RISKS IN RETIREMENT [00:00:00]
BRIAN: Welcome to safer retirement radio, where you get the transparency you deserve. With over 35 years of experience in financing 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: If you tuned into last week’s show, we left you on a bit of a cliffhanger where we talked about the first two risks. This week’s episode we’re gonna follow that up by talking about another three risks that have to deal with retirement and those facing retirement, so we hope you enjoy the show today.
RISKS IN RETIREMENT [00:00:41]
CLAYTON: Okay so we talked about a couple of risks, what’s the next one? Number three.
BRIAN: Okay the third risk is the stock market valuation risk. So, the stock market is valued in different ways. We have a chart that we send periodically to all our clients that talks about 15 different ways to value the market [LAUGH]. Price to book, price to GDP, price to earnings. And these different valuations are added up into a score. There’s been three valuations that have spiked in the last hundred years, 1929, 1999, and right now.
RISKS IN RETIREMENT [00:01:21]
BRIAN: The market is priced so high right now in valuation that 10 years from now, in 1929, markets didn’t go back to where they were before they crashed. 1999 the same thing happened. If people think that the markets are gonna continue to do what they’ve done, this is a risk expectation that cannot historically, has never happened. 10 years from now when the markets are trading at this valuation, we’ve never been able to have a positive 10-year return.
RISKS IN RETIREMENT [00:01:59]
BRIAN: So, if you’re a buy and hold, or you are an indexer, you’re hoping in retirement for something that’s never historically happened before. And by the way, we should add that at Decker retirement we are not anti-risk. Most all our clients have risk.
CLAYTON: Sure.
BRIAN: But we handle risk differently, which we’ll get to in a second.
CLAYTON: Right.
BRIAN: But the third risk I want… We talked about credit risk, we talked about [higher?] bond risk, and rating risk, and now the third is valuation risk in the markets. Most people are completely oblivious that they’re expecting a 10-year positive return right now when historically from this level it’s never happened, not one time.
RISKS IN RETIREMENT [00:02:44]
CLAYTON: Right. And it seems almost like, I mean maybe this is a silly analogy, but let’s say you walk into a dealership and you see this bright, shiny truck and it looks just clean, there’s no rust on it, everything looks great on the outside and you say I’ll take it, and then you start driving away and realize it hasn’t had an oil change in the last 25,000 miles, and you just bought yourself a lemon. I think that’s a little what people are, when the people are jumping in right now, that’s a little of what they can expect.
BRIAN: Right.
CLAYTON: Because it looks great on the outside but when you actually get into the valuations, when you look at the different dividends that have been paid out, that aren’t being paid out anymore, you look at the fundamentals of these companies that are supporting all of these stock lines, it’s not as rosy as it looks.
RISKS IN RETIREMENT [00:03:30]
BRIAN: Right. So, there’s, on the fourth risk we want to talk about how the markets cycle. There are many cycles, there’s the presidential cycle, there’s the seasonality cycle, we’re not gonna talk about those. There are three reasons that the markets go up. This feeds into the cycle that we’re gonna talk about. One is earnings. Right now, the earnings gap between the price is divergent, earnings have dropped. Now, people can explain and say well, we’re expecting stock prices to go higher because everybody knows that the economy’s gonna recover, it’s just a matter of time, the market’s ahead of where the earnings are.
RISKS IN RETIREMENT [00:04:13]
BRIAN: But you’ve gotta have earnings growth to sustain higher stock prices. Would it surprise you if I told you S&P earnings peaked two years ago?
CLAYTON: No, that doesn’t surprise me.
BRIAN: Two years ago. Okay the second reason that markets go up is lower interest rates. There’s an economic expression, all things being equal. If all things are equal, and you’re getting lower and lower CD rates, you’re gonna take your chances more and more in the stock market looking for dividend yields to replace what is now, a sub one percent yield on a 10-year CD.
CLAYTON: Right.
RISKS IN RETIREMENT [00:04:51]
BRIAN: Why would you lock in a 10-year CD at point 8 when you could buy Exxon’s dividend at three percent.
CLAYTON: Sure.
BRIAN: And that’s what most people are doing. So, they’re taking more and more risk.
CLAYTON: And when you say risk, it’s essentially, we’re defining it as putting it in a place where it can lose value, right?
BRIAN: Right, right.
RISKS IN RETIREMENT [00:05:13]
BRIAN: But on this fourth risk that we wanna cover, it’s federal reserve risk. There’s three reasons markets go up, we talked about earnings, we talked about interest rates going down. Interest rates are at or near zero.
CLAYTON: Right.
BRIAN: There’s not much lower it can go.
CLAYTON: Yeah. This year, I mean it’s been historic lows this year.
BRIAN: The 10-year treasury is at point six right now.
CLAYTON: Right, and I know you’ve said it before, but Abe Lincoln got better returns on his bonds then we’re seeing today.
BRIAN: He got four percent.
CLAYTON: Gosh.
BRIAN: Okay. So, on this fourth risk the federal reserve is singlehandedly keeping this market up.
RISKS IN RETIREMENT [00:05:53]
BRIAN: Do you know that the fed owns forty percent of the mortgages in the United States, right now, today?
CLAYTON: That seems like that’s gonna head in a bad direction.
BRIAN: Yeah, so The Fed cannot keep doing what it has been doing, so at some point it’s like musical chairs, the music stops, and everyone scrambles. That’s what’s going to happen with the Fed. We’re not being, what do you call, the sky is falling. We’re not being overly pessimistic; we’re being realistic that at some point you’ve gotta have downside protection.
CLAYTON: Right.
BRIAN: And buy and hold doesn’t work when you’re retired.
CLAYTON: Right.
RISKS IN RETIREMENT [00:06:30]
BRIAN: I’m gonna add a fifth risk, if I can?
CLAYTON: Yeah.
BRIAN: The fifth risk is in the dividend strategy. The dividend strategy is where, because of low interest rates, you’re gonna buy a dividend in some high yield situation in the stock market. So, there’s two problems with the dividend strategy. By the way, the dividend strategy is the most superlative intended, the most popular retirement risk strategy out there. And there’s periodicals like Kiplinger that dedicate specific references to the dividend strategy.
RISKS IN RETIREMENT [00:07:10]
BRIAN: So, there’s two problems with the dividend strategy, particularly right now. One is that human nature, even among the smartest people that we come across, human nature is, if you can get three percent that’s better than one percent. And if you can get five percent then that’s better than three percent.
CLAYTON: Sign me up [LAUGH].
BRIAN: And so, what’s happened is, people are forgetting that the higher the yield the higher the risk.
CLAYTON: It’s the risk reward tradeoff.
BRIAN: Right. So, when people come in, and they’ll say, yeah, I’ve got a dividend strategy, I don’t care what the markets do, I just let the dividends roll in. Quote, unquote, they all say that.
CLAYTON: Yeah.
RISKS IN RETIREMENT [00:07:53]
BRIAN: So, I say, all right Mike, what’s your favorite dividend stock? And they’ll point at it and they’ll say this one, it’s yielding nine percent. So, I’ll say okay let’s take a look at this X, Y, Z stock. So, I’ll swing around in my chair, show them on the screen the financials, EBIDTA, earnings before interest, dividends, taxes, and amortization. Ooh, look, the stock is paying a dollar, that is nine percent on the stock price, but look, Mike, they’re only earning 80 cents. 80 cents. So, they’re borrowing to pay the dividend. How long do you think they’re gonna do that?
RISKS IN RETIREMENT [00:08:28]
BRIAN: So, folks, we’re talking about this now, if you’re using the dividend strategy, I hope you look at EBIDTA to make sure your coverage on the dividend is at least 2x. It’s not. If it’s paying over five percent, it’s not. Cause when the 10-year treasury’s at point six, the safer dividend yields are under five percent.
CLAYTON: Right.
BRIAN: The high risk is over five percent. So that is an underlying risk that people, it just escapes them.
RISKS IN RETIREMENT [00:08:59]
BRIAN: Also, I want to add the second issue when it comes to the dividend strategy is that most of the high dividend yields are coming from two sectors. Real estate and energy.
CLAYTON: Sure.
BRIAN: Is real estate getting crushed right now?
CLAYTON: No. Real estate’s doing phenomenally well with the interest rates.
BRIAN: Home building is. Is commercial real estate doing well right now?
CLAYTON: No, it’s not.
BRIAN: No. A lot of people discovered they can work at home. So commercial real estate is getting hammered in two ways. One, from Amazon, cleaning their clocks.
CLAYTON: Right.
RISKS IN RETIREMENT [00:09:37]
BRIAN: And the other is from the economy, where people with COVID, COVID scare, they had to work at home and they no longer need to occupy this office space, and so commercial real estate is getting hammered. So, you have incredible risk, right now, with real estate, commercial real estate specifically, and energy. So, with energy, what happens to the price… Oh, actually, forget about that. What happened to the March contract this year? It went negative. That’s never happened before.
CLAYTON: Right. That was a fun one to watch.
BRIAN: Yeah.
RISKS IN RETIREMENT [00:10:14]
BRIAN: So… can real estate and energy cycle? Yes. You can lose 20, 30 percent in these dividend stocks because those sectors cycle.
CLAYTON: Right.
BRIAN: Try saying that really fast.
CLAYTON: [LAUGH]
BRIAN: Those sectors cycle. [COUGH] So those are five underlying risks that, we want to communicate out there, are real risks right now today that [run around?] especially all at once.
RISKS IN RETIREMENT [00:10:50]
BRIAN: You’ve got all five, you had one of the five scattered around in the last decades, but all five are hitting us right now.
CLAYTON: Right. Well and I think too, I know you mentioned the presidential cycles, I know that it is something that it can be a risk, but if we look at it… And I don’t, I’m not trying to say one side or the other with politics, but regardless of who gets elected, I would imagine we will see some new policies next year that will come out and will likely affect the direction of our economy and the market.
RISKS IN RETIREMENT [00:11:23]
CLAYTON: Regardless of who gets elected, it could be better, it could be worse, doesn’t really matter. But there is that underlying risk of the unknown, and so that’s something else to consider. For somebody that’s looking at retirement or jumping into retirement is that to be in the stock market where businesses potentially are going to be affected in one way the other, being all in the stock market, buying and holding, is going to be another way to say, well I need to start looking for a job, if you’re a retiree, and I think that’s something that people don’t take into account.
RISKS IN RETIREMENT [00:11:56]
CLAYTON: So, I mean we talked about our distribution plans before on the show and I hope that for those that are listening that you’ve got one or you’ve taking a look at it to see what your income looks like in retirement, and, if you haven’t yet, give us a call, our number is 833-707-3030. We can put one of those together for you for free.
RISKS IN RETIREMENT [00:12:16]
CLAYTON: The other thing to consider too is, if you’re, if you want a little bit more information but you’re not ready to call somebody yet, you can go to our website, we actually have, our EBook is available. It’s the Decker Approach, it’s a common-sense approach to retirement planning, and we spell out a lot more in that book about what distribution planning looks like and how it operates and what a distribution plan should look like. So, we encourage you to check that out, go download it, it’s free.
RISKS IN RETIREMENT [00:12:42]
CLAYTON: Just Decker Retirement Planning dot com is where you can get that. But we’d love to hear from you, let us know what you think of the book, and if you have any questions about it, please give us a call and we look forward to talking to you next week.
RISKS IN RETIREMENT [00:12:53]
