We’re 10 years out from the Great Recession of 2008, which was second only to the Great Depression of the 1930s in terms of widespread economic devastation. Have Americans learned anything in the last decade about how to mitigate retirement risk? Do we know how to protect our retirements when the stock markets take another nosedive, as they historically do every seven to eight years?
At Decker Retirement Planning, we’ve been helping clients retire for more than 30 years. We worked right through 2008, and we got almost no phone calls from our clients panicked by the headlines. Why? Because for the most part, their retirements were unaffected.
We have developed and utilize what we have found to be a much better approach to retirement planning. Yet from our many meetings with new clients, we find that other financial advisors appear to have forgotten all about what led to so many retirees’ bankruptcies in 2008, forcing them back to work at whatever jobs they could get.
Ignorance is not bliss. Retirement risk from stock market crashes can hurt you.
“Bonds,” aka Bond Funds, Are Not “Safe”
Common advice on the internet (and still espoused by too many financial people) says that as you get older, you should put more of your retirement money into bonds versus stocks, because they are supposedly “safe” from market risk. The term “bonds” is thrown around and used interchangeably with bond funds.
This is terrible advice, period. Bonds funds are not safe—for one thing, when interest rates go up, bond funds lose money. They go down.
Historic bond fund performance data from Morningstar showed that in 1994, when the 10-year Treasury went up from 6% to 8%, people invested in bond funds lost around 20%. In 1999, the 10-year Treasury spiked up from 4% to 6% and people lost about 17% of their money.
This year, interest rates have gone up—the Federal Reserve raised rates in June, and they’re planning to make two more rate increases in 2018. If interest rates go from around 2% back up to around 4%, it will be a hit to your principal of around 20% on what many financial professionals are telling you is your “safe money” invested in “bonds.”
Furthermore, bond funds are priced daily, and the market prices change, just like any other publicly-traded security. Bond funds are subject to market risk, and some types of bonds held in bond funds are riskier than others. Bond funds are mutual funds containing either one type of bond, or a mix of different types, including US government bond funds, municipal bond funds, corporate bond funds, mortgage-backed securities (MBS) funds, high-yield bond funds, emerging market bond funds, and global bond funds. Typically, a bond fund manager buys and sells according to market conditions and rarely holds bonds until maturity.
Bond funds are not always safe, they are affected by the overall stock market and other economic indicators. With the exception of a few sectors (namely longer-dated U.S. government bond funds) most bond fund categories went down in 2008. Bond funds can go down in bear markets.
The Pie Chart Portfolio Is for Accumulation, Not Retirement
It seems like 90% of America still uses the pie chart portfolio planning method, because that’s what their broker does. And unfortunately, most pre-retirees have no idea just how risky their portfolio really is. As we just pointed out, it’s not okay to just move money over from stocks into more bond funds as you get older and call those “safe,” because they’re not.
There is a huge difference between the pie chart “buy and hold” thinking that works in your 20s, 30s and 40s, versus the safety and protection of the type of assets and retirement planning you should be seeking as you move closer to retirement. Accumulation mode is a completely different phase of life. In accumulation mode, you have the time horizon to wait out bear markets. You won’t need your money for many years.
Distribution mode—which is what retirement is—is a whole different story. When you stop working, you no longer have a paycheck coming in. You have a pile of money, but you don’t know how to take draws from that money in the most efficient manner. Creating an actual plan to distribute money out from an investment portfolio properly takes a true fiduciary retirement planning firm like Decker Retirement Planning. A company that understands how to structure a retirement distribution plan.
A comprehensive retirement distribution plan should support your lifestyle, while minimizing taxation, handling inflation, covering risks like health care, and most importantly, avoiding the possibility of running out of money in retirement.
A pie chart just doesn’t cut it.
Don’t Manage Your Money Yourself
Studies show that the individual investor usually loses out.
Dalbar released a study spanning 30 years, the period from 1986 to 2015. It showed that for the 30 years ended December 31, 2015, “the S&P 500 index produced an annual return of 10.35%, while the average equity mutual fund investor earned only 3.66%.”
Fidelity conducted a similar study that focused on the Magellan Fund. It showed that from 1977 to 1990, the fund averaged a 29% annualized return over that timeframe. The fund was one of the best—hands down. But the average investor in the same fund made only 7% during the same period. Why the difference? Emotions. There is a behavior gap—investors have a history of selling low and buying high. We’re talking human psychology here. There is the tendency for investors to withdraw money when markets drop, then reinvest when markets are high.
If you’re managing your own assets, just don’t. Don’t try to read a lot of (conflicting!) advice on the internet and think that you can do it yourself.
But don’t hire just anybody.
Get Away From Brokers and Bankers—Find a Retirement Fiduciary
Art Levitt said if you’re working with more than $50,000 of investable assets in the market you should fire your broker and find an investment advisor who is a fiduciary. The trouble is, a lot of financial professionals claim to be fiduciaries, but they aren’t. Only 1.6% of all financial professionals are actually true fiduciaries according to Tony Robbins.
For instance, big-name brokers and bankers are actually just licensed to sell you investment products and make a commission on them. They have to follow some suitability standards, but bear in mind that they only sell the products that their company offers or wants them to push. And if they make more commission on one product than another, they can legally offer that without disclosing that information to you. They can even legally take kick-backs from mutual fund companies without telling you, rather disclosing it only in the fine print.
A fiduciary is held to a much different standard. They are required to disclose all fees, and to only recommend what is in your best interest, even if it doesn’t make them any money at all.
Here’s how to determine whether or not an advisor is actually a fiduciary. (All three must be present.)
- They are a completely independent company. No one is telling them what to buy and sell you, or what they can or can’t recommend. You get access to product and investments that you would not normally have access to.
- They are Series 65 licensed, which means they can’t receive a commission on investments, so it doesn’t matter what product or strategy they recommend as long as it’s the right one for you.
- They are structured as an RIA (Registered Investment Advisory), which means they are fee-based. They want to hold you accountable and help you get better results because that makes them more money, too. It’s a win-win. You’re getting advice legally in your best interest instead of working with salespeople.
Here’s the other thing, fiduciary retirement planners bring more to the table than just investments. They coordinate for tax efficiency, estate planning, legacy planning, and helping you meet the many other retirement risks you will face.
Don’t let the banker and broker salespeople talk you into risk that you don’t need. If and when the market tanks, don’t be a part of it. Find a fiduciary who specializes in the full scope of retirement planning.
Avoid The 4% Rule, and Never Withdraw from a Fluctuating Account
Too many people walk into our office after being told by a broker that, “It’s all right, you can retire now, here’s all your money.” These retirees wonder if it’s okay to take 4% out every year like they were told.
Even though the very creator of the 4% Rule said that it was faulty after the recession in 2008, most brokers are still using it for retirees in conjunction with their risky pie chart containing more and more bond funds as you get closer to retirement age.
Remember, both stocks and bond funds fluctuate wildly because they are subject to market volatility. If you have all your money in stocks and bond funds and start taking out 4% every year, the first few years of market performance after you retire become make or break because of a retirement risk called “sequence of returns.”
Timing is everything, and no one can predict the year-by-year ups and downs of the stock market. Here’s what we mean by timing.
- If you had put $100,000 in the total S&P in 1988, left it there, and reinvested the dividends for 15 years, it would have grown by around 650%.
- If you would have invested that same amount for 15 years in the very same way starting in the year 2000, it would only have grown around 237%. A huge difference.
In each of the above examples, there was only an average difference of around 7% each year, which sounds acceptable, but isn’t when it comes to retirement. If you take money out of a fund that tanks during the first year, it takes a lot longer than one year just to get back to breakeven. And if you continue to take 4% every year out of a fund that’s down, you will run out of money—just like thousands of retirees did in 2008.
When you draw income from a fluctuating account, you are compromising the gains when the markets are up and you are accentuating losses when the market’s down. It’s financial suicide. Never draw income from a fluctuating account.
The Decker Retirement Planning Approach
Completely opposite of a pie chart, we set up a long-term retirement plan for you on a spreadsheet, so you can see what you have and what you can spend for the rest of your life—up to age 100. (For the people retiring now and in the future, health care and medical advances have created the ability for people to live in retirement as long as—or in some cases, longer—than the years they worked in their careers!)
Your customized retirement plan shows you exactly where your monthly income will come from; and it shows you how much you can draw. It spells out anticipated income taxes, and the steps we take to try to minimize those. We even put in a yearly cost-of-living adjustment for inflation. The written distribution plans we create are truly comprehensive, and use a math-based, logical approach.
Because we work with clients for the long-term, we also cover dozens of other topics, addressing retirement risk head-on. For instance, one spouse will likely pass away before the other one does, which means one Social Security check and/or pension will evaporate someday. Or one will become incapacitated, needing long-term care. We want to help make sure the surviving spouse will be financially solid regardless of the retirement risk they face.
What’s Happening Now
We are at a market top right now. It’s kind of like when you hear that eerie music in a scary movie. Nothing has happened yet, but it’s going to. Market crashes happen every seven to eight years, and we are two to three years overdue for the next one.
JPMorgan Chase Co-president, Daniel Pinto, warns that equity markets could fall as much as 40% in the next two or three years.
There are three reasons a bull market turns into a bear. One, rising interest rates, which affect housing, companies, government, personal debt and more. Two, higher oil prices, which can be thought of as a tax on consumers. Three, overly high stock market valuations. Experts are seeing all of these right now.
If you are getting close to retirement, you need to take measures to protect yourself! You’ve worked too hard for too long to have your retirement money evaporate in the next market crash. Don’t put this off. Let’s talk.
Call 855-425-4566 to discuss your retirement with Decker Retirement Planning. We are true fiduciary retirement planners with multiple locations to serve you, including:
Decker in Kirkland, Washington
