wallin. We’ll talk to you again next week.

Ron Stutz:

Redefining Wealth is a registered trademark of LS Wealth Management. Take advantage of a complimentary plan. Know where you stand regardless of the market. Walk through the redefining wealth process and have a clear picture, the key risks you likely will face and achieve a deeper understanding of how to properly plan for these risks with the redefining wealth framework. Schedule a strategy session now, by going to redefiningwealth.info and click schedule.

Redefining Wealth is a registered trademark of LS Wealth Management. Investing involves risk, including the potential loss of principle. Any references to protection, safety, or lifetime income generally referred to fixed insurance products, never securities or investments. Insurance guaranteed are backed by the financial strength and claims paying abilities of the issuing carrier. This show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual situation. LS Wealth Management LLC is not permitted to offer and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the US government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by LS Wealth Management, LLC. Investment advisory services offered through optimize advisory services and sec registered investment advisor. LS Wealth Management is a separate entity.

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Inflation is a dubious topic and a lot of people are searching for answers when it comes to inflation increases in 2021. For many years inflation in the U.S. was so low many people didn’t care about it, but everyone seems to be talking about rising prices this year. So, what’s causing this historic rise?

Coming out of the pandemic, we were simply not ready to see the amount of demand we saw from consumers. Coupled with a new governmental administration, we’ve seen a dramatic delay in our supply chain. These issues along with a variety of other factors: labor costs, asset bubbles, etc. created a perfect storm in 2021 for inflation to rise. On today’s episode, we’ll discuss the cause of inflation, who’s to blame, and how we can protect our financial future against inflation.

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TIMESTAMPS (SHOW NOTES) 2:19 – U.S. inflation at a 39 year high

3:27 – Why do prices keep going up?

7:39 – Is Biden 100% to blame?

8:22 – What actions will the Fed take and what are the consequences?

14:26 – Will infrastructure bills contribute more to inflation?

20:52 – Higher energy prices and its domino effect

21:50 – The erosion of purchasing power

23:27 – How can you keep up with inflation but protect your portfolio?

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Review the Transcript: Ron Stoks:
Welcome to Retirement Talk, the Redefining Wealth Show. Your source for financial information for pre-retirees and retirees. We’re here to help you better navigate during these financial times. We’re here to discuss thoughts and ideas in the field of finance and retirement, as well as discuss trending topics and the impact of major legislation that could impact your retirement. We’ll break it all down. These discussions can help you make better informed decisions, so you can live the lifestyle you imagined and make better financial choices. Laura Stover is a registered financial consultant and CEO of LS Wealth Management, as well as founder and owner of LS Tax, a consulting firm. She’s been featured in Forums, CNBC and the Wall Street Journal. I’m [Ron Stoks 00:01:00]. Our topic for today is what’s causing inflation in 2021, and is Biden to blame?
Laura Stover:
Hello, hello, hello, Michael. How are you doing on this episode of Retirement Talk, the Redefining Wealth Show. My right hand man here, my wing man.
Michael Wallen:
I am super happy about going over today’s topic. I think this is one that many listeners are probably searching for solutions, Laura, and I think you have put the candle on top of the cake with this one.
Laura Stover:
Well, as they say, inflation is a very dubious topic, unfortunately, in the day and age that we’re living in, and we’ve fielded a lot of questions on the topic. We’ll hop right in. That’s primarily what we want to discuss on today’s Retirement Talk. What is causing inflation? What started the cause in 2021, and is Biden to blame? And this is literally an article that we are featuring from Market Realist.com, and as always, go to Redefining Wealth.info for all the show notes and extra insight on what we discuss on today’s show. And for many years, US inflation was so low that nobody really, really cared about it. But the scenario really reversed for 2021 and everyone seems to be talking about rising prices, regarding food, groceries, gasoline, consumer goods.
Laura Stover:
I’m at the gym and I know for a fact, some of the families are really feeling the pinch in the purse, because US inflation measured by the CPI, it has indeed reached a 39-year high on consumer prices. It rose by over 6.8%, and continuing with no end in sight is the unfortunate aspect of this. It’s the sixth straight month, as of the recording of our episode today, that we see these prices rising and topping really close to 7% now, and many people want to know who to blame and when, really more importantly than blame, is the more important question, when inflation, when will it come down? And so the first question, why do the prices, Michael, keep going up, and what causes inflation? There’s a perfect storm of causes here; demand-pull inflation, supply side, cost-push energy, higher energy prices, higher wages, asset bubbles, currency depreciation. Unpack this and help us understand why are prices continuously going up and what is the core reason we have inflation right now?
Michael Wallen:
And the list goes on and on and on. And I don’t think that there’s one area, I think that we are in that perfect storm where we are seeing a multitude of these different angles of how we evaluate the GDP, as well as our economy overall. The healthy side of what we… Consumer side of what we coming out, so I think there’s a multitude and we’ve got inflation, but we also have two other things. We have skimpflation. That definitely comes into the equation. We also have shrinkflation, and those are some of those things that people aren’t really identifying out there. But when we start looking at demand-pull, one of the things is we were not ready, based upon coming out of the pandemic, to see the amount of demand from consumers. That was one of the biggest things that has caught our supply chains off guard.
Michael Wallen:
Another thing is, it can be the debated out there as we look at the two superpowers that battle it out here in the world, which is the United States and China. One administration felt that it was better for us to start manufacturing and generating products being sold into America from resources from America, using America personnel, being able to create that. Other administrations believe that outsourcing that for cheaper labor cost is better, and we’ve seen that battle between the two, and the perfect storm of changing an administration, as we saw through President Trump into President Biden’s administration, was moving away from US domestic manufacturing, and going back into China. And we’re seeing all of the ships that have been out on the outside of our coastline, not being able to get into a port and distribute products to us, we are seeing that impact, so that becomes that supply side inflation.
Michael Wallen:
And so even in that, we are met with that perfect storm of having a labor force that has a resistance to work. And individuals that are out there saying, “Hey, we need to have higher wages. If we’re going to give you our service, we need a higher wage.” And we’ve seen large corporations that historically have had great benefits for their employees, that most recently over the last couple of weeks, that their labor force is coming together and asking to be able to unionize. And so we’re seeing this-
Laura Stover:
I guess if you like a lot of coffee, that might affect you, right?
Michael Wallen:
Yeah, get that caffeine boost, but I guess individuals are looking at the cost of living out there and saying, “I enjoy being a barista, or I enjoy this, but I want the same lifestyle that others have.” Their occupation may be paying more, it may be a greater demand, but those individuals are demanding that same level of compensation. Well, anytime we see labor cost go up, it’s a direct correlation back into the products or services offered by those companies. They are going to push those expenses out to their consumers. And so, like you said, there is a perfect storm and it’s not just one area, and I think it would be a little bit unfair to blame one individual, even though there is a lot of policy that is being created today that supports those causes.
Laura Stover:
You heard it here from the certified financial planner, Michael Wallen. Biden’s not 100% to blame entirely. Is that what you just said?
Michael Wallen:
I think the buck stops at the top-
Laura Stover:
Yes, I agree.
Michael Wallen:
But I believe that there’s additional policies and communication that could be pushed out, that we have created for way too long a scenario that says that you don’t have to work. You can now become dependent upon the government.
Laura Stover:
There you go, yeah.
Michael Wallen:
And we need the dollars coming out. That helps slow down inflation early on, but we are now outside of that. And honestly, people just need to get back to work. Be contributory.
Laura Stover:
There you go, yeah. The currency depreciation and all the other factors support higher prices, and prices for almost everything have been going up, as we’ve stated now and laid the groundwork, and we’re putting this article into perspectives. There’s several factors, but the demand has been quite strong for most products and no one anticipated that that demand would bounce back so strongly, because there was a little window when the pandemic kind of lowed. Now we’re peaking again, as of the recording here in mid-December, where we are now, dependent upon when you’re listening to this episode, where the pandemic has spiked in various pockets throughout the country, and to make things worse then, when the supply on many goods, it didn’t keep pace during that little window when the consumer comes out of the house and they start buying again, they want to travel again, they’re wanting to get back to normal.
Laura Stover:
That demand-supply mismatch is really one of the simple reasons behind a lot of the inflation that we’re seeing now. We’ve kind of identified some of the causes, many link to the pandemic, and certain policies and consumer demand returned with that vengeance once there was that little window, as I just stated, where the vaccinations increased, we saw a dip in the pandemic, and then there was less than ready supply side that led to the logistics and the supply chain issues that we’re familiar with, and then that cost-push inflation occurred in high raw material prices, forced producers to increase finished product prices. These factors all together did indeed create that perfect storm for higher prices.
Laura Stover:
Now, the Fed has been in the news quite a lot here recently, Michael, and he’s changed his stance on inflation, because consumers are very eager, in terms of waiting for it to subside, and that really brought a lot of havoc on budget plans for individuals, because wages are also rising a little bit. Obviously, a lot of companies are begging and trying to hire in almost every industry they’re trying to hire, and it hasn’t been enough to keep up with prices, but the Federal reserve has long said high inflation is transitory. However, the persistent rise has left the Fed faced, and they’re expected to start taking action.
Laura Stover:
This is one of the things I think we can forecast pretty accurately now that we see the mindset, interest rates are going to start to go up in 2022. I’ve read potentially three hikes in ’22, and he’s going to start aggressively, during the 2008 crisis, it was 10 million a month, we’re looking at much more than that to start the bond purchase tapering. How will that affect things going forward in ’22, and do you think the inflation’s going to continue to rise through ’22?
Michael Wallen:
Definitely inflation’s going to rise. Jerome Powell came out this last week and said that… And the markets reacted again. Everybody’s listening to this at different times, but mid-December here, he came out and made a statement that we’re actually going to go from that 10 million to 30 million dollar tapering, and we’re looking for that to hit through mid March of 2022, with three points on the inflation scale. We’re going to see rates expected to rise up through three times into 2022, and I think it’s important to understand a backstory on why this happened. If we put this in, maybe an example of what most individuals out there would see, if you had a company, and we’ll take the government and we’ll say they were a company, and that company was just very successful over a period of time and they had reserve profits, and then decided to take those profits into a profit sharing with their employees, that’s a great thing. Individuals go, “Hey, that’s great.”
Michael Wallen:
Now, let’s look at how the government did this. The government does not have a pool of profits. For them to go out and do the profit sharing, ie., through the pandemic we saw stimulus, but that stimulus was coming from borrowed money and that borrowed money is from future taxation, and so what we ended up having out there is they go in and they bought a lot of treasuries, US treasuries to be able to generate that, because that’s the promise to pay those dollars back. And of course the taxpayers are the ones that pays all the interest on that money as well. Then they took that borrowed money and turned around, printed more money and sent it out as if it was profitable, or the government was profitable and this was a profit sharing.
Michael Wallen:
That’s the polar opposite of what we see in businesses. Now, we’re having to go through a process of tapering that buying down, back down to normal levels, so that we don’t continue creating national debt that can just never be paid back. This is what we call quantitative easing. Unfortunately, we have just added and added and added debt that has now taken us to about $30 trillion, and there is a lot of speculation into what 2030 will look like if we don’t expand our workforce, if we don’t increase our tax base, and there’s two ways that you’re going to generate taxes. Either it’s horizontal or vertical. Either you add a lot more people paying in taxes, or you take a lot more dollars away from those that are paying taxes. That’s the difference between vertical and horizontal taxation.
Laura Stover:
Fed officials say they’re going to taper both mortgage back and treasury security purchases at the same time, and just a little history here; after the great recession, the US Federal Reserve announced the first round of that QE, if you recall, back November in 2008. That was 175 billion in agency debt, 1.25 trillion in mortgage-backed securities, 300 billion in longer term treasury securities, then they did the QE2, then we saw the Fed buy 600 billion in longer term treasuries, then that was followed by Operation Twist, where the Fed bought longer term assets while selling shorter term securities. And the last leg of that large scale asset purchase lasted from September, 2012, until 2014, totalling 790 billion in treasury securities, 823 billion in agency MBS. Bernanke was the Fed chair at the time. He mentioned ramping up the program in testimony before Congress, May of 2013, followed by a press conference in June, and the Fed began slowing its pace of asset buys in 2014.
Laura Stover:
We’re way over those numbers now, with what we have spent. At the time in ’08 when… They absolutely needed to infuse money, we all agree on that, when the initial crisis occurred ’08, or we would’ve been in a big depression had nothing been done. But those numbers pale in comparison to where we are seeing numbers now. The fiscal policy adding to inflation since the bipartisan infrastructure bill has passed, the administration’s working to get behind the bill back better bill and passing. We know it passed through Congress here not long ago, these investments are longterm positive, but they could also add to the inflation in the short term, could they not? Because the president has said that increased spending, he says it will help control inflation by addressing the supply side bottlenecks, but a lot of economists would buy that argument, since the supply problems are only short-term headwinds.
Michael Wallen:
I agree with the economists. I do not believe that the infrastructure bill, and it’s a problem that we always have with a bill; find one good element of it, make it the title of the bill, but then there is so much pork that is built inside of it. And unfortunately, as the statistics or the numbers came out, it was saying somewhere around 15% of the actual bill was actually for infrastructure. The rest of it was agenda-based. That is the part that gets into where policy from administration really skews what we are needing to do. When we go back to the 2012 through 2014 time period, and we saw individuals through mortgage-backed securities, we saw a policy that, over the years, had allowed individuals to qualify for loans that should have never had loans, and then they bundled those loans together and sold those out as a security or an underlying investment option to consumers.
Michael Wallen:
That a lot of their retirements were based upon, unbeknownst to them, they were buying really high risk debt, but was also the rating companies had came in and said those were triple A or double A-rated bonds and they really weren’t. They were B level and some of… They were at the junk level bonds that were skewed in with the other, more favorable, positive side of the bond market there. And so when we look at that, yes, it was a part of policy that was dubious to the investor and something needed to happen. This infrastructure bill is an emotional play to get dollars out and to politically get favor to push this debt out that would be very hard to push through a bipartisan agreement in the house or the Senate.
Laura Stover:
Well, businesses certainly are not sure about the longevity of a stronger demand. I think businesses are very cautious about ramping up production, and it’s going to take time for closed factories, oil rigs, the suspended workforce to come back. Suppliers have started responding to the higher demand, but it’s going to be a while before things come back to normal. And as long as companies struggle to keep up with consumers’ demands, inflation likely will not come down to a level that can be termed as normal, and the prices for almost everything have been going up due to the facts that we’ve discussed thus far. No one anticipated that demand would bounce back strongly after the pandemic lows, to make things worse, and the supply of many goods has not kept pace at all. The demand-supply mismatch really is a big catalyst behind a lot of the inflation that we’re seeing now. You’re listening to Retirement Talk, the Redefining Wealth Show. We’ll be back in a moment to tell you what you need to do to better position yourself for 2022 and the ongoing discussion with inflation.
Ron Stoks:
Thanks for listening to this episode of the Retirement Talk Podcast. To learn more about how we can help you redefine your wealth and make sure you’re on the right track, go to Redefining Wealth.info and schedule a review to talk about your unique situation. Schedule a 15-minute strategy session with Laura and Michael. Speak to our host directly. Go to Redefining Wealth.info. You’ll also be able to get access to today’s show notes. Redefining Wealth.info/podcast. Redefining Wealth.info/podcast. Now back to this episode with Laura Stover and Michael Wallen, about what’s causing inflation and is Joe Biden to blame?
Laura Stover:
There was some interesting tweets that I noticed not long ago, regarding oil prices are up $3 per barrel, above $64 per barrel for the first time since January of 2020. The oil price will likely hit a two-year high this month and a seven-year high this year. That was by Peter Shift. Continuing with his tweet, he said, “We could have also added higher energy prices to the cost-push inflation bucket, but it deserves a special mention. Higher energy prices have a domino effect on inflation. Higher energy prices lead to higher prices for most goods by adding to logistic cost. Higher wages are also adding to inflation; the domino effect between wages and inflation. Higher wages lead to higher inflation and vice versa.”
Laura Stover:
And we have another tweet here by Senator Ted Cruz. “Inflation is the highest in 31 years. Joe Biden is responsible for crisis after crisis and the American people are paying the price.” Okay, the Twitter feed continues to blow up on various topics, depending on the day of the week you look at it, but I think the moral of the story, and we were talking about this during the break, high cholesterol can be a very bad problem. It can be a very bad health problem for individuals. Well, they figure, oh, I’m just going to take a medication. I can still eat what I want, or maybe our DNA is creating some of these problems and it can be a bad thing if it goes unattended. Well, when we talk with clients on a day in and day out basis, a lot of them do not see the silent portfolio killer or the erosion of purchase power.
Laura Stover:
There’s a mismatch in thinking, and you can point the math out to some people. If inflation’s almost now touching upon 7%, no sight in the near future where it’s going to start going down in 2022 at this point, and you are not keeping pace with that. You’re losing money, but I think where the psychology of this comes in, Michael, is the market risk perception and the fear of loss, the loss of version mentality versus not seeing the loss of purchase power, so how can people get their mindset wrapped around just because you don’t see one element, you see it when you pay a price at the pump or you’re buying food, but you’re looking at a statement saying I’m not losing money, versus the fear, oh, the market can’t stay up forever and I don’t want a big loss of capital. I think there’s a big disconnect mentally, because if they just look at the math and take the emotion out, it makes no sense to be overly weighted in fixed income right now, or CD or overweighted in bank products.
Michael Wallen:
The answer to this is personal finance, and individuals truly need to take account of where they are and understand where that dollar is going and how much it is actually buying, because inflation, as you said, is the erosion of your purchase power. For instance, a lot of manufacturers today are adhering to a skimpflation or a shrinkflation approach. What that means, for those that are listening, when we were kids, let’s just say that we went out and we bought a loaf of bread and that loaf of bread, let’s just use a dollar amount and say a loaf of bread was $2, for easy calculation. The length of that loaf of bread may have been 18 inches long.
Michael Wallen:
Nowadays, we are seeing two different things that’s happening going through this, coming out of the pandemic, looking at this time period, of where, because the cost of goods and services are going up at the manufacturing level, we are getting shrinkflation. Go over and look at a loaf of bread, just for easy consumer approach, go look at a loaf of bread and that loaf of bread may be 12, 14, maybe 15 inches long, opposed to what used to be 18 inches long. Ultimately, to have the same consumption of eating sandwiches in your home, you would have to buy three loafs of bread for what you used to buy two loafs of bread for, and so that becomes the shrinkflation.
Michael Wallen:
The other part is skimpflation, where the quality of food we are seeing being reduced, because of the increased cost, we are seeing the manufactured end product with lesser quality ingredients. And so we are seeing that hit us at the dinner table, and you mentioned gas prices going up by $3 a barrel, the price at the gas pump is altered three months after what we see happen on the price of the barrel. From right now, three months from now, and that’s barring any major storm that may happen in the Gulf or supply issues, but right now everyone should be expecting that three months from now we’re going to see a major increase in our price at the pump.
Michael Wallen:
How that rolls back is personal finance. You have to be getting ahead of the game. You have to start now looking and really managing your budget. For a lot of people, in prosperous times, you’ve got more cash flow than what you’ve got in expenses, people really don’t adhere to their budget. Right now, this is a time to line item your budget, truly understand what you’re buying, because Laura, when you go out and you buy a bag of chips and only 25% of the bag actually has the product in it and 75% is air, that’s shrinkflation, and you got to buy three to four extra bags to have the same thing that we used to have in a full bag of chips.
Laura Stover:
Mikey, you need to change your diet. That’s why I go keto, no bread and I don’t really do chips anymore, but I hear exactly what you’re saying. I think the point very well taken, and that’s why we have our proprietary Redefining Wealth Process. We want to go through the six key risk that we’ve identified that retirees, pre-retirees will face. We want to walk you through our life, our proprietary life arc system, where this is very, very detailed and broken out, determining your risk capacity, understanding those budgetary cash flow needs, the risk analysis, the type of money management style, making sure that you have the income needed to last and sustain during the duration of the longevity that you are likely to have.
Laura Stover:
The healthcare and all encompassing tax expenses, which we know are forthcoming, and that might be the next perfect storm. But unfortunately, inflation is here to stay. We might best enjoy the cost at the front end of ’22, because more than likely things will continue to go up. And if you need help identifying a written income plan, or you have a question for Michael and myself, go to Redefining Wealth.info, click schedule review, and we’ll schedule a strategy session with you. Thank you for joining me today. I hope you learned a lot from today’s episode. Again, go to Redefining Wealth.info.
Ron Stoks:
Redefining Wealth is a registered trademark of LS Wealth Management. Take advantage of a complimentary plan. Know where you stand, regardless of the market. Walk through the Redefining Wealth Process and have a clear picture of the key risks you likely will face and achieve a deeper understanding of how to properly plan for these risks with the Redefining Wealth Framework. Schedule a strategy session now, by going to Redefining Wealth.info and click schedule. Redefining Wealth is a registered trademark of LS Wealth Management. Investing involves risk, including the potential loss of principle. Any references to protection, safety or lifetime income generally refer to fixed insurance products, never securities or investments.
Ron Stoks:
Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier. This show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. LS Wealth Management LLC is not permitted to offer, and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the US government or any governmental agency. The information and opinions contained herein, provided by third parties, have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by LS Wealth Management LLC. Investment advisory services offered through Optimize Advisory Services, an SEC registered investment advisor. LS Wealth Management is a separate entity.

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With the “Build Back Better” bill working its way through the Senate, we thought now would be a good time to discuss estate planning and the powerful Irrevocable Life Insurance Trust (ILIT) tool. Originally created when exemption levels were much less than they are today, the ILIT was designed to provide individuals the ability to pass on life insurance through a trust. It is irrevocable so you want to work with a qualified team when setting one up! On today’s show, we’ll discuss the benefits of an ILIT, some rules to follow for efficiency, and more.

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TIMESTAMPS (SHOW NOTES) 1:36 – Will “Build Back Better” possibly impact estate planning?

3:48 – Why was the ILIT tool created?

5:27 – You can’t serve as trustee of the trust

6:38 – What can go wrong when assigning a trustee?

8:25 – Rules for efficient ILIT use

12:27 – Who is an ideal candidate?

15:23 – Potential complications during the three-year rule

19:30 – How would you dissolve an ILIT?

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Review the Transcript: Ron Stutz: Welcome to Retirement Talk, the Redefining Wealth Show, your source for financial information specifically for pre-retirees and retirees. We’re here to help you better navigate during these financial times, as well as discuss trending topics and the impact of major legislation that could impact your bottom line. We will break it all down. These discussions can help you make better financial decisions and be informed so you can live the lifestyle you imagined and make better financial choices. Laura Stover is a registered financial consultant and CEO of LS Wealth Management, as well as founder and owner of LS Tax, a consulting firm. She’s been featured in Forbes, CNBC, and The Wall Street Journal.

I’m Ron Stutz. Our topic for today is estate planning, the irrevocable life insurance trust, ILIT. If you’d like to learn more on today’s topic, head on over to redefiningwealth.info. Schedule a strategy session. Now, here are your hosts for today’s show, wealth advisor Laura Stover and certified financial planner Michael Wallin.

Laura Stover: Hello. Hello. Hello and welcome to Retirement Talk, the Redefining Wealth Show. I’m Laura Stover here. With me as always, good friend and colleague certified financial planner Michael Wallin. How are you?

Michael Wallin: Laura, I am doing fabulous. And yourself today?

Laura Stover: I am wonderful. I know this is… You are an estate planning expert, and I thought with all of the Build Back Better that the House of Representatives, actually November the fifth of 2021, this bill now headed for the Senate. We would behoove us and our listeners to have a discussion about how will some of the Build Back Better maybe affect estate planning going forward. Now, I think there’s still a lot up in the air. We’re going to keep everyone updated, of course, on any new changes, but the tax cuts and JOBS Act increased the federal estate tax exclusion amount for descendants if you happen to die between the years of 2018 to 2025. The exclusion amount is for 2022, now that’s $12.06 million.

This means that an individual can leave $12.6 million and a married couple could leave $4.12 million to their heirs or beneficiaries without paying any federal state tax. Now, we want to break down gifting. We’re asked about this all the time. Do I need a trust gifting? What do some of these changes mean? My estate is not worth $12 million, so there’s a lot of the middle or upper middle income class people that may not really see the need to do the amount of estate planning that’s necessary. But let’s just look at where his real estate values went. Recently property values have increased substance in terms of inflation adjustments for tax year in 2022.

There are some new tax rate schedules, tax tables, cost of living adjustments for various tax breaks. Let’s put it into perspective a little bit of where we are with the whole estate landscape and a tool that we want to talk about called an ILIT. That sounds like a pretty flower that you might want to give to your wife, but it’s an irrevocable life insurance trust. Let’s just set the stage a little more on some of the estate discussion and where this tool potentially can help some folks out if they’re not utilizing it already.

Michael Wallin: Well, I think the beginning point of this is to understand why did ILITs get created in the first place. An irrevocable life insurance trust was a great instrument we were able to utilize many years ago when the exemption levels were way less than where they are today. We would see more in that $1 million exclusion rate before we have seen it escalate up to the $12 million, as you mentioned, for the individual or the $24 million on a married couple, which at that point really took away a lot of the sizzle of the ILIT.

But what that was designed to do is for individuals that had life insurance accounts, because what a lot of people don’t understand is although if properly structured, a life insurance policy can be tax free to the beneficiaries of the plan. But if you have a life insurance policy and you die, the value of that insurance policy counts in the estate, the cash value of the plan. We’re not talking about term insurance. We’re talking about a permanent plan. And that cash value inside of it is counting inside of the overall value of a person’s estate. It’s not uncommon that we would build up an amount of asset it’s inside of it, and we used ILITs to be able to keep that value out of the estate.

Laura Stover: Okay. Now we know what an ILIT is, basically a type of living trust specifically set up to own a life insurance policy. Now, it is irrevocable. This is one of those things you really need to work with a team and knows what they’re doing and how to counsel you on this, because irrevocable means you cannot change it after it’s put in place. You can transfer ownership of an existing life insurance policy that you may already have to the ILIT after it’s been formed or the trust can purchase the policy directly. But with that, Michael, you can’t serve as trustee of the trust, because that probably is a conflict of interest is the main reason that that’s not allowed.

Michael Wallin: It is. Yeah, you cannot have incidental ownership or benefit from that dollars that you’re putting in there. Because what you’re saying is those assets you had that you put over into it, whether it’s cash or any type of other irrevocable plan, you’re saying that you are surrendering ownership and you cannot have incidental benefit from it.

Laura Stover: If you’re the trustee, which you can select your spouse, an adult child, a friend, a financial institution, I’ve heard stories of the banks that took over my estate. The person dies and the spouse now can’t get access to their money. What goes wrong in that kind of situation? I know you’ve heard those stories from years ago too.

Michael Wallin: Absolutely. You’re identifying who that trustee is going to be, and you need to make sure that it is a person that, first of all, is a fiduciary, an individual that is going to be working in your best interest and actually can dedicate their time. There are banks out there that may have been in more rural areas or smaller areas where they had a trusted individual that that grantor said, “Hey, I’d like to have this individual to execute the documentation of my trust.” Well, that individual may have had other duties at the bank, may have had other responsibilities, and was really not focused on that trust, and because of that may have created unnecessary taxation, may not have executed properly the distribution based upon the trust document.

Now, there are other banks out there that actually has full departments of nothing but individuals that can serve as a trustee. Those are two different components there. But you need to make sure that as a grantor of any of your assets into any type of trust, that you have a well-established trustee that, the name says it all, a person that you’re going to trust to execute and distribute based upon the provisions that has been written for that trust document.

Laura Stover: Let’s talk a little bit about there’s a few rules. Well, there’s quite a few rules, but a few that we’ll just take time to highlight a little bit here. Really the ILIT can help with estate taxes. I mean, would you say even it can help avoid unnecessary estate taxes when implemented properly? Obviously through that irrevocable life insurance trust, and it has to be established exactly by the rules for it to be effective, and it’s designed to own life insurance, then you spoke about the granter and/or spouse, and that grantor remains primarily liable for the income tax.

It also allows trust assets to grow from income tax purposes. The idea that people have behind this is so that greater wealth is transferred to their heirs. What’s the three year rule, safe harbor regulatory guidance, and some exemptions surrounding this? I think that’s kind of important if someone’s considering looking into this to be aware, because I don’t know that people really talk about these aspects as often as they should.

Michael Wallin: I would say, Laura, that the number one that they need to look at, you mentioned earlier that if a person has an existing life insurance policy that it can be transferred into an ILIT. The three year rule says that if you’re transferring an existing life insurance policy over into a newly established irrevocable life insurance trust, that it does not go into full benefit and full protection for three years. Now, if an individual is out there and they are looking to establish a new ILIT today, I would tell them to establish the irrevocable life insurance trust first, make it the owner as they are applying for a new life insurance policy.

That way upon issue of the policy, it is owned by the ILIT, because it takes three years if you’re transferring ownership to an ILIT to become the owner versus immediate protection and immediate acceptance into the ILIT when the ILIT is the original owner. And that goes into looking at the safe harbors and making sure that the rules are being applied appropriately. And then as we’re talking about exemptions, there are certain provisions out there that you would want to look at. These are going to be on a state by state basis. Make sure that as you’re designing this that you’re meeting with a very competent attorney.

That’s what we always have. Our clients come in and sit down with our legal advisors and let them structure that based upon the state rules that is identified in that individual’s resident state.

Laura Stover: When we come back after the break, let’s hit on the estate tax thresholds and some of the aspects of the ILIT that there could be some potential complications, but some of the areas in terms of how we’re helping people with valuable estates so that they don’t have to worry as much about federal and estate taxes. You’re listening to Retirement Talk, the Redefining Wealth Show.

Ron Stutz: Thanks for listening to this episode of the Retirement Talk Podcast. To learn more about how we can help you redefine your wealth and make sure you’re on the right track, go to redefiningwealth.info and schedule a review, schedule a 15 minute strategy session with Laura and Michael, speak to our hosts directly. You’ll also be able to get access to today’s show notes along with the transcript, as well as resources mentioned. Again, visit redefiningwealth.info/podcasts. That’s redefiningwealth.info. Now back to this episode, How to choose a retirement financial advisor. Here is your host Laura Stover with Michael Wallin.

Laura Stover: Who is an ideal candidate? Maybe the type of individuals that should look at an ILIT, irrevocable life insurance trust. We know values today, Michael, are going to be gravely different just a few years down the road. Property values, real estate values have all increased substantial this year. I think we want to really kind of… Let’s carve out some of the ideal profiles of people that this may be the most suitable path for them if they’re concerned about taxes and passing their estates to their heirs.

Michael Wallin: One of principle groups that we deal with all the time is individuals that have closely held businesses. It could be a small business. It could be a medium sized business. As those individuals come in, for a lot of people they’ve been lull to sleep, Laura, for the last really 10, 12 years because as estate planning, and we saw those exclusion rates starting to accelerate up, individuals started saying, “Well, I’ve got an exemption that is going to be way more than what my estate is or what my estate could actually grow to by the time that I decease.” I believe that is a false security. There’s too many people that believe that that $12 million or that $24 million exclusion is going to be their estate plan.

I believe that you really have to take a look at what the legislative branch is doing today. Look at what type of activity they’re doing. Because again, it seems like a lot of these decisions have been long-term plays. And 10 to 15 years from now, if the ability for our government to have the amount of assets needed to cover debt, they’re going to constantly be looking at how can they take more and more dollars away from those individuals that may have property. They’re not looking for that wealth to be generated from the one percenters from this generation to the next generation, to the next generation. They’re saying, “How do we redistribute that wealth to the majority of our population?”

We’re going to see more and more of those states being attacked by policies. My thing is, hey, if you’re going to be in that situation, it’s like going to the beach. If you’re fair skinned, put a double layer of sunscreen on. If you want double protection in this, put other things in place, not just that $24 million exclusion, but do some other strategies. Just in case that policy comes down, those exclusions are changed, you’re not going to be scrambling 10 years or 15 years from now trying to be protected.

Laura Stover: One last area, Michael, I want to touch on here, potential complications if you die. We talked in the first part of the show about the three year rule. And if you die within the three years of actually transferring your life insurance policy to the ILIT, the IRS will still include the proceeds in your estate for the estate tax purpose. Well, you could avoid that by having the trust purchase the policy on your life, then fund the trust with sufficient money over the years to pay the premiums. And then we have the gift taxes can also be a consideration because you’re effectively giving the trust the money to pay for the policy each year. But that is avoidable too and your trustee can simply send your beneficiary something called a Crummey letter.

Have you ever received a Crummey letter? I’ve gotten some Crummey letters. I got one actually in the mail the other day here I’m going to talk to you about on Monday. I got a Crummey letter. And each time you transfer money to the trust, this letter would advise them. This letter set precedent some years ago, so there is a story behind the Crummey letter and it’s often referred to in estate planning. The letter would advise them they can ask for their share of that money with a specific period of time. As long as they have an immediate right to the money, the gift tax wouldn’t apply in that situation. Let’s kind of unpack that.

Michael Wallin: Yeah. The Crummey letters is, and that’s spelled out for those that are listening, if they want to look it up, is C-R-U-M-M-E-Y. What that letter is designed to do is you have an individual that wants to gift, but their desire is that money would actually go into the life insurance for a future benefit. Well, with estate planning, you have to make the beneficiaries have today value or be able to receive the value of that gift today for it to count as gifting. You have to send them the Crummey letter, which outlines that this is the amount of money. And let’s just say the insurance premium…

Let’s say you had four children and you are going to give $15,000 to each of those four beneficiaries, because the annual premium for the life insurance is $60,000 each year. You would send out four Crummey letters to them saying, “You can have value. You can actually have this $15,000. But if you say that you choose to defer it, I’m going to put it into the life insurance.” This is a big family discussion. You don’t want to start this process without everybody being involved in understanding the process, because you don’t want little Billy over there to mess up the plan by saying, “Yes, I want to go out and I want to take a vacation to Europe. Give me the $15,000.”

Everybody’s got to play their role in saying, “Yes, give me the value of the 15 now. I want to actually defer that so it goes into the life insurance. So that instead of getting $15,000, and let’s just say that that happened over 20 years, that $15,000 turns into $300,000 that has been put into the plan. What we want that to be is give me the $1.2 million in the future or whatever my fourth or beneficiary amount would be. That’s what you’re looking at is the tax free, probate free benefit in the future for those living benefits.

Laura Stover: I think that’s going to become even more meaningful as the years go by, as we talk often on the show. I think we’re will do some more shows on estate planning. There’s a lot of different topics. This is one aspect to many types of solutions. There’s many different types of trust. This is one tool that’s probably a bit underutilized yet today as long as it’s been around. The last thought here, dissolving the trust. Because it’s irrevocable, normally you can’t undo an irrevocable trust after you’ve set it up, primarily because there’s ongoing premiums that must be paid to keep that life insurance policy in effect.

But all you’d have to do is cancel the trust and stop making payments for the premium, then the trust would become an empty vessel when the policy lapses. Pick up on that just a little bit. An empty vessel, that sounds kind of creepy.

Michael Wallin: Yep. One thing I always tell people, think of a trust… I think back of my grandmother that had a hope chest at the end of her bed. I know when I was a kid growing up, it was always wonderful. When I’d go visit my grandmother, she had opened up that beautiful trunk and we would look in it. She had all these possessions that she valued from all of her life. Well, that’s the same thing as a trust. If she would’ve opened it up and nothing had been in that, nothing had been funded, that’s the same thing as a non-funded trust or an empty vessel.

If you don’t have any assets inside of a trust, whether it’s irrevocable life insurance trust, the revocable trust, any type of trust documents, if it hasn’t been funded, it is an empty vessel. For those individuals that are out there that may have had a trust put together for them, really take a review. Call our office. Let’s sit down and take a look at your trust and make sure that you have an inventory of items that have actually been… The ownership of those items have been moved to the trust and the trust is now the owner of them.

Laura Stover: And that’s why estate planning is part of the redefining wealth process. It’s one of those key pillars that must have coordination, evaluation. There’s been a lot of legislative and law changes, especially the last few years with the SECURE Act and the CARES Act. I think putting a plan in place so that you’re not underestimating some of the cost in the future, it’s about being proactive. Our team is here to help. As always, if you need a strategy session, go to redefiningwealth.info. Click schedule review. You can have a call on the phone virtually or in person. You’re listening to Retirement Talk with Laura Stover and Michael Wallin.

Ron Stutz: Redefining Wealth is a registered trademark of LS Wealth Management. Take advantage of a complimentary plan. Know where you stand regardless of the market. Walk through the Redefining Wealth process and have a clear picture of the key risks you likely will face and achieve a deeper understanding of how to properly plan for these risks with the Redefining Wealth Framework. Schedule a strategy session now by going to redefiningwealth.info and click schedule.

Our firm is not affiliated with or endorsed by the US government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by LS Wealth Management LLC. Investment advisory services offered through Optivise Advisory Services, an SEC registered investment advisor. LS Wealth Management is a separate entity.

The post 84. Estate Planning — The Irrevocable Life Insurance Trust (ILIT) appeared first on redefiningwealth.info.

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When you are looking to work with an advisor, what should you pay attention to? Maybe your advisor was referred to you by a friend or family member. Perhaps you began meeting with them when you were in the accumulation phase of your life and now you are in retirement and facing decumulation. Ask yourself what phase of life you are in and if your advisor is still matching your portfolio needs. On today’s episode, we’ll be discussing what you need to consider before hiring a retirement financial advisor.

The types of planning strategies an advisor implements for young workers is going to look a lot different than it does for those entering the retirement red zone. Furthermore, you want to have a clear understanding of the advisory fees you are paying and what kind of value you are attaining from them. An advisor should know your risks and how those risks align with the income plan you are building for retirement. You don‘t want to work with someone that is only concerned with moving money, but someone that is creating a plan that will match your long term expenses.

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Show Notes: 2:15 – What type of advisor are you working with?

3:31 – How should you select an advisor?

4:57 – What phase of your financial life are you in?

8:22 – Tools and strategies depending on the phase of your financial life

12:01 – Understanding advisory fees and their value

17:02 – Having a trusted advisor during market turns

19:23 – Sequencing of returns risk

23:56 – Knowing your income plan and balancing risk

27:15 – An advisor that understands your expenses

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Review the Transcript: Ron Stutts:

Welcome to Retirement Talk, the redefining wealth show, your source for financial information specifically for pre retirees and retirees. We’re here to help you better navigate during these financial times. We’re here to discuss thoughts and ideas with some of today’s foremost experts in the field of finance and retirement, as well as discuss trending topics and the impact of major legislation that could impact your bottom line. We will break it all down. These discussions can help you make better financial decisions and be informed so you can live the lifestyle you imagine and make better financial choices. Laura Stover is a registered financial consultant and CEO of LS Wealth Management, as well as founder and owner of LS Tax, a consulting firm. She’s been featured in Forbes, CNBC and the Wall Street Journal. I’m Ron Stutts. Our topic for today is what to know before hiring a retirement financial advisor from US News. If you would like to learn more on today’s topic, head on over to redefiningwealth.info and schedule a strategy session. Now, here are your host for today’s show, wealth advisor, Laura Stover, and certified financial planner, Michael Wallin.

Laura Stover:

Hello. Hello. Hello, Michael? How are you?

Michael Wallin:

I am doing fabulous, Laura, and yourself?

Laura Stover:

I’m doing fabulous as well. And another great show in store. I know I say this every week, but these topics are so relevant. The client conversations that we are having on a weekly basis, and it’s such an honor to know so many people are listening. Our downloads continue to increase each month. And if you know somebody, if you like the show, if you know somebody that might benefit from listening, please introduce the show and share it with somebody else. Go to Apple or Spotify, wherever you’re listening to Retirement Talk, The Redefining Wealth Show and give us a rating; an honest rating. And if you find value, others hopefully will as well. And we are here to talk about the most important topic. I say, all the topics are important, but what type of advisor are you working with?

Laura Stover:

Our featured article is from US News here today. And what you need to know; what you need to know before hiring a retirement financial advisor. So a little caveat there, and I’ll just set the stage for the key areas that we really want to cover in what you need to know about this very important topic. So maybe, maybe you hired your advisor while you’re accumulating your retirement nest egg. Maybe during your working years, maybe you are still working. Maybe your friend at the water cooler goes to the broker down the road, and you were referred to somebody from a friend or an acquaintance that you know. Maybe you inherited your advisor. Maybe you’re the beneficiary of an account and you just kept the accounts there and you’re working with the same advisor. Why does it matter? It matters a lot because, and this is part of the redefining wealth process that we really want to emphasize.

Laura Stover:

First, we want to break down what phase of your financial life you’re in. That’s one of the key reasons this matters because depending on that question, the different models that advisors can align with, they really cater to different aspects for a lack of specifics, whether you’re in the accumulation phase or the income and distribution phase of retirement. These are some very distinguishing differences. We also want to hit the big fee. Everyone always wants to know, Michael, what do you cost? That question is a fair question. And it seems like the advisors that point out the fees and are the most transparent get asked the most questions. And if you’re not transparent, advisors are never wanting to understand the fee and what they’re getting really for the value of the fee that is being rendered. And then we want to look at the differences in these platforms.

Laura Stover:

What’s in registered investment advisory, versus a brokerage, or a bank brokerage model, and how that parallels with your phase of your financial planning. And lastly, avoiding, this is a big one, especially if you’re in retirement, taking distributions. The big risk is sequence of return risk and why that matters. So let’s start with the phase of your financial life and how that really aligns with how you select an advisor, the way you invest. Maybe right now you’re investing systematically or maybe you’re near retirement. And the big difference really is that buy and hold philosophy when you have a lot of time before you, wouldn’t you agree, Michael?

Michael Wallin:

It is. When we’re looking at using a 401(k), 403(b), 457, during those accumulation phase of a person’s life, and historically, or we look at the age range on that between ages 18 up to about 65, but with a caveat on that, that if somebody’s going to retire at that 65, 66, 67 time period, always remember five to seven years before that you should start changing your philosophy on the way that you’re investing and start remediating some of the risks that you have in your portfolio so that you don’t get caught a year or two before retirement, and you have a huge contraction in the market like we saw in 2001, 2008, and you don’t have an ample amount of time for recovery in the market. The market recovers, but the key is, do you have time on your side for that recovery process before going in and becoming dependent upon those assets? And that’s, as we look at accumulation, and then as we transition in our way of approaching investing strategies is we look at preservation and income.

Michael Wallin:

What we’re looking there is, when are you going to start becoming dependent upon those assets? And should you have your assets directly into equities that you’re going to be dependent upon for income because a contraction in the market while you’re also taking a distribution that is what’s called triple compounding in reverse. It is much different than during the accumulation phase where you are buying assets over that time period. And so you have no distribution coming out. And so you do have average rate of return at that time. And that is in your favor. Preservation and income is a completely different step, a different phase. It should be treated differently. And then ultimately the third phase of everybody’s life is distribution. And is your plan effectively and efficiently structured to mitigate as much taxes as possible as you’re transferring it to those heirs that you have selected for your estate.

Laura Stover:

So, the phase of your financial life, when you have a broader, longer time horizon, maybe you’re systematically investing the static composite models; the buy and hold approach; buying low, selling high, and you’re not taking income out of those dollars. You’re accumulating. Maybe you’re getting an employer match. That’s a big difference. And it’s really a juncture of having a mindset change as you near retirement then in that red zone that we talk about, or in retirement, because now whether you need supplemental income or forced required minimum distributions, at some point, you have to start beginning a withdrawal out of those accounts. And so the mindset and the philosophy really needs to change. So, some of the things we want to think about when we look at buy and hold, versus, that’s also referred to as strategic management, and then we have tactical management.

Laura Stover:

So, some of the tools… Now, let’s just shift. Some of the tools during these phases as… and you can really apply them at any phase if you have lump sums of money, but the whole idea is to preserve the nest egg, to preserve the capital, grow the account, but avoid really large drawdowns. The 20, 30, 40, 50% like we saw back in 2008. Those are the times that that really bites people, and that can create that negative sequence of return. So, by shifting and hedging and mitigating the risk and managing the volatility, that’s a little bit where some of that mindset needs to shift at that income or preservation stage of managing your retirement account.

Michael Wallin:

Well, and Laura, one of the things, I think all of our listeners on here, if we ask them, what does ROI stand for? During your accumulation phase, ROI stands for return on investment. What are you making on that investment? And a way to really understand the difference between accumulation and the preservation and income phase is ROI means something completely different in your preservation and income phase. It means reliability of income. So during your accumulation, you have return on investment. During preservation and income, it is much more that you have a reliability of that income. It’s going to be structured. You can count on it. That’s why many studies have been done of the happiest people that are in retirement are those individuals that have a pension because a pension is reliability of income.

Michael Wallin:

It’s something a person can bank on. They know it’s going to be hitting their check or their checking account or their bank account. It’s going to be hitting those every month. It’s going to be something that if structured correctly is going to be there for their living spouse once they decease. Very similar to the structure of social security. So, that becomes reliability of income. And that’s why accumulating is one thing but once we get in preservation and income, we don’t want the reliability of income to be based upon maybe an equity position, because when equities contract, there’s no reliability.

Laura Stover:

Predictability of income and sustainability because of the other retirement risk, longevity and the inflation, the taxes, the healthcare, all of the many risk that are factored because we’re living longer. So guaranteeing maybe, and this is really how you diversify, making sure you’re not risking the income that you need, but you’re segmenting the assets, [inaudible 00:11:25] monies, like you say, Michael, that you’re not dependent upon today or maybe in a year, but perhaps three years, five years, seven years, 10 years, we segment those out. Maybe employ tactical management and risk management on the growth side of the portfolio but providing solid predictability on the income side. And conservative is not the same as guaranteed. Would you agree?

Michael Wallin:

Absolutely. And that becomes the elements of really an evaluation and talking about evaluation, second points you wanted to hit, today was the advisory fees. And I think this is a very critical area that is important for everybody to look at because advisory fees, you need to understand what you’re paying for and what you’re getting for that. Now many people will sit down and they’ll tell us what their advisory fee is, and they are one dimensional. And so you want to know if that individual that you’re working with approaches you in a multi-dimensional way, because as last time I checked, Laura, I’ve never met a person that was one dimensional. There are many facets of who they are and what’s important to them, and it needs to be approached in that same way. So when you’re looking at an advisory fee, is that going to include money management?

Michael Wallin:

Does that potentially include any third party money managers? Is it going to include the custodial charges, if there is any transaction cost, is it included? Many times we see that the difference between a wrap and a non-wrap account, and that’s a industry terminology that we use; a wrap account, meaning that all of your expenses are wrapped into one expense, versus a non-wrap account, where an individual is going to be responsible for any transaction. So if you are in a investment strategy that has a lot of turnover or subsequent purchases at that time, you could have several transaction fees that runs up and is actually in excess. So a lot of times people come in on the front end and say, well, somebody else’s account or their fees may be lower.

Michael Wallin:

Well, if they’re telling you that they’re running a non-wrap account, and they’re telling you what the fee is on the front end, at the end of the year, you may have actually paid more than what the wrap fee was because of all the transaction costs that we’re seeing. So, those are very important elements that you need to really lay out, and a good advisor is going to have their fee structure laid out. So you understand every component of what you’re paying for and there’s no surprises at the end of the year.

Laura Stover:

And I know [Morning Star 00:14:12] and The Wall Street Journal did a combined study in 2010, analyzing mutual fund costs, for example. And they said that the fee was typically two to three times higher than advertised. And in recent years, they’ve changed some regulations where transparency of this, and it sometimes it’s very hard still today, even for advisors to dig in those prospectuses and try to, as you would say, unpack what those fees are costing. And there’s a little difference in terms of the type of advisor you work with. And I will say, you need to understand, the service is rendered, and what value are you getting in return? And like you said, are they just one dimensional? Is your account, if it goes up or down, is that advisor paid the same regardless? Or there’s some advisory models where if your account doesn’t do as well, the advisory firm isn’t doing as well in the way the fee structure is implemented in that case and all of the services, are you obtaining some tax planning, a proactive plan?

Laura Stover:

How many times a year are you meeting with the advisor? What are the expense ratios? What are the fun costs? What are the turnover ratios? A sales charge. There’s front end, there’s back end. And the list really goes on and on. And 12b-1 fees, it’s a very robust, and sometimes it’s kind of [inaudible 00:15:44] mess for people to really put it in perspective, if they’re just looking at the cheapest index fund, well, that’s good in the accumulation phase, that may make sense. But if we’re trying to have… avoid negative sequence of return, there may be value in paying a little bit of a fee for the tactical management in the other financial planning aspects. So that’s areas that really, you have to weigh that out and make sure you have a full understanding.

Michael Wallin:

And if you’re looking at having somebody that is bound to those type of services, then you should be looking to find somebody that is a fiduciary, an individual that always has to act in your best interest, whether that is on the fee side, evaluating the fees that are being paid. Sometimes people are in low cost 401ks. As a fiduciary, we’re constantly reviewing the expenses at the 401k versus a recommendation of those accounts being moved out. And if an individual happens to be in a 401k that is providing better services, or equal services at a lower cost, as fiduciaries we recommend they stay into those plans. We always are acting in the best interest of the client. Another thing that comes into that evaluation is when you have that trusted advisor, we all get emotional. We see the changes in the market. The market goes up, it goes sideways and it goes down. We can tolerate the market going up. I haven’t found anybody so far that has not tolerated the market going up unless they had options against the market. And so-

Laura Stover:

Guess you could have some capital gain discussions there. One of my clients, they had a pretty hefty, they’re looking at Roth conversions. You have 15,000, but they made a lot. 15,000 in gains, that’s in perspective with making a lot overall, that’s the whole idea of investing.

Michael Wallin:

Yeah, absolutely. And when you’re looking at those numbers, we play a vital role with our clients by sitting down and statistically, they say that an advisor that can help a client during the emotional distress of a contraction in the market saves that client on average between one and 3%. So when you’re looking at a fee being paid, but you counter that on the other side, that being able to educate and assist that client, staying through the investment strategy it’s put in place and they’re not abandoning and going to cash. And then missing the best 10 days in that recovery process, we typically save or help the client to achieve one to 3% greater return. So if you’re paying 1% or you’re paying one and a half or 2%, whatever that magic number is, then you’re looking at a fee structure that’s really being offset by that coaching aspect.

Ron Stutts:

Thanks for listening to this episode of the Retirement Talk podcast. To learn more about how we can help you redefine your wealth and make sure you’re on the right track, go to redefiningwealth.info and schedule a review. Schedule a 15 minute strategy session with Laura and Michael, speak to our host directly. You’ll also be able to get access to today’s show notes along with the transcript, as well as resources mentioned. Again, visit redefiningwealth.info/podcasts, redefiningwealth.info. Now back to this episode, how to choose a retirement financial advisor. Here is your host Laura Stover with Michael Wallin.

Laura Stover:

So there’s many changing risk of retirement and moving into the next area in terms of the planning team and that negative sequence of return. That just makes my blood boil because that can be a really impactful, negative event. We do not know. And your crystal ball’s not all shined off I’m sure Michael. Which days of the market, is it going to be up? And what days is the market going to be down? And maybe you have to begin income. I have another client they’re starting income one year earlier than what they originally planned for. She’s in the medical field. She is wanting to retire in 2022 versus 2023. So really knowing the income is paramount. Are you utilizing a flooring strategy, a goals based strategy? We’ll talk about that just a little bit more, but Dr. Wade Pfau, my favorite professor, he has identified a number of risks that retirees will face.

Laura Stover:

And this sequencing risk is really probably the largest. And what it is even if your portfolio, let’s say it has large gains, maybe even in the latter years of your retirement, the effects of early losses and drawdowns on a portfolio for retirement income could still linger. And worse, according to him, they can stick to the point of the retiree having to downsize their lifestyle. It could be that impactful and maybe even have to go back to work or be permanently stuck in employment longer than what you had wanted to do. And that’s also assuming that your health stays good in the world we’re living in today. So keeping this at bay, not having the danger of the sequency risk. This is really a very, very important, and it’s not just making your assets conservative. I think there’s a disconnect with people in understanding what this really is.

Michael Wallin:

This is the main reason Laura, where I tell our clients, when we’re sitting down, do not have your income coming out of your investment account. The reason why a sequence of returns is not impacted on dollars that does not have a distribution coming out of them. It goes back to the same scenario we were talking about the accumulation phase. It doesn’t matter what that sequence of return is, it’s an average rate at that time. Sequence of return risk is impactful once income is being distributed out of the portfolio in that preservation and income phase. So the best way that I have seen for most of our clients is to take a small proportion of the assets, separate it, use other type of investment instruments that generate guaranteed structured or contractually structured income, have those to be the distribution of that income, leaving the investment strategy alone so that sequence of returns is not impactful.

Michael Wallin:

But if you don’t approach it just like you said, you go into a scenario, you treat all of your dollars exactly the same in retirement. You’re taking income from it. A contraction in the market happens. You’re going to experience what’s called triple compounding in reverse. And when people come through our LS wealth process, one of the things that I love to show them is a two brother story. We have technology or software that we like to use that shows two exact same situations. Two brothers identical, only difference of four years apart. And the difference between 1997 and 2001 is one retired at the beginning of a bull market, one retired at the beginning of a bear market. And like you said, no one has a crystal ball to what is going to be the following year or the next year. And that’s why we say the five to seven years before retirement and the five to seven years after retirement. That corridor is the most impactful to whether or not your retirement plan is going to be successful.

Laura Stover:

So guaranteeing the income, knowing the income plan again, after you want a goals based type of income plan or flooring plan, there’s a number of ways as they say, to carve this out. And there’s a number of tools when you work with a fiduciary based advisor, you want to be able to really understand this and you may think you know it all. But I can assure you going through the redefining wealth process, I think we peel back the layers a little more so that people, they may have done a very good job accumulating, but so they really understand how the six areas of risk that I’ve identified that we have through our proprietary process [are 00:08:38] redefining wealth process, having enough liquidity, having the right income from the right assets, knowing what assets to take that income from, having the healthcare tax investment plan and a state plan is ever so important. And segmenting out assets, maybe using for some of these growth buckets tactical management, which is going to allow for growth over time.

Laura Stover:

But hoping to avoid those very large drawdowns, like 2008 and other times that we’ve seen. They are able to rotate based on momentum, maybe hedging with uncorrelated assets. We want to use every tool that’s available and what makes sense for the client. Perhaps structured notes that can provide a buffer. We really want to focus on that total return. And even if the market has a big swing down, you want to be able to keep some of your money intact and be able to keep paying your monthly income like clockwork. And growing some parts of the portfolio, we need to be able to balance that risk.

Laura Stover:

And I think that’s the number one thing I see as a flaw with most people’s accounts when we’re analyzing them, they lack some balance. Perhaps they had a scare in 2008 or a bad year. They were with the wrong type of advisor. They saw a lot of losses. Now they go to the other extreme where they become too conservative, too annuity based. And I’m just saying that extreme, like all of their assets pretty much in one asset class, that’s never a good thing to not have the proper balance.

Michael Wallin:

Well, it’s critical because it doesn’t take a true consideration of inflation because when you’re looking at annual withdrawal rates, and the safe money withdrawal rate, is a little bit sub of 3% based upon Wade Pfau’s studies. It’s about 2.87% of the account value with adjustment for inflation. So inflation always think of that as a baseline, if 3% inflation, just to maintain it, then you need your portfolio to do 3%, but then you also need to pick up that additional let’s just round up to 3%. So you would need just, if there was a 3% inflation and you’re taking a 3% distribution, you need to be making about a 6% return, to make sure that your probability of success is going through your retirement years. So the biggest element I’ve seeing Laura, and I had a client came in our office last week.

Michael Wallin:

And unfortunately, the individual sat down and said, well, I’m 80 years old. I don’t really believe I’m going to have more than 10 years of life left. I need about $30,000 out of the account, and I’ve got $300,000. And I was like, well, is $30,000 what you’re needing in today’s dollars? And they said, yes. And I said, well, we’re potentially going into hyperinflation. I’m not sure that 300,000 is actually at the same buying power as today, going to last you 10 years. He had really never considered the impact of inflation.

Michael Wallin:

So that’s another thing, is you want to make sure that you’re working with someone that is not just quickly looking to have money in motion, making transactions, but really building you an extensive plan. I come as you know, Laura, out of a carpenter family, it’s always about measuring twice and cutting once. Do more time on the planning side and then get it right on the first cut.

Laura Stover:

If you just cut things by eyeing it, I know enough about carpentry that that doesn’t work out so good. And you got to find other parts to try to stick in there to make it look right. That’s not my forte, but I think analyzing portfolios, I do a pretty good job of that when, you can have an opportunity to speak to both myself and Michael. We are happy. If you have questions, just go to redefiningwealth.info, it all begins and stops with income as well as planning for those six key risks. That is why we utilize the redefining wealth process. We have the framework in place to address all of those key pillars. You want to make sure you have a coordination and most importantly, balance with your retirement plan.

Ron Stutts:

Redefining Wealth is a registered trademark of LS Wealth Management. Take advantage of a complimentary plan. Know where you stand regardless of the market, walk through the redefining wealth process and have a clear picture of the key risks you likely will face and achieve a deeper understanding of how to properly plan for these risks with the redefining wealth framework. Schedule a strategy session now, by going to redefiningwealth.info and click schedule. Redefining Wealth is a registered trademark of LS wealth management. Investing involves risk, including the potential loss of principle. Any references to protection, safety, or lifetime income, generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier.

Ron Stutts:

This show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual situation. LS wealth management LLC is not permitted to offer and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the US government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by LS wealth management, LLC. Investment advisory services offered through Optimize Advisory Services and SAC registered investment advisor. LS wealth management is a separate entity.

The post 83. What to Know Before Hiring a Retirement Financial Advisor appeared first on redefiningwealth.info.

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With the recent dip in the market around the holidays, we’re seeing a lot of conversations around the potential changes over the next ten years that lead to the idea of an upcoming rough year for investors.

In this episode, we’re debunking some of the ideas that the 2022 market will be bad for investors based on historical data. Listen in as we discuss a few important details you need to know about your taxes, your investments, and potential changes coming in the next few years.

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Rate & Review the Podcast on your favorite podcast app!

Show Notes: Team Approach to a Proactive Tax Strategy (3:44)

Roth Conversions in Tax Strategies (4:26)

Potential Changes in Taxes (4:58)

Prohibiting Roth IRA Conversions for Wealthier Tax Payers
Capped Aggregate Account Balances

Backdoor Roth IRA (16:34)

Market Volatility Over the Holidays (19:51)

Hawkish Fed Policy (22:47

Dove Fed Policy (23:17)

Perspective, Mindset, & Balance (25:18)

Triple Compounding in Reverse (27:48)

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Review the Transcript: Ron Stutts:

Welcome to Retirement Talk, the Redefining Wealth Show, your source for financial information for pre-retirees and retirees. We are here to help you better navigate during these financial times. We’re here to discuss thoughts and ideas with some of today’s foremost experts in the field of finance and retirement, as well as discuss trending topics and the impact of major legislation that could impact your bottom line. We will break it all down. These discussions can help you make better financial decisions and be informed so you can live the lifestyle you imagine and make better financial choices.

Ron Stutts:

Laura Stover is a registered financial consultant and CEO of LS Wealth Management, as well as founder and owner of the LS Tax, a consulting firm. She’s been featured in Forbes, CNBC, and The Wall Street Journal. I’m Ron Stutts. Our topic for today is all about what 2022 holds and strategies you should implement today to be better prepared for tomorrow. If you’d like to learn more on today’s topic, head on over to redefiningwealth.info and schedule a strategy session. Now, here are your hosts for today’s show, Wealth Advisor, Laura Stover, and Certified Financial Planner, Michael Wallin.

Laura Stover:

Hello, hello, hello, and Michael, welcome to this week’s retirement talk. How are you?

Michael Wallin:

Doing great, Laura. How are you today?

Laura Stover:

Oh, it’s been a very, very busy week. Well, you’ve been with me most of the week. We’ve spoken with a lot of clients, and I think that is appropriate to say as we’re approaching the end of 2021, there are a lot of questions that we have gauged with clients, a lot of listeners to the show. Thank you for listening, and some of you are taking advantage of going to redefiningwealth.info and clicking that schedule review button because you want a complimentary consultation. A lot of you are soon to retire, you are wanting to make sure you’re on the right path. And I think as everybody is wanting to be on the right path and wondering the big question and get your polisher out, Michael, for the crystal ball, what does 2022 have in store?

Laura Stover:

That is what we are going to discuss at today’s show. An article from BofA, and it was on the internet in markets.businessinsider.com, 2022 is shaping up to be a bad year per the article for the stock market as investors grapple with three shocks. Well, I don’t know that I agree entirely with the title of this article. We are certainly seeing some things in question, as we approach the end of the year and like myself, many clients have had questions. What will the market do? What will the impact of fed policy? How will that affect my retirement account? We have a lot of questions we’re filled in terms of, should I do a Roth conversion? So I think we’re going to focus on taxes, Michael, and the second part of the show, then a little more time spent in terms of what the market is looking like.

Laura Stover:

We saw Black Friday take a little bit of a nose bleed. We’ve seen ongoing volatility. Let’s dive right into this week’s show and beginning with a proactive tax strategy. Now, many clients have taken advantage of consulting with our CPA, and you’ll hear us often speak about the team approach. I do not believe that any one person, if you are just exclusively consulting with one advisor and you are counting on them to do everything for you, that must be an exceptionally bright person because it is requiring a CPA specialist, certified financial planners, case planners, legal experts. And we want that team approach with some of these questions.

Laura Stover:

And the first item on here is really a discussion, Michael, about Roth conversions. And we provide the tools with our CPA team to our clients evaluate that cost analysis. What is it going to cost to do the conversion? How much can I convert? And that is very insightful for many of our clients. So being proactive with these tax strategies, it’s one of the pillars of the redefining wealth process. So if we first hit this topic on taxes, there are some changes around the corner for 2022, 2029. Let’s talk about some of those potential changes first regarding the ability to convert a Roth and how that may be impacted going forward. This is a big one.

Michael Wallin:

Absolutely. And now we’re looking at the House bill that is being evaluated right now. It is still in the bill that Roth conversion limits will be put in place. The House bill is prohibiting Roth IRA conversions from wealthier tax payers, those individuals earning more than $400,000 as an individual or as a couple earning more than 450,000. And going into the bill that that restriction would actually take place in 2032. So even though we’re looking at adding it now, there’s still a 10 year window for individuals at that higher income level, still being able to make Roth conversions over the next 10 years, but then it would limit that going into 2032 at those income levels.

Michael Wallin:

So, that’s a huge part of a lot of people’s strategy. As we have looked at over the years, people have thought, well, I’ll get to those retirement years and then I’m going to take my 401k and then I’m going to bump the bracket. I’m going to start taking money out of my IRA or my 401k, I’m going to start converting that over into a Roth account so I can mitigate and control my taxes in the future. Well, you better start planning and making adjustments because these limits get passed by the Senate we will start seeing those higher earners not being able to take advantage of it.

Laura Stover:

When you think about it as an individual or a couple it’s only 50,000 a year more as a couple. 450,000 as a couple these days, if you’re living in a state like California, now it’s beautiful, beautiful state, but we know how expensive it is to live in states like… 450,000 between two people, it’s not really… I mean, that’s a nice income depend upon the lifestyle you’re wanting to live, but that’s a lot of upper middle class individuals, that’s not really wealthy in my opinion. What do you think? As far as that cutoff to say, if I’m an individual at 400,000, that seems a bit lopsided when there’s a 50,000 more only as a couple.

Michael Wallin:

I found this to be very interesting. Last week as I was on Thanksgiving break, I was watching TV and it seems that Whoopi Goldberg, I have finally agreed with something that she had to say on The View. She came out.

Laura Stover:

Drum roll.

Michael Wallin:

She came out with a same complaint saying that somebody at $400,000 of earned income is not the upper 1%. They are not the one percenters of our population. And she was complaining that that number is too low. So I think that’s important as we look at it is we are getting it into middle class America, we are getting into those individuals that may be small business owners that may have that type of income, but when we’re limiting their ability to make sure their revenue is going to last, or their earnings is going to last throughout their retirement, that has impact because what if they start selling off small business or we start seeing other decisions that they make that eliminates jobs, what’s going to be the impact in local communities because of this fed bill that’s being looked at right now?

Laura Stover:

Yeah, and I’d say that’s a big whoopty doo if I thought the same thing that Whoopi… So I think that could be a unanimous consensus, but everyone’s so polarized these days. It’s not going to be an agreeable viewpoint to see if we put our heads in a bag and we both give an opinion without hearing the other side’s opinion then we come out to the whoopty doo, it is not the upper 1% by any means. So the message here is if you have most of your retirement assets, and this is the thing, when you do the internal rollover, if you’re soon to retire with your 401k and you do the internal rollover to a fidelity type of, I’m not picking on anybody, but if you do like an internal rollover, you’re not going to get some of the strategic planning that you need to put in place today to mitigate some of these changes that are forthcoming to really understand what the rules are.

Laura Stover:

They’re changing rapidly in terms of these discussions, and really is your favorite word and I like this word now to unpacking it all, can be convoluted and you really have to be on top of this with a forward looking approach. Taxes are something that requires being very proactive. So if you have the bulk of your wealth right now in these large retirement accounts, check that off is something immediately that you need to have on your radar about the amounts that you should be converting now because the target year where this potentially could change is 2032. It is not that far down the road, and they could always move this up sooner. Things are happening rapidly. Now the next part of this whole thing, let’s explain what aggregate account balances are in terms of IRA accounts. They’re also looking at capping these aggregate account balances.

Laura Stover:

This bill would prohibit individuals if you have an aggregate savings. So this is probably the upper higher net worth now at 10 million or more in tax advantaged retirement accounts and if your income though is above 400,000 from making any more contributions. So if you’re in these income limits, and of course we always know it starts at one place in the House and it ends up looking different in the Senate. But what they’re eyeing right now is if you exceed where they ultimately put this criteria as an individual, you are going to be required regardless of your age, to take an RMD from these accounts. That’s huge and that is on the agenda for 2029. I can’t even say years that far ahead, I feel like the Jetsons, 2029. So they want tax revenue, here in the next few years they’re really targeting these retirement accounts.

Michael Wallin:

Absolutely, and they’re even more stringent on rules that we’re seeing for individuals with 20 million or more. Again, like you’re saying, Laura, it’s looking at the federal government making fed policy to say, what can we do to get more revenue in to the coffers of the government? And I think that’s important that as they’re balancing this out… Now, this is on the House bill, it still has to go through the Senate and be passed. And those are the negative side to the high net worth but I think it’s noteworthy to look at the other side of the spectrum. And there’s a lot of listeners out here that I think would fit within this scope. They may be in the retirement years today, they have an IRA, they’re taking RMDs every year out of their accounts. However, when you’re looking at their social security and social security is not taxable in itself, it’s only taxable when other income is added to it.

Michael Wallin:

So individuals need to be talking to a tax expert, talking to a financial planner, going through the LS wealth process like we guide people through, because this week we were able to help a client that came along, has a very modest IRA and they were taking their RMDs out, because we’ve been helping everybody currently getting their RMDs out of their accounts, and simply ask them, why are you not taking out more of this? Because their RMD and their income, they still had a gap on what their exclusion rate was. Their personal deduction, they were not meeting that level and I advised them, go ahead and take more out. We’ll move that into a Roth and over the next four years, we’re going to be able to move that IRA from a taxable account… Housing taxation to the individual that over the next four years, we’ll be able to move all of those funds into a Roth.

Michael Wallin:

It will longer be taxable to the individual in the future because we’ll already pay taxes from the traditional going into the Roth. So any gains are tax free in that going forward, but even more important because our client was not needing those assets on an annual basis for income, it’s no longer going to be taxable to the beneficiaries in the future as well. The client was just elated and was like, this is a great strategy, I don’t know why my previous advisor did not share it with me. And again, it’s because not looking at things holistic, they were only looking at the investing side, not taking consideration of taxation, not considering distribution. And that’s why you have to really evaluate and are there advantages that you can take today to protect or create a better opportunity while you’re living, but also in what you distribute to the next generation?

Laura Stover:

So definitely the eye is on qualified retirement accounts with some of the proposed items that are just coming out now where some attention in Congress is… And really with the current administration’s viewpoint on where they want to eye tax revenue going forward. So Roth conversion limits based on your income is one and then aggregate account balances if you have multiple IRA accounts, there is a cap on these, as we just stated, they’re eyeing a change if your income or the balance in these accounts to be determined yet, exceed a certain amount. Their agenda would say, you regardless of your age, it’s not just the 72 anymore, regardless of age, now you’re going to have to start paying tax on these accounts with a distribution. That’s some of what is out there at the moment. Now, another area I did recently see, Michael this week, and maybe we’ll dedicate a show to this.

Laura Stover:

A lot of the diversification with tax structure comes in getting some of the money from the taxable tax deferred to that tax free bucket. And I did see where IULs or the life insurance world is changing that corridor with regards to MECs with some possible legislative changes going forward, that would allow a person to fund these a little more fully without paying that 10% distribution if you exceed and it becomes a modified endowment. So I don’t want to confuse listeners, but there’s a lot on the horizon with regards to tax changes. Another popular discussion revolves around the backdoor Roth IRA. Now this is not an official type of individual retirement account. It is just an informal name for a kind of complicated internal revenue service. It’s a sanctioned method for high income earners now, that you have an ability if you exceed the income limits to facilitate doing a Roth conversion, this is as it’s described a backdoor ways.

Laura Stover:

Purely legal if your income again, exceeds the limits that the IRS allows for regular Roth contribution. So basically a backdoor Roth, it’s not a special type of an account. They are traditional IRAs and 401k accounts that you can convert to a Roth IRA. So understanding this legal way to get around those income limits that normally restrict high income earners from contributing to our Roth. The backdoor Roth is not a tax dodge, it’s maybe even going to incur higher taxes initially when it’s established, but the investor will get the future tax savings of the benefits of having the Roth account. So let’s talk about this, beginning in 2022 individuals would be prohibited, that’s just next year, that’s weeks away, from converting after tax contributions to either the 401k are the traditional Roth.

Michael Wallin:

That has been a… Like you said, for high net worth individuals has been a great strategy over the years and what I call an in flight transfer and the taxation is created while the transition is done in flight. And then where does it land? Well instead of allowing the after tax dollars to land into a Roth account where all future gains within, as long as it met eligibility would be tax free, the government is basically saying, no, it’s going to be taxed, but it’s going to have to go into a non-qualified account because they’re wanting that any future gains in that contract or in that whatever the account is that is set up, that those gains are going to be taxable in the future. So again, it’s a way of saying, high net worth individuals we’re not going to allow you to continue growing your accounts on a tax-free basis in the future and pushing more of those dollar into current today taxation.

Ron Stutts:

Thanks for listening to this episode of the retirement talk podcast. To learn more about how we can help you redefine your wealth and make sure you’re on the right track, go to redefiningwealth.info and schedule a review. You’ll also be able to get access to today’s show notes along with a transcript, as well as the resources mentioned. Again, visit redefiningwealth.info/podcasts. Thanks again for taking the time to listen and be sure to tune in next week for another episode, the Retirement Talk Podcast with Laura Stover.

Laura Stover:

So some of what we may be looking at in 2022 and going forward is our featured article for today’s Retirement Talk, The Redefining Wealth Show, you’re listening to Laura Stover and Michael Wallin. So market volatility, we may end up 2021 with a few bumps. I’m personally buying more, but I think we want to put this in perspective. Our target audience that we are listening to is those folks nearing retirement. And we always call that little window, the bridge to retirement, is the five to seven years, ten years away, or you’re in retirement, you are welcome to listen to the show. So you’re learning some steps to take, but there’s specific strategies when it comes to the tax portion. And we spent the first part of the show discussing that, but now there’s a lot of questions, Michael, about market volatility. We had some turmoil in the market, Black Friday, we saw a steep decline.

Laura Stover:

In fact, it was the worst Black Friday on record in about 70 years. Now, if we put corrections into perspective, this is one aspect of what I want to discuss. And then a few of the shocks that are contributing to some of this volatility regarding payroll recoveries, inflation, rising interest rates. Some of these things and the virus obviously was a big impetus for why we had the turmoil that we did on Black Friday and subsequently the following Monday it was up and Tuesday it was down and so we’re seeing that yo-yo effect completely. So we’re on the cusp of policy pivots from pro growth to anti inflation. And I think this is a lot of what’s going on. So lets kind of explain the backdrop as to what the factors are that’s causing some of this volatility, then really our philosophy and how you should deal with it.

Michael Wallin:

Like you mentioned, Laura, on Friday, we had a 2.14% drop in the market on Black Friday. That came because the latest headline news about COVID, that was when the Omicron strand hit the news wire and everybody reacted to it and then we did have a recovery on Monday, and then on Tuesday, November 30th, we also saw 1.95% drawback at that time, that really came from Jerome Powell’s comments during the Q&A portion of the Senate hearing when it was namely talking about speeding up the pace of tapering and that at its time to retire the word transitory when he was referring to inflation, and that really gets into two things. One is those comments were seen as very hawkish and just for the listeners to understand when we’re looking at fed policy and there’s two birds that is looked at the Hawk and the Dove. Well, hawkish is one where they believe that from a fed policy that if you can control inflation, you can control the economy and make sure things balance out. The converse of that is dovish.

Michael Wallin:

And when I look at that, it’s more around fed policy that is looking at expanding the workforce and the workforce creating greater taxation, taxation comes in. So it’s a longer smooth process opposed to the hawkish process, which is really focusing in on one element and targeting that. And so because of Jerome Powell’s comments around that, we saw a reaction because a lot of the market got a little uneasy. And again, the market’s just like everybody else, uncertainty does not make the market perform well. And I would have to believe that most of our listeners on here, Laura, would also say that uncertainty causes them a little bit of an uneasiness.

Michael Wallin:

Well, those two things work in parallel. And so we saw a correction, but immediately we saw an expansion back at the market to where we are today. And so I think that those are, again, what we call news article or news cycle corrections and the key thing is not to overreact when you see those. We’re going to have a bad month but in consideration to those two days that we saw coming out of Thanksgiving, neither one of those two days even make the 50 worst days in the market, going back from 1995 to 2021. So if you look at that time period, neither one of those two days would’ve even made it in the top 50.

Laura Stover:

So again, with the target client that we are kind of catering to, the 10 years before retirement or you’re already retired, the moral of the story is the philosophy. We know the market is going to go on these cycles. We may not continue with quite as robust of a bull market going forward. I don’t think it’s realistic to try to expect 20-30% returns all the time, but it’s about consistency of return. It’s about a total return approach and it’s about balance in the portfolio. With a couple of our client conversations this week, and we’ll just break these last closing thoughts down to put in perspective really the mindset, your mindset from previous experiences that you have had and understanding the difference between that static composite buy and hold that you typically invest that way when you are in your accumulation phase. And as we go through our life arc planning, we are focusing on the preservation and distribution phase.

Laura Stover:

If you are an individual that is 10 years before retirement or in retirement, and then having that risk capacity discussion, what return do you need to have to be successful? Then the tool in the toolbox with tactical management, with uncorrelated asset classes, and really having that very defined plan, because it’s the losses, the bad negative sequence of return that hurts a person more than anything if they get this recipe wrong. And it’s having balance, it’s not just going to the bad actor and having 90% of your portfolio put in an annuity, I’m not saying annuities are bad. Again, it’s balance, B-A-L-A-N-C-E. Whoopi would agree, I’m going to call her and ask her. We talked about Whoopi the first part of the show. Having that right balance in the portfolio and not putting all, as the saying goes, all the eggs in one basket.

Michael Wallin:

Well, you nailed it right there, Laura, sequence of return. I can’t overstate when I’m talking with clients, how important that is, and making sure that your income is not coming out of your positions wherever you have your accounts position. That it’s not coming out of a volatile side of the portfolio. And you want to make sure that that income is coming out and it can be consistent and reliable. Now over on the other side of it… And that’s again the reason why we talk to clients about tranching their assets, breaking the assets down upon when you’re going to deploy them into the income plan, because then you can diversify your risk over each one of those tranches or sleeves. Some people may have heard that terminology as sleeving, but to be able to break it down over time periods, it correlates to when they’re going to use it.

Michael Wallin:

And sequence of returns is very important because as much as compounding interest is very valuable during the accumulation phase, if you don’t get this correct, you will get what’s called triple compounding in reverse during your preservation and income phase. And what that simply means is its very difficult to overcome taking a distribution because you need additional income to live off of, so you’re taking a distribution out of your retirement account at the same time, a correction happens in the market and let’s just say you were taking a 3-5% distribution, which 3% is the safe money distribution rate. But let’s say you were between 3-5%, but the market also corrected by 25%. You could be in excess of 30% of your portfolio lost in one year. And then you go into the next year and the markets trying to recover, but what if you’re taking that 3-5% again. Then what you’re doing is you’re consistently going through a process of draining down your assets and you will shorten the duration of how long those dollars will effectively be there during your retirement years.

Laura Stover:

It’s all about sustainability of the portfolio covering the five key pillars of risk that we’ve identified that all of us will face and having a well crafted plan. So there’s coordination and a framework in place to make sure you have the income, that you have the investment management, that you have the healthcare plan built in, that you have the tax plan built in. That’s a big piece of the five pillars. And that you have the estate plan that is called the redefining wealth process. Thank you for listening to this week’s show. If you have any questions, Michael, and I would love to speak with you in person, go to redefiningwealth.info, that’s redefiningwealth.info, click on review, schedule a 15 minute call. We’ll meet you virtually by phone or in person. Thank you again for listening to this week’s retirement talk with Laura Stover and Certified Financial Planner, Michael Wallin.

Ron Stutts:

Redefining wealth is a registered trademark of LS Wealth Management take advantage of a complimentary plan. Know where you stand regardless of the market. Walk through the redefining wealth process and have a clear picture of the key risks you likely will face and achieve a deeper understanding of how to properly plan for these risks with redefining wealth framework. Schedule a strategy session now by going to redefiningwealth.info and click schedule. Redefining wealth as a registered trademark of LS Wealth Management. Investing involves risk, including the potential loss of principle. Any references to protection, safety, or lifetime income generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier.

Ron Stutts:

This show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual situation. LS Wealth Management, LLC is not permitted to offer, and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the US government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by LS Wealth Management, LLC. Investment advisory services offered through optimized advisory services and SAC registered investment advisor, LS Wealth Management is a separate entity.

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Have you looked into the odds of success with your financial plan? In this episode, we’re exploring the Monte Carlo Success Thresholds, highlighting adjustments in tolerance for spending volatility, and sharing three questions you should be asking yourself as you think through every situation in your retirement planning.

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Show Notes: Volatility Tolerance (2:47)

What is the probability of success? (5:08)

Risk Tolerance & Volatility (15:06)

Behavioral Finance (17:29)

Building Bond & Equity Positions (19:29)

Scenarios & Variables in Retirement Planning (21:23)

Questions to Think Through Planning Situations (22:24)

Question 1 (23:07)

If market performance over the next three years is well below long-term expectations requiring you to take corrective action by reducing some adaptive expenses, how would you perceive this outcome?

A: unfortunate, but part of the nature of planning and uncertain world conditions

B: disappointing, something you’d like to avoid if at all possible

C: unacceptable the result of a poor plan

Question 2 (24:19)

If market returns are poor over the next three years, let’s consider which response:

A: Modify my financial goals to create a more feasible plan

B: Lower some of my adaptive spending items to get back on track

C: Accept a higher level of market volatility to improve expected returns

D: I would not be comfortable with any of the options above.

Question 3 (26:04)

Complete the statement: I should only expect to modify my spending if the market falls ____ percentage or more.

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Ron Stokes:

Welcome to Retirement Talk the redefining wealth show, your source for financial information for pre-retirees and retirees to help you better navigate during these financial times. We are here to discuss thoughts and ideas with some of today’s foremost experts in the field of finance and retirement, as well as discuss trending topics and the impact of major legislation that can impact your bottom line. We will break it all down. These discussions can help you make better financial decisions and be informed so you can live the lifestyle you imagine and make better financial choices.

Ron Stokes:

Laura Stover is a registered financial consultant and CEO of LS Wealth Management, as well as Founder and Owner of LS Tax, a consulting firm. She’s been featured in Forbes, CNBC and The Wall Street Journal. I’m Ron Stokes. Our topic for today comes from Michael Kitces. If you would like to learn more on today’s topic, head on over to redefiningwealth.info. Schedule a strategy session with Laura Stover and certified financial planner, Michael Wallen, or check out show notes and archives of all shows redefiningwealth.info. Now, here are your hosts for today’s show wealth advisor, Laura Stover, and Certified Financial Planner, Michael Wallen.

Laura Stover:

Hello. Hello. Hello. I am joined today by my good friend and certified financial planner, all around great guy, Michael Wallen here with me today. Hey Michael.

Michael Wallen:

Wow, I thought my mom was the one giving that intro. She’s the only that gives me those kind of accolades. Thank you so much for that intro, Laura.

Laura Stover:

I mean every single word, Michael. I like the article that we’ve chosen for today that we’re going to share with everybody, but surround yourself with great people no matter how overwhelmed you feel in the day and I’m going with my friend and telling her all these things that’s going on in my busy, busy world these days and she simply said, “Look at all the great things that you’re accomplishing.” And not to feed my ego or anything, but the good that’s being put out, and this is a time of year with the holiday season, we’re coming at the end of the year, we have a new year before us. The last two years have been very challenging for some people and I love the article, the discussion for today. It’s a little bit of a academic type of article. Now, I know podcasts are supposed to be fun and entertaining and we’re going to make the title of this article by my favorite blogger, Michael Kitces.

Laura Stover:

He is well known in the financial world. He’s very much a deep thinker in the title of our topic of discussion, Using Volatility Tolerance to Refine Monte Carlo Thresholds. Is that not a mouthful to discuss? But this is so relevant and it’s one of the trending topics. If you want to read more, go to the show notes, hop on over to redefiningwealth.info and I’m going to break down some of the key takeaways today, give our listeners some things to think about, take back to your financial advisor if you’re not receiving this level of information. And better yet, I hope you can begin implementing some of the important concepts that Michael and I want to discuss into your own financial life. Maybe you’re thinking of retiring soon, maybe you’re doing it yourself, this shows very much for you if you are a do it yourself investor. Remember, you can always connect directly with us, go over to redefiningwealth.info, get the link to the show notes and this one comes to us from, as I said, Michael Kitces, the tolerance for spending volatility.

Laura Stover:

He gets a little deep into the weeds, but this is some of the best information and I think it’s being put out to financial advisors, so we want to break this down to the listeners and it’s all revolving around what are your odds of success with your financial plan? That’s what the topic is centered around, Michael, and we want to determine what the odds of success are. And more importantly, what does that mean? A 90% chance of success, a 50% chance. The article actually illustrates how you could enter retirement with a 50/50 chance of a plan actually working out and still making it work out in the end. What do you have to do to increase your odds above 50%? Having a better conversation, maybe having a better handle on what you’re going to do if volatility hits the stock market, which inevitably it will. This is pretty much testing against what a lot of do it yourselfers really get wrong.

Michael Wallen:

Laura, one of the essential parts of our first pillar, which is income planning on the LS wealth process there, is really diving into this and that is what is the probability of success that we are going to have based upon the solutions that we put in place? Now, 90% typically is that threshold. Anything more than 90%, you typically get into a little too conservative of a retirement planning strategy, but we want to know that if we have the ability to at least… if we had nine out of the plans we put together and then on that 10th plan, what we’re looking at is what is that individual’s ability to modify their spending habits? And that’s a part of this article that he talks about as well is how would we be able to go in there and maybe modify some of the spending? But let’s frame this up for a second and I’ve got two scenarios I want to share with you because Monte Carlo simulations, they’re a very important part of an advisor’s toolbox when we’re constructing that financial plan.

Michael Wallen:

One of it is one of the leading financial planning softwares in the country… I had the privilege of flying out to the west coast and meeting with the developer of their software. They had been very one dimensional in the investment only side of the business and really never understood the insurance and some of the annuity type products that we’ve talked about in the past. They run a Monte Carlo simulation in side of their software, just like we do through Life Ark Plan, and when were looking at that simulation, I shared with them the use of mortality credits. And we’ve talked about mortality credits in the past shows, but that’s where you’re leveraging the large pool of insurance clients when you’re talking out an income stream coming out of an annuity. By implementing under this scenario that we had put in place… And disclosure, this is not every scenario out there, it was the scenario that we ran in the office there to show as a demonstration to the developers.

Michael Wallen:

But by adding that annuity, we increased the probability of success through their Monte Carlo by 10%. We took that individual that had a 80% probability up to the threshold we desired at 90% by properly incorporating a allocation or a percentage of the dollars into the annuity, whether it’s an immediate annuity or a fixed indexed annuity with an income writer or a variable annuity with an income writer that was providing the income stream, that’s where we start balancing that. And what the Monte Carlo is doing is allowing us to test thousands of scenarios at one time to test whether or not the solutions that we are advising have the probability that we want in the future. And like you said, if they are not working with advisors that are simply selling them something, whether it’s a one dimensional as an insurance agent or one dimensional as an investment or broker dealer, and they are not actually looking at the comprehensive plan and running these scenarios, they are leaving the risk of failure on the table because they do not have the analysis to dictate the probability.

Laura Stover:

Oh boy, this is a good topic and we could probably do every show on this type of discussion because I know we really work hard at identifying goals-based planning, not just the sexy talk. Oh, taxes are going up. Yes, taxes are going up. Do we do a Roth conversion? Yeah, I’m doing lots of Roth conversions. This goes on to a much deeper, getting under the hood analysis of probability of success in retirement and having what is a well constructed plan to address it. It comes down to expenses. Cashflow and assets are a very major component. It’s not just, “Oh, I have some money. What do I invest in?” A lot of do it yourselfers, really miss the boat. They’re using simplistic financial planning software online. Now, that’s all fine to kind of wrap your head around numbers and rates of return, but simplistic financial planning software online, plug in a of a rate of return, 5%, 7%. You hear this a lot. And the stock market, it averages 10% a year, right Michael? Or I made 12% a year or I invested in crypto and I’m down $70,000.

Laura Stover:

Now, I didn’t do that, but I see people that did do that. Not putting all your eggs in one basket or looking at annualized return of a 401k statement, maybe you’re making 12%, maybe you’re up 20% because the market’s been good this year. How long will your money last? Will the market repeat itself for the next 10 years as it did in the last 10 years? None of us know the question and what the author is trying to point out here is what you’re spending now, coupled with the rates of return, how would you have to make adjustments to maintain the lifestyle that you need to and want to maintain in your retirement years if seven or 10% or whatever.

Laura Stover:

We know of the market does not perform on a linear projection. If you have 7%, 10%, the stock market average is just that, it’s an average. It’s not a line into the future. It’s going to go up, it’s going to go down, it’s going to go sideways and the market’s a bit of a roller coaster and that creates some risk. Now, as you said, Michael, there’s thousands of different market scenarios. We do stress testing on all of these factors and we want to see what is the failure rate? We want to see many, many different simulations and run those returns in different orders. You can lower your average rate of return that are higher and lower in order to figure out how many different simulations could you run and not run out of money in retirement? There’s always the benchmark used by advisors. I’m at an 80% and 85, 90%. You might have heard this. What is the target? That’s what we want to accomplish is a 90% success rate.

Laura Stover:

That’s not really where we’re coming from based on some of the way Michael frames this in the article. I mean, I think our clients want $100 success rate. I don’t want to go into brain surgery with a 70% success rate or an 85% success rate, I want to know that my expenditures and my cash flow are going to match up with my expectations and the reality if something happens that the rate of return… that my income is not solely dependent upon the rate of return that I am achieving within my overall portfolio.

Michael Wallen:

And what we have to do is get outside of the information that so often we’ve got framed into in retirement planning. For years, we’ve been told that a 4% is a safe money withdrawal rate, plus inflation being added to it. Well, those numbers over the years running the simulation has really got it down that the safe money withdrawal rate is sub 3% at this time, Laura, and when you add inflation and we know right now that we could be going into a hyperinflation scenario. So as we’re looking at these increasing costs to where our dollars are coming in, how many scenarios can we run under the conditions, the variables that we present to that portfolio, to get to that success rate? And you’re right, as a retiree, that individual is looking for absolutes. The reality is absolutes are not going to be out there, but we’ve got to put the best strategy forward, shooting for the ultimate 100%, knowing that in the event that it’s not going to be achievable, the second phase of it is how much of that individual’s budget do they have the ability to draw back?

Michael Wallen:

So for instance, if an individual is making $50,000 in retirement, and let’s just say they’re making ends meet. Their expenses are at that same $50,000, they’re a typical retiree, that they’re not saving, but they’re meeting their current scenario, inflation adjustments being met, but what happens if we go into hyperinflation and all of a sudden their expenses are now for this next year much greater? What inside of their budget do they have the ability to draw back on or to reduce their expenditures to get them back inside of that margin? And because it is, we want to get them the highest probability, but it’s also on the other side that if that scenario is not meeting their needs, what is their willingness or ability to reduce down expenses in retirement? And that’s modifying the budget.

Michael Wallen:

It’s not a one dimensional approach. We must look at all dimensions, how all things come together. Just like we talked about on one of our previous shows where long term care could be a condition that we have to look at. That’s why planning early is so important that we get a plan in place, we get a strategy because we’ve got to make for inclusion of those additional services or needs that we’re going to need in retirement and build that into the equation with that long term probability that we’re looking for.

Laura Stover:

We’re looking at this approach in terms of gauging someone and volatility, their comfort with volatility, the risk tolerance in other words. We did a show about… similar to this a few times back. Maybe you fill out a questionnaire, you find that you are moderate or you’re aggressive or you are a high risk portfolio because the Monte Carlo simulation in that questionnaire is equating two things, your risk tolerance and portfolio volatility, which ultimately leads to portfolio centric responses by the advisor and the advisor then is allocating your portfolio simply due to your risk tolerance and not actually making the connection that needs to be made. Because maybe when you’re communicating that you’re moderate, for example, you are truly trying to communicate you want to avoid a certain degree of consequences based on losses, not just the loss themselves, not just the volatility in a year to year basis, but what are the consequences of that volatility?

Laura Stover:

What are the consequences of those market pullbacks? And you say, “Hey, the consequences that I need to cut my expenses,” then maybe you’re too aggressive. For that matter, if your consequences are not willing to accept that expense cut, that’s the key. When maybe you are conservative, you said, “Well, moderate,” and it’s just really thinking through these questions from the advisor side of the table and your own side of the table in order to determine what type of portfolio is right for you. Because volatility is just that, it’s a year over year thing.

Ron Stokes:

You’re listening to the Retirement Talk Podcast with Laura Stover and Michael Wallen. For a strategy session with Laura and Michael, go to redefiningwealth.info and click review. We take a deep dive with your particular situation and walk through the redefining wealth process. We will meet with you by phone, virtually or in person. Again, go to redefiningwealth.info. Now, back to Retirement Talk, the redefining wealth show with Laura Stover and Michael Wallen.

Laura Stover:

Market volatility doesn’t necessarily equate itself to reaching your long term financial goals, it’s really more about behavioral finance and that’s something that’s so important. Are you going to panic? Are you going to panic when the market goes down? How are you going to respond when markets are down? What is the consequence of the loss? This is part of your portfolio that you need for spending in the next five years and you may have a right to panic if you’re allocated wrong. And deciding whether you’re willing to cut expenses if still going to liquidate your portfolio when the market is down, we kind of nurture conversations. We don’t get a lot of this because we really approach the total return and making sure the income is never at risk and making sure the buckets are segmented out properly. This is really, really important.

Laura Stover:

You can’t just destroy your whole financial plan when these things happen, like in 2020 and we’re in the midst of a pandemic and the market surged down 34%. Well, that’s just a blip in everyone’s memory now because it recovered so abnormally fast. Or we see some advisors just putting everyone in annuities. Not that annuities are bad, but they’re so out of balance. People make the wrong moves at the wrong time because they don’t know what their plan is.

Michael Wallen:

It definitely takes a comprehensive approach. And again, not allowing the income to be directly correlated to the volatility of the market, use income providing solutions to do that and that’s why we look at diversifying the dollars, allocating them into proper tranches to mitigate that amount of risk that is exposed and, again, providing ourself a much higher probability of success by proper planning. Now, one of the things that as this Monte Carlo and a lot of advisors out there in the industry that are one dimensional are looking at building bond and equity positions, that 60/40, 40/60 portfolio. When we’re looking at those typical constraints… And Laura, yesterday I was meeting with an individual. We were setting up a 401k plan for their business and they had looked at some different competitions. And this goes back… It’s not just that individual, it’s working one on one with an advisor. This is the same thing happening with 401ks.

Michael Wallen:

But the individual said, “Well, do y’all offer any of these target date type of plans?” And I said, “No,” and I said, “Because here’s the problem with a target date. It is a system that will automatically modify down over a period of time the amount of equity to bond as you approach closer to your retirement date.” I said, “But what happens if you have not achieved the actual amount of assets you need going into retirement and you are reducing down your ability to gain those over a five, seven, 10 year time period it’s declining.” I said, “That is not our objective to do that. We want to do comprehensive planning, looking at it, evaluating it, making adjustments where necessary to target the goal.” We often talk about pilots today. When we are looking at… If I was flying up to visit you from Nashville to Ohio, Laura, if I was flying out today, the adjustments that 99% of the time that plane is in the air, the computer is making an adjustment because wind currencies, volatility variables are pushing against the plane. 99% of the time that the plane is in the air, an adjustment is being made.

Michael Wallen:

When we go into retirement planning, going into it and through it, we have to constantly review what we’re looking at to make those simple modifications, adjustments to get back onto the plum line to achieve the ultimate goal in the future and one of the tools that we use is running these scenarios. And it’s not a scenario that’s only ran once, but we should be looking at it on periodic reviews and that way we can see, “Hey, do we need to modify this? Do we need to adjust it? Has your budget changed? Has your income changed? Have you received an inheritance? Are you paying out more dollars because maybe a loved one has came to you and is in need? Are we seeing a failing health? Are we seeing another other scenario?” Maybe you started a new business or took a part-time job. All of these variables have to be added back in to look at that Monte Carlo to say, “Are we keeping your projections on target for the highest probability of success?”

Laura Stover:

That’s so true, Michael, and oftentimes clients really are getting one dimensional financial plans when we look at what they’re doing currently in their current situation. Now, the author offers some other questions that may be very helpful to assess your willingness to make course corrections in regards to your spending. We don’t like to read questions or read here on the show, but I think these are really, really good questions to help you think through your own unique situations. Michael, what’s question number one?

Michael Wallen:

Question number one, market returns are fairly consistent over long periods of time, but are highly uncertain over short periods. If market performance over the next three years is well below long-term expectations requiring you to take corrective action by reducing some, what he refers to as adaptive expenses, how would you perceive this outcome? A, unfortunate, but part of the nature of planning and uncertain world conditions; B, disappointing, something you’d like to avoid if at all possible; or C, unacceptable the result of a poor plan.

Laura Stover:

Well, it’s unacceptable. It would be unacceptable to make significant life changes or significant expense reductions. I think if I were in that position, it would be very disappointing to say the least, but that can just turn your world upside down. I want to, if at all possible, avoid that. I wouldn’t want to say I wouldn’t be willing to cut anything, but I may find myself in the middle. I’m willing to change some of my expenses, but, boy, don’t blow up my plan, Michael.

Michael Wallen:

Absolutely.

Laura Stover:

There’d be trouble if you do.

Michael Wallen:

Absolutely. What we want to do… But how we get there is by constant review of a person’s plan and that way we don’t have surprises. Let’s move on to question number two. If market returns are poor over the next three years, let’s consider this response. Modify my financial goals to create a more feasible plan; lower some of my adaptive spending items to get back on track; C, accept a higher level of market volatility to improve expected returns; or D, I would not be comfortable with any of the options above.

Laura Stover:

I’m going to find myself probably a B. I’m going to lower some of my adaptive for my discretionary spending items to get back on track. They’re using the word adaptive rather than discretionary. There’s different levels of modality. These are my discretionary expenses, I’m willing to accept some volatility with those discretionary expenses. I’m willing to cut back, let’s say, for a degree, you might be willing to completely eliminate the country club expense, but not eliminate… I’m not going to cancel my trip to go visit the grandkids. I’m always going to want those things. So really, I like that thought process.

Michael Wallen:

I do too. I like actually sitting down and having discussion with clients and walking through these different type of scenarios. We are seeing where the money is being spent and it really forces individuals to think through and think about that scenario if it became real for them in the future and then how would they respond to that situation?

Laura Stover:

The final question, there’s a table here that we’re looking at. And again, you can go to redefiningwealth.info. We’ll have this all in the show notes and the link to the article. This one here makes you really think. It outlines the largest drawdowns for the S&P 500 in each calendar year from 1928 to 2019. They want you to complete the following statement, so another provoking thought. I should only expect to modify my spending if the market falls blank percentage or more.

Michael Wallen:

This frames up a really nice threshold. If we’re looking at it from that 1928 through 2018, the average drawdown in the market was 16% to the negative best case scenario and the drawdown of negative 6.84%, to the negative worst case drawdown of 57.51%. We saw a huge range, a drawdown of negative 6.84 to negative 57.51%, so what it’s looking at is what is the range that no changes would have to be made? But if we crossed this threshold, we have an expectancy that we would start modifying some of those adaptive expenses at that point. I think what that does is establishes a plan of action and a person can go into it saying, “Okay, I am willing to make those choices and those decisions at that time,” and I think that Michael and his program, The Nerds Eye, does a phenomenal job in really doing the analytical side, the academia side of this, because it allows us to have those meaningful conversations, pre-plan and continue to have an agreement that as we go forward those adjustments are acceptable to the client and we don’t have to make any modifications.

Laura Stover:

Yeah. We want to avoid having to cut expenses drastically because you’re in the wrong plan. I think you’re going to want to go into this article into the show notes, as I said, create a chart like this for yourself. I love the chart. This may be my favorite part of the article. Probably the biggest takeaway from the article or the tool that I think is the center piece, it shows the expense items. You put together a budget, you have all of your expenses there, your property taxes, dining out, spring break, going to the movies, the entertainment and things like that, or you can connect with us. We even go deeper and it’s much more simple with our Like Ark Plan process, walking through the redefining wealth process. We have a link, you would have your own portal, you can go in and really organize these areas of your life.

Laura Stover:

But as far as the article, this helps you to put the questions in perspective. If taxes are higher, are you going to cut on costs for prescription medications? Some of those things, you’re not going to be able to cut back expenditures on. But maybe you don’t need the trip to Puerto Rico, maybe you go to Florida instead. These are part of the provoking thoughts that I think help to really put all of the cash flow, the expenditure, what your numbers are in the bottom line between the discretionary expenses and where would you choose to cut if certain things happen? And I think the whole moral of the story, Michael, is if your retirement relies solely upon depending upon the market, that’s the wrong plan to have. I know a lot of people get thrown off by spreadsheets and pages and start thinking about the market.

Laura Stover:

It’s really out of our control and what we can actually control, the biggest thing we can control is our expenses. Knowing the expenses is what’s going to put you in a position of power and help you to understand how much of them are adaptive, how much of your core can you be adaptive with, in terms of this conversation with your spouse, who may or may hate talking about finance and the market, but they’re going to be able to relate to some of the choices that you may have to make at some point in the future. Thank you for joining us. Until next time.

Ron Stokes:

Thanks for listening to this episode of the Retirement Talk Podcast. To learn more about how we can help and to get access to today’s show notes, transcript and the resources mentioned, visit redefiningwealth.info/podcasts. Again, that’s redefiningwealth.info/podcast. Also, don’t forget to leave us a review on iTunes, if you will be so kind. The more reviews we get, the more people we will reach. And if you found this information helpful, you can bet that there are many more people who need to find out. Thanks again for taking the time to listen and be sure to tune in next week for another episode of the Retirement Talk Podcast with Laura Stover. Redefining Wealth is a registered trademark of LS Wealth Management. Take advantage of a complimentary plan, know where you stand regardless of the market, walk through the redefining wealth process and have a clear picture of the key risks you likely will face and achieve a deeper understanding of how to properly plan for these risks with the Redefining Wealth Framework. Schedule a strategy session now by going to redefiningwealth.info and click schedule.

Ron Stokes:

Redefining Wealth is a registered trademark of LS Wealth Management. Investing involves risk, including the potential loss of principle. any references to protection, safety or lifetime income generally referred to fixed insurance products, never securities or investments. Insurance guaranteed are backed by the financial strength and claims paying abilities of the issuing carrier. This show is intended informational purposes only, it is not intended used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual situation.

Ron Stokes:

LS Wealth Management LLC is not permitted to offer and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the US government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by LS Wealth Management, LLC. Investment advisory services offered through through Optivse Advisory Services, and SEC registered investment advisor. LS Wealth Management is a separate entity.

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