RR S4 E10 REVIEWING YOUR 401K AND THE OPTIONS YOU HAVE IN A VOLATILE MARKET [00:00:01]
BRIAN: Welcome to Safer Retirement Radio, where you get the transparency you deserve. With over 35 years of experience in finance and investing, we help you stay up to date on market news and retirement strategies. I’m Brian James Decker, owner and founder of Decker Retirement Planning and host of Safer Retirement Radio. With me is my co-host and one of the advisors here at Decker Retirement Planning, Clayton Bradshaw.
CLAYTON: Okay. Today we’re gonna be discussing 401(k)s. Right now, we know there’s a lot of volatility in the market, so we wanna talk about whether or not you should review your 401(k), and what options you’ve got with your 401(k).
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CLAYTON: And later on, we’re gonna be talking a little bit more about how it was that we helped keep our client accounts positive through the first quarter of 2020, which most advisors weren’t able to do. So, we’re gonna be talking a little bit more about that strategy. But Brian, I wanted to go through some of these points with 401(k)s ’cause I know that there’s a lot of folks that are working. It seems that there’s some hesitancy to “Should I move it, should I keep it, what should I do with it? I don’t know what my options are,” so I wanted to go through some of the stuff on 401(k)s ’cause right now, I mean, what are the options that people have as far as 401(k)s and how to invest them right now? What are you typically seeing with clients that come in?
RR S4 E10 REVIEWING YOUR 401K AND THE OPTIONS YOU HAVE IN A VOLATILE MARKET [00:01:19]
BRIAN: As far as investing goes, usually you mean the selection of choices they have to invest?
CLAYTON: Right. Yep.
BRIAN: I see everything from very limited to anything. So, I guess I see the whole gamut.
CLAYTON: And for the limited options, it’s usually what, five to 10 funds that somebody can pick from, and then depending on their administrator or their custodian, it could go up to they’ve got full access to the stock market, right?
BRIAN: Right. Right. This is good information that we can be of great help to people that are interested in getting the most from their 401(k).
RR S4 E10 REVIEWING YOUR 401K AND THE OPTIONS YOU HAVE IN A VOLATILE MARKET [00:01:54]
BRIAN: First of all, if there’s a match, that’s free money to you. You should max out your 401(k) to get the match. You know what I mean?
CLAYTON: So, you’re talking about an employer match. Like if you’re contributing your 401(k) to your employer, if you’re getting, what is it, typically six percent, your employers can give you two, three, four, five or six percent on top of that.
BRIAN: Right. So just we hope that ’cause we’ve seen a lot of people come in 55, 60 plus, and their 401(k) is their majority of wealth.
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BRIAN: Usually, there’s a transfer of wealth via inheritance on top of that that we see that’s nonqualified or nonretirement assets.
CLAYTON: Sure.
BRIAN: But those are the two big chunks of money that we see. So, we hope that if you can on cash flow max your 401(k), take advantage of the free money. That’s all I have to say on that before we dive into how it should be invested. But anything you wanna add on that advice to maximize your 401(k), and particularly if the 401(k) option offers a Roth 401(k) option…
RR S4 E10 REVIEWING YOUR 401K AND THE OPTIONS YOU HAVE IN A VOLATILE MARKET [00:03:01]
CLAYTON: Yep. That was gonna be the next one I wanted to bring up, is what’s the best. And I know that for each individual, it can be different, and it kinda depends on where your situation is, but generally speaking, what’s the recommendation?
BRIAN: So, you let’s talk about the advantage and disadvantage. The advantage of a Roth 401(k) is that it grows tax-free, it distributes and come back to you tax-free and it passes to your beneficiaries tax-free. It’s a beautiful thing.
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BRIAN: So, the disadvantage is that that money is taxable right upfront. So, we actually don’t see that as a disadvantage because if you were a farmer and you were taxed on the weight of your seed instead of the weight of the yield, is that a good thing?
CLAYTON: You go “Yeah.”
BRIAN: Right?
CLAYTON: A corn kernel weighs a lot less than a cob of corn, right?
BRIAN: Right. And so that’s what we’re doing, is having the tax be right upfront so all the growth is tax-free. That’s a beautiful thing.
RR S4 E10 REVIEWING YOUR 401K AND THE OPTIONS YOU HAVE IN A VOLATILE MARKET [00:04:08]
BRIAN: So, if you have a Roth 401(k) option, find out, call HR. Primary, number one, most important thing I would say is that. Just know that that money comes to your paycheck and it’s taxed, and then it goes in. So, it’s not a pretax option, it’s an aftertax movement of money into your retirement plan.
CLAYTON: So, it sounds like it’s just a difference on perspective, right, on how it’s gonna be the most beneficial to an individual. When you’re looking at a 20, 30-year perspective, like we do as financial advisors, a Roth makes far more sense than the pretax contributions.
RR S4 E10 REVIEWING YOUR 401K AND THE OPTIONS YOU HAVE IN A VOLATILE MARKET [00:04:51]
BRIAN: Correct. So, we talked about two things so far. Find out if you have a match, try to max it if you do, that’s free money, and third, if you see if you have a 401(k), it gives you a Roth.
CLAYTON: And the contribution limits, what are the contribution limits for those over age 50?
BRIAN: They have the catch-up provision. But that’s usually on an IRA, not the 401(k). Well, the 401(k) should give you, it depends on HR. It depends on how it’s structured actually.
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CLAYTON: Yeah.
BRIAN: But study and find out if you’re maxing it with the catch-up provision for someone that’s over 55.
CLAYTON: Yep. Perfect. One of the other questions that I get along when folks come in is, and for even some clients, that for whatever reason they still have a 401(k) that they have to keep in their 401(k), what’s the best allocation strategy right now? I mean, with all the different options, with the market doing what it’s doing kinda, what’s that a good rule of thumb to follow right now? Is there one?
RR S4 E10 REVIEWING YOUR 401K AND THE OPTIONS YOU HAVE IN A VOLATILE MARKET [00:05:58]
BRIAN: Okay, good. Yeah. So, we’ve got some definite strategy options that are very valuable. First thing I wanna talk about is age. If you’re in your 20s and 30s, you should invest different than if you’re in your 40s and 50s. Do you agree?
CLAYTON: Oh yeah. It’s your time horizon.
BRIAN: Right. So, in your 20s and 30s, which is where my children are right now, I advise them to be pretty aggressive ’cause they’re not gonna be tapping into their 401(k) until later.
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BRIAN: And on their 401(k), let’s say that the markets go up. They’re in a win-win because they’re adding to their 401(k) every two weeks, and as the markets climb, they make more and more and more money. But let’s flip it on the other side. If the markets drop for two or three years, let’s go through 2008. From August of ’07 to March of ’09, that was 18 months of a 50 percent drop. So, during that 18 months, the 20 and 30-year-old kids, unfazed.
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BRIAN: They dollar cost average in, they’re putting money in as the markets have dropped so that when the markets recover, they make a lot of money. Because the markets have recovered and they have purchased in 18 months times two, 36, ’cause it’s two investments every two weeks.
CLAYTON: Right.
BRIAN: Okay. They make a lot of money when that market eventually does recover. Now if you’re in your 40s and 50s, not so much 40s.
RR S4 E10 REVIEWING YOUR 401K AND THE OPTIONS YOU HAVE IN A VOLATILE MARKET [00:07:36]
BRIAN: Let’s say that you’re in your 50s, and you’re within five years of retirement. That’s rough to take a 50 percent hit because the majority of your assets have already been invested, and you lose half of that? We’re gonna talk about how you can protect yourself. But the first thing we wanted to talk about is age, how the 20s and 30s should be aggressive, 40s start to lighten up, and 50s should have their exposure pulled back. So, one aspect, one variable of investing in a 401(k) is their age. Anything else you wanna add on that?
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CLAYTON: I think the only thing I wanna add is the reason you say within about five years of retirement is because if you take that 50 percent hit, the market takes, what, on average about 18 months to slide to the bottom when it starts to go, and then it takes another, what, three to four years to get back to the level it was at.
BRIAN: Correct. Just to break even.
CLAYTON: Yeah. You’re in about five years, and for a lot of people that were hoping on five years of growth, that’s gonna set them back on their retirement. So that’s why taking some caution to adjust, which is why we’re talking about allocations, because taking some caution to adjust your exposure to the market as you approach that retirement date can protect you in the long run.
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BRIAN: That’s right. So now let’s talk about how they can invest, number one, and number two, how they can protect their assets. And this applies to 20, 30, 40, 50-year olds plus. It’s all about the 200-day moving average, which we have talked about.
CLAYTON: Yeah.
BRIAN: By definition worldwide, it’s generally accepted that any stock index is in a bull market or is in uptrend if it’s trading above the 200-day moving average.
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BRIAN: If you don’t know what this is, find out what it is. It’s that important. So, the S&P, for example, the Nasdaq, the Dow Jones, any index that you’re investing in, which we hope that you are indexing, lowers cost, increases performance. I’ll get to that in a second. When you put your aggressive portfolio together, which should be if your 20s, 30s should be a third in the S&P, a third in the Nasdaq, maybe a third in the emerging markets, that would be pretty aggressive, and you probably wanna add other technology investments, biotechnology investments.
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BRIAN: That would be a pretty aggressive portfolio.
CLAYTON: Right.
BRIAN: Hold all of those indexes unless they drop below the 200-day moving average. And that is your stop-loss. This is jargon, but your stop-loss means that if that index, the Dow, S&P, Nasdaq, technology ETF, biotechnology ETF, emerging markets ETF, if they drop below the 200 day moving average, they should be sold and kept in cash until they go back above the 200 day moving average.
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BRIAN: In other words, you’re only buying momentum. In other words, you’re only buying uptrending investments, which is a good thing.
CLAYTON: Right.
BRIAN: If you do this, if people discipline themselves, they will save hundreds of thousands of dollars in their accumulated value of their retirement. It will be hundreds of thousands of dollars.
CLAYTON: Right. And I know that we’ve gotten somewhat technical and somewhat jargony with what we’ve been talking about, and this isn’t meant to be a high-level investing class.
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CLAYTON: We wanna make sure that everybody understands this and feels comfortable with it, so if there’s something you don’t understand as we’ve talked through it today, give us a call. We can go over it in 15 minutes, we can talk you through the ins and outs of what we’re talking about in more detail and how it applies to you specifically. The number to call is 833-707-3030. Again, that number, 833-707-3030, and we can talk you through it. No obligations, a free 15 minute call, but we just wanna make sure you understand so that you feel comfortable as you try to approach your 401(k) to save yourself some of these massive losses that we’ve seen some people that haven’t taken the care to protect themselves go through. So…
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BRIAN: So now let’s talk about the 40-year-old. The 40-year-old, can they take a 50 percent hit, and like you said, get their money back in? Yes. And if they’re using the 401(k), or I’m sorry, if they’re using the 200 day moving average in their 401(k), in my opinion, I wanted you to weigh in, in my opinion, they can be just as aggressive as the 20 and 30 year old. That’s my opinion. Do you see the benefit of using the 200 day to allow someone in their 40s to maintain that aggressive 401(k), get the benefit of the Roth, get the benefit of the match, and still be growing their funds aggressively through their 40s and not have to defer to lifestyle funds?
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BRIAN: I’m asking you this question because lifestyle funds in the past have had bonds in there that were yielding four and five percent. They’re not anymore.
CLAYTON: Right, right. Yes, I think somebody, if they’re taking the right approaches and they’re being cautious about and diligent to sticking to the rules and not letting their emotion get the best of them, yes, I do think that they can be aggressive through their 40s as well. You mentioned the lifestyle funds. I think a lot of people probably see ’em show up as target-date funds or they’re some date, usually in increments of five or 10 years, 20-30, 20-35, 20-40, you’re gonna see some options like that, usually five to 10 of them on your 401(k) options, these are going to shift some of your assets within that fund over to the bond side, but the problem with that we’ve talked about before is we’re historic low rates, and there’s another issue.
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BRIAN: Two problems. One is low rates. You’re not getting paid on a third of your portfolio, half of your portfolio. As you’re getting closer to retirement, three quarters of your portfolio is earning almost nothing on these target-date or lifestyle funds.
CLAYTON: Right.
BRIAN: Problem number one. Problem number two is eventually, interest rates will go up. And when a bond fund- the response of a bond fund to rising interest rates is loss of principal. A lot of people don’t know that. That’s called interest rate risk.
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BRIAN: So, interest rate risk is the highest it’s ever been right now, today, because the 10 Year Treasury is a .56 percent right now.
CLAYTON: Historic low.
BRIAN: Historic low, historic high interest rate risk because imagine this. Let’s say you bought a 10 Year Treasury today, and interest rates on the 10 Year Treasury go back from .56 to one percent. How much have you lost? You’ve just lost a huge double-digit amount in your bond funds by just that percentage move. A huge amount.
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BRIAN: So, we’re warning people that with target-date funds that historically, going back to Abraham Lincoln, have always been good. They weren’t around then, but bonds have always been a good cushion for retirees, as they get closer and closer to retirement. That has worked. What we’re warning is right now that that has two problems that we’ve never dealt with ever in the history of our markets. One is low interest rates at this level, sub one percent on the 10 Year Treasury, and two is the highest interest rate risk ever before.
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CLAYTON: Yeah.
BRIAN: So, we hope that you use the 200-day moving average as a way to aggressively invest and protect your assets from these big hits in your 20s, 30s and 40s. Now there’s another option as you get closer and closer to retirement. When you’re within five years of retirement, so this takes you through your 50s if you’re gonna retire at 65, a lot of people retire at 65 because they don’t have any healthcare costs. They can go right into Medicare.
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CLAYTON: Sure.
BRIAN: Okay. So, if you’re gonna retire at 65, you can aggressively invest 20s, 30s, 40s and 50s, but at 60 or within five years of retirement, you need to change your allocations. Low risk or low volatility allocations would be cash, it could be utility stocks or utility funds. Those have big dividends and are usually low volatility unless you’re owning Pacific Gas and Electric, which just went bankrupt.
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BRIAN: You can’t use REITs in there because of REITs volatility. I think it’s cash and it’s utilities that should be half of your portfolio, so a quarter in cash, a quarter in utilities, and then 50 percent would still be in the allocations we mentioned before, S&P, Nasdaq, technology, biotechnology, emerging markets. That should be 10 percent each. And then 25 percent cash, 25 percent utilities, all following the discipline of getting out, including utilities, if they drop below their 200-day moving average.
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CLAYTON: Right.
BRIAN: This is very valuable what we’re sharing.
CLAYTON: Right. So let’s say one of our listeners decides, “Hey, I’m gonna follow through with this and look at it,” and you think you got your portfolio adjusted, you’re set up, you’re within a few years of retirement, call us and we can just double check just to make sure you follow through with it because some of the options we’re talking about aren’t available, and some of them are to people. It just depends on what’s in your own 401(k). And we’re happy to do a review on it with you.
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BRIAN: Right. Clayton, unless you have anything else to say, now let’s talk about how to get their 401(k) out of their company.
CLAYTON: Yes. That was the next thing that I wanted to talk about, is you’ve got a 401(k), but you’re approaching retirement. You don’t wanna leave it in the 401(k) or maybe you want to leave it in the 401(k), which I don’t understand why. You have unlimited options in most cases, but that’s your prerogative, I guess, but with that, as you approach retirement, let’s talk about how you can get access to a 401(k).
RR S4 E10 REVIEWING YOUR 401K AND THE OPTIONS YOU HAVE IN A VOLATILE MARKET [00:18:32]
CLAYTON: So first, you gotta be, what, over 59 and a half for an in-service distribution?
BRIAN: Right. So over 59 and a half. Check with HR to see if you have an in-service distribution option, which means you can roll the money out of the 401(k) into the IRA. Two important points on this. One, if you leave a company in your late 20s or 30s, the new company may want you to roll your 401(k) into theirs ’cause they get more fees.
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BRIAN: Don’t do it. You’ve got more options if you roll your 401(k) into an IRA. You can buy anything. You’re not limited in an IRA if you do that. So, when you leave the company, just know it’s best for cost, to lower the cost, and it’s best for choices, investment choices, to just roll it automatically to an IRA.
CLAYTON: ‘Cause most of the time in your 401(k), you’re limited to mutual funds, which can carry higher costs, but when you move into an IRA, you get access to ETFs, which are gonna be lower in cost than the mutual funds, generally speaking.
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BRIAN: Correct. Right. So, once you’re over 59 and a half, if you can, the in-service distribution option allows you to roll the money out. It doesn’t disqualify you from continuing to participate in the company’s 401(k) and the match.
CLAYTON: Right. Your employment status doesn’t change, you keep doing the same contributions that you’ve been doing, and I have talked to a few people that the age at their company had been adjusted up from 59 and a half. I talked to somebody, it was 60, somebody else said it was 62.
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CLAYTON: So that’s why we say check with HR to confirm what your restrictions, if any, are on the in-service distribution.
BRIAN: Right. So, the age, number one. Number two, if there’s a job change. Now, we were talking before we started about what are the other reasons to pull it. So, when you retire, yes, you should pull it for two reasons, cost, and it’s the same two reasons.
CLAYTON: Right.
BRIAN: I can’t think of a good reason to leave your 401(k) in where it is unless, well, I was thinking of Boeing clients.
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BRIAN: Boeing clients have access to, in their VIP, a guaranteed two percent. But it’s all or none. If you pull that money out and try to leave just the guaranteed section there, they’ll say no. So, it just makes it hard. In most all cases that I’m aware of, when you retire, when you leave a company, when you’re over 59 and a half, pull that money out.
CLAYTON: Right. And there are some provisions for different hardships. You can pull it out for hardships, but your 401(k) should be if you do decide to walk down that path the absolute last option you ever take when it comes to a hardship.
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CLAYTON: So, you wanna be cautious about any of those kinds of things. To get 401(k) access, anything else?
BRIAN: No, I think we covered it.
CLAYTON: Okay. Okay. So, you take it out of the 401(k), and what do you do with it at that point? I think that’s probably the question that some of the listeners have got at this point, is what’s next then? What’s my alternative if I was in that accumulation phase, I pulled it out, it’s in an IRA. Now what?
BRIAN: Now the whole investment world is open to you. In your IRA, you can invest in ETFs to lower the cost for mutual funds that are typically 70 to a 100 basis points, one percent on average in the mutual fund.
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BRIAN: ETFs, we can bring that down by 30, 40 plus percent. So, one is cost saving. The second is, well, this is self-serving ’cause it’s our own podcast. There are options out there that are producing the highest consistent returns in the last 20 years. You have access to computer trend following models that are designed to make money when markets go up and protect you when markets go down.
RR S4 E10 REVIEWING YOUR 401K AND THE OPTIONS YOU HAVE IN A VOLATILE MARKET [00:22:43]
BRIAN: For example, we’re using six managers, three of them in the equity markets, we have a gold manager, a silver manager, and we have an energy manager. Commodities, and I hate to get jargony, so chime in on this.
CLAYTON: Precious metals and energy.
BRIAN: They’re negatively correlated, meaning the environment that makes it very good for stocks makes it very horrible for commodities.
RR S4 E10 REVIEWING YOUR 401K AND THE OPTIONS YOU HAVE IN A VOLATILE MARKET [00:23:14]
CLAYTON: Sure.
BRIAN: So, gold, silver and energy have not been good investments during the years that have been good for the equity side and vice versa. So, we’re diversified, number one, we’re trend following, number two, and so when the markets are going down, most people are losing money. Our clients made money in February and March of this year. When the markets are down 30 percent, our clients made money because of these strategies.
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BRIAN: So this is something that if you don’t know is out there, you should familiarize yourself and find out about these two-sided trend following models because they significantly lower your risk, key point number one, number two, they dramatically increase your performance because when you didn’t take a 50 percent loss in 2008, you’re miles ahead of the guy that did.
CLAYTON: Yep.
BRIAN: So, you’re increase performance, you’re lowering your risk and you’re lowering the cost of your investment because now not all of your money is at risk, only a portion of your money is at risk.
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BRIAN: Typically, in the plans that we put together for someone that is in retirement, we’re lowering their costs by at least 50 percent.
CLAYTON: Right. So, it’s a cost saving, it’s a risk reduction, it’s also a potential increase in returns over the S&Ps. And we’ve got the returns. We can show people these as they come in. One of the things that I think is important to note as well is we didn’t create any of these strategies. What we’ve done is we’ve done the research to know where the best managers are. We scoured the databases to find these.
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CLAYTON: So, these are things that other advisors have access to, but they don’t implement. And I can’t figure out why that is the case when they perform better, they lower risk, it’s just something that I don’t see why other advisors don’t do this. And so, if you’re wondering has your advisor looked at this, I mean, I’d be surprised if they have.
BRIAN: This is just my opinion, but I believe there’s one huge reason why banks and brokerages are unwilling to leave the safety of the pie chart.
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BRIAN: And that is liability. So, when you’re putting a portfolio together, you’re filling out a risk questionnaire with a banker or a broker, step one. Based on how you fill out that questionnaire, it’s producing a diversified portfolio of bonds, stocks, mutual funds, cash, etcetera. And that’s how you’re gonna be recommended to invest your money, and when you lose 50 percent in the markets, you can’t sue their banker and broker.
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BRIAN: Not successfully. You can try, but they’ve never lost a case because you put that risk questionnaire together yourself. Based on that, your portfolio is what you asked for. And so, I think that’s why bankers and brokers, that’s my opinion why they’re not willing to deviate from their pie chart, modern portfolio theory, asset allocation strategy.
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CLAYTON: Right. And so, this is something that we do differently than other advisors because we’ve seen the results, we know how they operate, and it just makes the most sense to us. As fiduciaries, we’re obligated to look for and find and use what’s in our clients’ best interests, and that’s what we feel we’ve done.
BRIAN: Correct.
CLAYTON: And so, these strategies, again, as we talk about where we got ’em from, we’ve scoured the major databases to look for these.
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BRIAN: We can even name the databases. The Wilshire Database is the largest database in the world for money managers. Morningstar, the largest database for mutual funds. And we even go further. We look at Time or Track [PH] and Theta. We look at others, and we just try to find the highest earning net of fee risk managers out there.
CLAYTON: Right. And the other side of this is, while yes, this is the wealth management strategy that we use for the bulk of our clients, the income that they draw in retirement, these retirement planners, it’s coming from principal protected sources, and so we drastically reduce risk again by only having our clients have 20 to 30 percent exposure in most cases to the stock market.
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BRIAN: Right.
CLAYTON: And so, the combination of using these two-sided models or these momentum strategies along with the principal guaranteed sources for income, that helps our clients sleep at night.
BRIAN: That’s a whole another podcast.
CLAYTON: Yeah. And we’ve talked about it before. But when you use all of those pieces together in a distribution plan in retirement, our clients, and we’ve seen this, we have these conversations that they feel that sense of security in retirement because they know everything, and we just heard from a client the other day.
RR S4 E10 REVIEWING YOUR 401K AND THE OPTIONS YOU HAVE IN A VOLATILE MARKET [00:28:31]
CLAYTON: He said he felt like everything was on autopilot at this point, which is so nice to hear that they have that confidence and that comfort in what we’re putting together.
BRIAN: Right.
CLAYTON: Is there anything else that you wanted to cover?
BRIAN: We covered very important things on 401(k), investing, allocations, protection of principal using the 200 day moving averages, age. So, I think we covered it all. The Roth option to try to get that when you can, to roll out as soon as you can through job change or through in-service distributions.
RR S4 E10 REVIEWING YOUR 401K AND THE OPTIONS YOU HAVE IN A VOLATILE MARKET [00:29:13]
CLAYTON: Yep.
BRIAN: So, I think we covered the 401(k) points.
CLAYTON: Yeah. And if anybody has any other questions that they wanna talk to us about, I mean, we’ve got advisors. We can do a 15-minute call with any of us to talk through these different points that we’ve covered today on the 401(k). If you just, “Hey, 15 minutes, let me just pick your brain a little bit,” we’re happy to do that and help make sure that it makes sense ’cause we want you to have comfort and confidence in what you’re doing and what your approach is. It’s a kind of a big, scary world, the world of investing, and we love it, we eat this stuff up, so we’re happy to talk people through it.
RR S4 E10 REVIEWING YOUR 401K AND THE OPTIONS YOU HAVE IN A VOLATILE MARKET [00:29:44]
CLAYTON: So, give us a call. Our number’s 833-707-3030. Again, that number, 833-707-3030. Thank you.
