Some experts claim we’re at a market high point, and stocks are about to drop. Others claim “not to worry.” FAANG—Facebook, Apple, Amazon, Netflix, and Google—as well as other tech stocks will keep the markets on an upward trajectory.
The thing is, people getting close to retirement don’t have the timeline that 20 to 40-year-olds have to ride out the market downturns if they guess wrong. They need their money to live on. They can’t wait years for their investments to regain value.
If we are at a market top, chances are that retirees right now are taking too much risk and won’t have the ability to ride out the next crash, just like we saw happen in 2008, when gray-haired people were forced to get jobs at Walmart or move in with their kids as they lost their retirement savings to the great recession.
At Decker Retirement Planning, we see investment headwinds rising and other pitfalls awaiting retirees who don’t plan effectively and efficiently for retirement. Here are some things to consider:
1. The “Rule of 100” for Retirement
The “Rule of 100,” which is a basic rule of thumb still being used today, says that if you are 60 years old, you should invest 60% of your assets in bonds/bond funds, and the remaining 40% in stocks. If you’re 70 years old, it should be 70% bonds versus 30% in stocks. In other words, as you get older, you should hold the majority of your investments in bonds/bond funds because they are supposedly “safer,” at least according to the Rule of 100.
However, there are big problems with this strategy in retirement.
2. The Asset Allocation Pie Chart’s Other Rule for Retirement: The “4% Rule”
The Rule of 100 and the “4% Rule” are part and parcel of the asset allocation pie chart strategy that most Americans use, because this is the only strategy that bankers and brokers are trained or able to utilize. Unfortunately, this is the extent of most Americans’ “retirement planning.” This is a terrible approach to retirement, because virtually all of your money is at risk in the market.
The 4% Rule says that once you do retire and stop working, you can start withdrawing 4% of your pie chart of stocks and bonds/bond funds to live on and be just fine. Millions of Americans found out the hard way that this isn’t a good strategy. If you start taking money out of fluctuating market accounts like stocks and bond funds, you can lose money more rapidly—sort of like compound interest in reverse.
In 2009, the creator of the 4% Rule, William Bengen, discredited it and said it didn’t work—a year after the 2008 recession wiped out millions of people’s retirements. (So, why are bankers and brokers still using it? At Decker Retirement Planning, we liken this to financial malpractice.)
3. Interest Rates at Historically Low Levels
A huge problem when it comes to having the bulk of your money in bonds/bond funds as you get older is the fact that interest rates are actually at historic lows, and they have been since about 2010. The yield on a 10-year Treasury bond has been hovering right around 2 – 2.5% for the last eight years. Interest rates have been this low only once before in US history, and that was back in 1940.
Using the Rule of 100, this means as you get older and closer to retirement, the majority of your money is held in investments earning practically nothing.
4. Interest Rates Rising – Interest Rate Risk
But, there is an even bigger problem than having 60% or more of your money earning rock-bottom rates in bonds and bond funds, and that problem is called interest rate risk.
What interest rate risk means is that as interest rates begin to climb back up again, as they are doing now, the value of your bonds or bond funds goes down.
This phenomenon has happened a few times in recent history. In 1994, for example, when interest rates had climbed up from around 6% to 8%, the average bond fund fell by about 20% that year, according to Morningstar. It happened again in 1999, when interest rates climbed from about 4% to 6%, and the average bond fund fell by about 17%.
That’s a big one-year hit, especially for a retiree, on what’s called “safe money” assets. Remember, if you keep taking 4% out of fluctuating (or dropping) investments, you will run out of money.
If your banker, broker, or other financial professional is telling you to put all your “safe money” into bond funds, that should be a huge red flag, because the Fed has been raising interest rates, and plans to raise them even more. If rates go from 2.5% back up to 4 or 5%, which seems to be the trend, everybody who listened to their bankers and brokers and decided to park the majority of their money in bond funds are only going to end up losing money in this rising interest-rate environment. That’s why interest rate risk is one of the biggest headwinds right now.
5. Stock Market Risk
When it comes to the stock market, recent events are alarming. In mid-October, the stock market slid to wipe out most gains for 2018. Markets rallied for the next two weeks, but on November 12, there was this news in the headlines: “Dow drops 600 points as tech giants slide.” One thing is certain, markets are becoming more volatile.
Often, people say they are “holding on to their stocks for the long run because they trend higher over the long-term.” The truth is that stocks tend to cycle over time. What does that mean? Well, looking at the history of the stock market, it normally goes through 18-year cycles, with crashes every seven to eight years, and this has been happening for decades.
The last crash, of course, happened in 2008, when the housing market caused the stock market to go down by about 50%. Prior to that was 2000, when the tech bubble burst, and the market went down another 50%. Prior to that was in 1994, when Iraq invaded Kuwait. Before that was 1987, we had Black Monday, and the stock market fell by 30% in a single day. The crash before that happened between 1980 and 1982, when the market was down by 46%. Prior to that, ‘74, ‘75, it was down by about 45%. In ‘68 it was down by about 48%. And this keeps on going. If you look back historically, it’s always about every seven, eight years like clockwork.
Which puts us in a very alarming position right now, with a crash two years+ overdue. Although the bull market has had a long run, it’s important to remember that even with the stock market growth we’ve had in the last 10+ years, we’re still barely breaking even when you factor for inflation and actual value of today’s dollars.
Many experts say today’s stock market is overpriced. If you look at the forward P/E ratio, also known as the Shiller P/E ratio, it’s extremely high right now, around 24 or so—suggesting that investors are willing to pay $24 for every $1 of earnings that the company generates over a year. The P/E ratio is higher than it was in 2008, it’s higher than it was in 1987—it’s higher than it was in 1929!
What goes up must come down. There is a day of reckoning coming, and at Decker Retirement Planning, we intend to keep our clients protected from stock market risk. Our clients sailed through 2008 without changing a thing about their lifestyle.
6. Real Estate
Retirees should beware of other pitfalls and retirement risks as well, like certain “opportunities” centered around real estate. The real estate market right now is a concern to some experts as the demand for residential real estate levels off because high home values have made purchase unaffordable for many. (We’ve seen this ourselves in Seattle, San Francisco, and Salt Lake City.)
Watch out for two things in particular:
Reverse Mortgages
A lot of advisers are starting to push reverse mortgages, which we have a problem with. A reverse mortgage, essentially, takes all the money from your home that might go to your grandkids or whoever you want it to after you pass, and hands it over to a bank instead.
Sometimes, reverse mortgages seem to be a very desperate, last attempt for somebody to try to get additional income in retirement. The bank will let you live in your house, and they will pay you back some of the equity in the house while you’re alive, so you have a place to live and you have a stream of income based on the equity in the house that you’re living in. At least, that’s the strategy.
The problem is, the way that most of these reverse mortgages are designed allows the bank to structure your income such that they end up getting your house from you for about half price! When you actually do the math, it really is a terrible deal.
Not only does the bank get your house for half price, but a reverse mortgage takes away your home equity nest egg, which can hedge against adverse life events. A reverse mortgage creates a situation, so if something catastrophic does happen, you can’t fall back on your house. There are other options, such as downsizing. If a financial professional ever mentions a reverse mortgage as a viable strategy, please call us immediately!
Privately-Traded REITs (Real Estate Investment Trusts)
Publicly-traded REITs may be fine investments, as long as the real estate market holds, but privately-traded REITs are another matter and a big red flag! First of all, the investment professionals selling these things are getting 7% to 10% commission on every one of them, up front.
We once worked with a man who had 100% of his assets tied up in privately-traded REITS. The REITs were in a dividend portfolio that wasn’t paying enough for him to live on, so he wanted to find another option. He found us, and we put a beautiful plan together and started diving into his portfolio to pull out the assets in a way that wouldn’t compromise on the surrender charges and fees, in order get him out in an advantageous way. It took two years to clean up his portfolio.
As a retiree, if you need an income, can you wait two years to gather your income? The answer is no. No, you can’t. To lock up your entire portfolio in something like privately-traded REITs is very risky, and there’s next to no liquidity. Often, an REIT will give you a one-week window every year. You can liquidate during that window, but if you miss that window, then you have to wait until the next year to get out of it.
But, you can only get out if someone wants to buy your shares. If nobody wants to buy them during that one week that the window’s open, then better luck next year. There are very few investments that are as illiquid as an REIT. It’s easier to sell your primary residence than to sell your REIT, and that’s just ridiculous.
7. Other Risks
There are so many potential risks and pitfalls in retirement that we actually go through a huge list of them with every one of our clients before we develop their retirement plan. Liability risk, inflation risk, spousal death risk, long-term care risk—the list is extensive, and we’ve developed strategies to address them based on your situation, your desires, your family dynamics, and your objectives.
We’ve also developed specific strategies to address investment headwinds, like our two-sided model for market risk, which takes advantage of both up and down markets using a computer-driven, quantitative model that’s designed to make money when the markets go up and offer downside protection if the markets are going down.
The Decker Approach
We are not brokers, and we’re not bankers. We are completely independent, fee-based fiduciaries. We don’t make commissions on trading stocks and bond funds. We are focused on retirement planning.
Decker Retirement Planning uses a safer approach to retirement. We transition you out of that accumulation pie chart, away from the Rule of 100 and 4% Rule, and into an income distribution plan instead, which is much more ideal for somebody who is in or heading into retirement.
An income distribution plan is a spreadsheet that adds together all of your sources of income in retirement, subtracts the taxes that will be due, factors in cost-of-living adjustments and runs the entire plan out to age 100 to tell you the maximum amount of monthly income that you can live on for the rest of your life. We take into account your existing income streams, like pensions, rental real estate, and more. Then, we optimize Social Security for those who haven’t filed yet, in some cases preventing hundreds of thousands of dollars from being left on the table by not filing in the most advantageous manner.
We don’t have to guess to see what might work. We actually use math, crunch the numbers, and do the calculations to figure out, strategically, how to maximize someone’s income for the rest of their life, assuming you will reach the age of 100 or older.
The way that the assets are actually invested, is pretty ingenious, if we do say so ourselves. The majority of the assets in a Decker Retirement Planning’s income distribution plan go into laddered, principal-guaranteed accounts.
A principal-guaranteed account is any type of investment that is guaranteed by either a bank, an insurance company, a state municipality, or the federal government. Our main concern is to make sure that these products are in fact guaranteed, and that we can find the highest rate of returns available for our clients. The advantage to having your income in principal-guaranteed accounts is, if the stock market ever crashes throughout your retirement, if the bond market crashes, if interest rates skyrocket, if the economy tanks, you name it, then your income is unaffected.
Which is huge. In 2008, none of our clients had to go back to work because their income was structured in this way.
We do all of this, while also helping reduce your fees at the same time.
Call us at 855-425-4566 to discuss your plan for retirement. We have offices throughout the Northwest.
