RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:00:01]
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.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:00:27]
CLAYTON: Welcome back, we’re excited to be here. So, last week, for those that tuned in, we talked about the headwinds with retirement. So, the headwinds that retirees commonly face is they’re approaching that wonderful day where they can hang up their hat and they can go and do the things they want to do. Today we’re gonna be talking about, on the financial plan side of things, how to counteract those or counterbalance those headwinds that folks are running into. So, we’re going to talk a little bit about what a common strategy is in the pie chart, and that’s what falls short for most retirees that we see when they come in the door. They don’t know how much they can draw. They can’t see what their tax minimization is gonna look like.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:01:08]
CLAYTON: There’s a big list of things and again we talked about those headwinds last week but also we’re gonna talk about an income distribution plan and what that looks like and how that helps a retiree answer the two big questions which are can I retire and how much am I gonna be able to draw for the rest of my life so that I don’t run out of money? And so, Brian I’m gonna have you talk a little bit about that pie chart approach and what a lot of retirees typically use before we jump into that income plan.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:01:35]
BRIAN: Sounds good. So, I just want to say, we did a good podcast last time about the headwinds. If you can, go back and listen to that. We talked about living longer than ever before now in an environment number 2 of the lowest rates ever in the history of our country with a stock market that’s only been listed higher once before. That is really tough. That is, in my opinion, the most difficult environment to retire in than anything else in over a century.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:02:08]
BRIAN: So those are the headwinds right now [CLEARS THROAT]. To combat those headwinds, let’s talk about the pie chart. As a stockbroker I was trained in asset allocation, modern portfolio theory. You go into your bank or broker; you fill out the risk questionnaire and based on your level of acceptance of risk you’re assigned a portfolio that is diversified. So, first of all I want to say, mathematically, do you know what a perfectly non-correlated portfolio should give you for a rate of return?
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:02:45]
CLAYTON: Non-correlated you’re at zero.
BRIAN: Zero is correct.
CLAYTON: Right.
BRIAN: And so, you don’t want zero. You can’t get rid of volatility, but you can have non-correlated assets that can offset each other in a positive way. But let’s talk about the pie chart, the advantages, and disadvantages of the asset allocation pie chart. So, let’s talk about the advantages. The advantage is if you’re in your 20’s, 30’s and 40’s, you have your 401k, your dollar cost averaging every two weeks into the plan, as the markets go up you’re making money, you’re getting your paycheck so it doesn’t matter when the markets go down.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:03:29]
BRIAN: You’re able to, every two weeks, add 401k money into that 401k and so when the markets eventually come back up, like they did in 2000, ’01 and ’02, that was a three year drop, 50 percent came roaring back and you made great money in ’03, ’04, ’05, ’06, ’07, didn’t matter, didn’t affect you, because you have a paycheck coming in.
CLAYTON: Sure.
BRIAN: That accumulation plan makes all kinds of sense in your 20’s, 30’s and 40’s. You are on offence, you’ve got your paycheck, you’re aggressive in your portfolio and it’s separate from your income. Does that make sense?
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:04:13]
CLAYTON: Yeah.
BRIAN: Okay. Once you retire-anything else to say on the advantages before we go to the disadvantages?
CLAYTON: No, I guess the only thing I would add is that when you’re looking at retiring and you’ve had money that’s been invested, you’ve had income coming from a paycheck, you’ve had some of your emergency cash put on the side, you gotta make sure those three aspects are filled in somewhere else when you retire ’cause you’re giving up that paycheck and a way to save money ’cause now you’re living on those assets that you’ve accumulated.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:04:45]
BRIAN: Correct. Okay, so once you take that last paycheck, you’re ever going to draw and you retire, where’s your income coming from? It’s your portfolio, right? You might have other source of income, so security, pension, rental real estate but you’re going to have portfolio income as well.
CLAYTON: Well, and social security and pension, a lot of the issues that I see folks run into is that while yes, social security does go up with inflation, it doesn’t go up the way that people need it to. And most pensions…
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:05:24]
BRIAN: Are fixed.
CLAYTON: Are fixed…
BRIAN: If you’re lucky enough to have one.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:05:27]
CLAYTON: Yeah if you’re lucky enough to have a pension it’s probably gonna be fixed. I don’t think I ever even saw anybody that had a pension that adjusted for inflation.
BRIAN: Right. We’ve had some clients that are senior-level executives. They drafted their pensions for themselves and so they put a colon in it. Okay, so anything more on the advantages of the pie chart before we go to the disadvantage.
CLAYTON: No.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:05:53]
BRIAN: Okay. So, on the disadvantage. Once you’re retired, let’s say that you retire at 65, you take your last paycheck, and markets go down 30, 40, or 50 percent. You’re drawing money from that account that went down. You’re accentuating the losses for that year, year, and a half, two, maybe three years that the market’s down. So, when the markets go back up, it’s going up with far less money than what was in it that went down originally. In other words, you’re accentuating the losses of that portfolio. Now when the markets go up, you’re still pulling money out of that portfolio and you’re compromising the gains when the markets go up.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:06:40]
BRIAN: So, there’s three huge problems with having a pie chart when you are retired. One is the most important, in my opinion, and that is when you draw income out of a fluctuating account you are mathematically committing financial suicide. And that’s why we saw-Let’s go through 2000 to 2010, that was the worst 10-year period in the history of our markets. So, let’s say, Clayton, you have the opportunity to have five million dollars and you retire January one of 2000.
CLAYTON: Okay.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:07:18]
BRIAN: Now, yes, you don’t have all of your money in the stock market but let’s talk about what happens. And what happened to millions of retirees in this county, in the next eight years, actually. So unfortunately, in 2000, ’01, and ’02, the S and P is down 50, five zero, 50 percent. But you’re drawing money. Let’s say you follow the four percent rule and you draw four percent per year from that account.
BRIAN: Your equity portion of your portfolio is down 64 percent in 2000, ’01, and o-62 percent in 2000, ’01, and ’02. Then the markets go up, you don’t get all that, it recovers, but you don’t get all that because in ’03, ’04, ’05, ’06, ’07 you’re drawing four percent a year, times five is 20 percent, as the markets go back and recover to their highs.
CLAYTON: Right, so the markets are recovering, and you’ve pulled money out of that, that money can’t make it back up to that level so you just, you stated digging a hole and you kept digging.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:08:24]
BRIAN: Yup. And then the markets dropped from August of ’07 to March of ’09, that, what is that, 17 month period saw another 50 percent drop, you’re pulling money out on top of that and people saw that they had to go back to work. Their original pie, their original pot of gold that they had to retire with had shrunk so much using the four percent rule that they had to go back to work and in early ’09 we saw them by the hundreds.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:08:59]
BRIAN: They showed up in the local Walmart, banks, fast food, restaurants. They had to go back to work because their portfolio had been decimated. So, in fact the guy who invented the four percent rule said that when interest rates are this low it doesn’t work, he says he doesn’t use it. He said, William Bengen his name, he says it’s dangerous and so if bankers and brokers are still using the four percent rule, it’s been discredited by the creator of that discipline.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:09:36]
CLAYTON: Sure. Well, and I hear some people that say “Well just don’t draw four percent, only take two or three” and it’s like, well, number one for a lot of people, I mean, the average that people have in their 401k’s as they’re approaching retirement is what, only a couple hundred-thousand dollars? Something in that range. It’s not a lot and so you consider that and if you’re only taking two or three percent, I mean there’s a year out of that? That’s not a lot, that’s not enough to live one.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:10:01]
BRIAN: You would think that just drawing four percent should work because, historically, stock market returns averaged twice that.
CLAYTON: Sure.
BRIAN: And before recently interest rates used to be, gosh at least three or four percent, but now they’re not.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:10:20]
CLAYTON: Right. Yeah, and so you’ve got a couple of problems now with the argument of “Well, let’s take less than four percent out” but you’re still-it’s not enough income to live on. The other problem is you still have all those other problems that we talked about still apply.
BRIAN: Right.
CLAYTON: That if the market goes down, you’re still digging a hole. And so it doesn’t matter if it’s two or three or four percent, taking a percentage out of the portfolio, out of the pie chart annually, that’s gonna wind up causing you some serious issues in retirement when the market takes a dive.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:10:52]
BRIAN: This is the first of the three. When you draw income from a fluctuating account, you’re committing financial suicide. That’s point one. So, we talked about the four percent rule, we talked about how it doesn’t work when markets fluctuate and you’re drawing income out of a fluctuating account. The second point is having all of your money at risk. That makes no sense to us. We’re fiduciaries and to have all of your money at risk doesn’t serve you, it serves your advisor.
CLAYTON: And when you say all of your money at risk, you’re just referring to put it in an investment that can lose value, right?
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:11:32]
BRIAN: Correct. Stock funds, bond funds, alternatives like precious metals, real estate. That’s the typical pie chart portfolio. All of those things can lose money.
CLAYTON: And I think it’s important to note, too, is that the level of risk for different investments varies. When we say at risk, by definition that it can lose value because there are investments where people are gonna tell you, “Oh this is a safer investment” but it likely can still, I mean, so we’ll talk about it in a minute but bond funds is a problem.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:12:07]
BRIAN: That’s number 2. So one is, don’t draw income from a fluctuating account. We talked about the four percent rule, the second is all of your money at risk. And to your point, when you have no downside protection, which is a problem with having all of your money at risk, stocks, people get that. People understand that when the markets go down then their portfolio is gonna drop. But they think that their bond funds always come to the rescue. They consider their bond funds as stable and they’re always the white hat fund.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:12:43]
BRIAN: Let’s talk about interest rate risk. Do you want to cover that? Because, in the history of the United States, interest rates have not been this low. And conversely, in the history of the United States, interest rate risk has never been this high.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:13:00]
CLAYTON: Right and so whenever you’re dealing with interest rates and bonds, and I don’t want to get too far off into the weeds here with the jargon, but for our listeners to understand that when interest rates go up, the value of your bond fund, that your banker, broker, advisor told you was safe, you’re gonna lose value in it. And you’re gonna see that in your statement. And we are near, and this is what you said, we’re near or at historic low interest rates in the history of the United States, we’re on a historic low on the 10-year treasury.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:13:32]
CLAYTON: And so, at some point when those rates starts to go back up, everyone holding bond funds, they’re gonna get hurt, they’re going to lose money. And we saw this in the 90’s, what was it ’94, interest rates bumped from what, five to seven percent and that was a what, 20 percent hit to bond funds on average?
BRIAN: Say that again. That’s very important.
CLAYTON: So ’94, when interest rates went from five to seven percent, so they spiked up…
BRIAN: Your safe money, bond funds, lost how much?
CLAYTON: 20 percent on average.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:14:01]
BRIAN: Okay, and then in ’99…
CLAYTON: It was ’99 they went from, what was it, three to five percent or four to six percent…
BRIAN: Four to six.
CLAYTON: It was four to six and it averaged about 17 percent. Wasn’t it?
BRIAN: Right. Right.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:14:12]
CLAYTON: Yeah. So, it’s evident, we’ve seen this in the last 30 years, what can happen when interest rates go up. The value of your bond fund, that you are told “This is your safe money, this will protect you”, it doesn’t when interest rates go up. So being in a historical low interest rate time period, that’s where the risk comes in, is it puts us at historic high interest rate risk. Now if we’re in the mid ’80’s when we’re getting 13 percent on a 10 year CD, or whatever it was back then, that’s a great time because interest rates are likely to go down at that point, you can make some money and that’s what, was it Bill Gross, that made his name as the Bond King during that time period ’cause he wisely invested. But it’s not a good time now ’cause we’re at historic low interest rates.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:14:55]
BRIAN: And just like the market cycle, interest rates cycle too. So, imagine having a bond fund from 1960 to 1980. That 20-year period, you lost money in your bond funds almost every year. The interest rate cycle went up. By the way, Abraham Lincoln, the 10-year treasury was at four-point seven percent when Abe Lincoln was in power. Now, today, the 10-year treasury is at point six.
CLAYTON: Point six.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:15:30]
BRIAN: 0.6. I just want to emphasize this because most all listeners to this podcast think that their bond fund is safe. Would you invest in a stock fund when you cannot have the stock market go up above DOW 30 thousand? So, imagine the ceiling of the stock market was DOW 30 thousand and the markets today was 29 thousand, five. Would you invest your money in that?
CLAYTON: Well, if the market’s nearing a high, I’d be worried.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:16:11]
BRIAN: Okay. Interest rates are close to zero. And, that means that if interest rates on a 10 year treasury, and you have the medium duration, I know that’s jargon, medium duration bond fund, and the 10 year treasury goes from point six to 1.8, which is was only there less than a year ago.
CLAYTON: Yeah.
BRIAN: If we go back to that level do you know what your losses are?
CLAYTON: It’s gonna be, what, 30 percent?
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:16:42]
BRIAN: 30 percent.
CLAYTON: Gosh.
BRIAN: On your quote-on—quote safe money. So, we’re emphasize- We’re spending a lot of time of this because interest rate risk has never been higher ever in the history of our country than they are right now. Anyone who tells you that your bond funds are safe is not informed.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:17:02]
CLAYTON: And the other reason we keep talking about it is because that typical pie chart approach, to throw it in, a lot of advisors as their clients get older and approach retirement, they ratchet back how much of the assets are in the equity side, the stock market side of the portfolio, and put more in the bond fund side. And so, for retirees, and we see this a lot that’s why we’re bringing it up, because for retirees that are coming into retirement or just started retirement, thinking “Oh, yeah my advisors got me in some bond funds. I’m feeling pretty safe, feeling pretty good about this”, it’s a false sense of security that they’ve given you.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:17:41]
BRIAN: That’s right. So, number one there’s three things, we’re almost out of time on this segment. Number one, having all of your money at risk and drawing income from a fluctuating account is mathematically terminal for someone in retirement. Point one. Point two, having all of your money at risk means that you have no downside protection when either the stock markets go down or interest rates on your bond funds go up. Those are huge double-digit losses that potentially can affect you in retirement.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:18:17]
BRIAN: And number three, I’ll just mention this, having all of your money at risk means you’re paying incredible fees. So, let’s say that the 10-year treasury in your bond fund is yielding point six and the fees on that are point eight, which typically they are in bond funds, you know that?
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:18:40]
CLAYTON: Yeah.
BRIAN: Okay. Is that a good deal?
CLAYTON: Let’s see, no? [LAUGH] Took me about this long to think about that.
BRIAN: Yeah. So, look at your fees, know that there’s no downside protection in your stock and bond funds, your income is no longer coming from a paycheck, it’s coming from that portfolio, that to us, is strike one, two, and three. So, in the next segment next week, we didn’t have time this time, we’ve talked about the problems of the typical historical asset allocation pie chart. It’s fine in your 20’s, 30’s and 40’s to accumulate assets but once you go into retirement, just like in the NFL there’s offence and defense.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:19:27]
BRIAN: There is-In investing there’s an accumulation period and investing there’s a distribution period. And the distribution period we’ve not gotten time to in this segment, we will next week. Let’s go next week and spend, in detail, the solutions to the headwinds, the alternative to the asset allocation pie chart. Do we have time for one more comment?
CLAYTON: Yeah.
BRIAN: Quick comment.
CLAYTON: Yeah.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:19:54]
BRIAN: I was curious if in the risk segments of the asset allocation pie chart, how much diversification would benefit anyone, any client. So, I looked at large cap, mid cap, small cap, growth, value, international, emerging markets, those seven different diversified segments, and I put equal weights in all of them and I drug ’em through August of 2017 to March of 2009. Markets were down 50 percent. Guess what an equally weighted, diversified portfolio in those seven sectors, what their returns were.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:20:37]
CLAYTON: Probably down 50 percent or close to it.
BRIAN: Bingo. So, in other words, diversification among risk sectors offered zero protection when there’s a waterfall decline. It’s a rush for the exits. It’s like yelling fire in the theatre. It offers no protection. I wanna emphasize that that diversification among risk sectors. Now diversifying among non-correlated sectors like bonds, precious metals, commodities, things like that, that they do offer non-correlated benefits. But among the risk sectors, when there’s a panic, they all go down.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:21:19]
CLAYTON: Yup. And we saw that in the beginning of this year, right, everything just started to go, and it slid fast once it started to go. So, I mean, for any of our listeners, if you’re wondering what do you have in your, I mean you have your statements but a lot of times I mean, I see these and even I get tired of looking at them because I mean I know what to look for at this point but they don’t make a lot of sense to most people that are just looking at them. So we’d love to go them with you if you want to talk about your statements or how much income you can draw, we’d love to talk and give you a second opinion and right now, we’re doing our calls virtually, obviously with COVID, we want to make sure that everyone we meet with is feeling comfortable so we’ll do a call with you, just 15 minutes, it’s free, it’s no obligation.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:22:03]
CLAYTON: Our number is 833-707-3030, again that number 833-707-3030 and we’ll just go over questions, find out what’s important to you, and see if your current plan, if you’ve got one, works for you. If you don’t have a plan in place, we can talk about some options on what it would look like to get something put into place for you, and we’ve seen this this year, this has been so amazing. Typically, with financial clients you only hear from them in times of panic, and we do stay in touch with ours at least once a year.
RR S4 E13 THE PIE CHART STRATEGY & HOW IT FALLS SHORT [00:22:41]
CLAYTON: But during this time of panic we haven’t been hearing from them because they’ve been enjoying their retirements, because they have a distribution plan. They know what their income looks like and it’s working and it’s showing us that. And it’s been so much fun to enjoy these conversations with our clients when most advisors’ phones have been “We’re at first quarter of the year ringing off the hook” and our clients have been able to enjoy their retirements. So again, give us a call at 833-707-3030, we look forward to talking to you and we’ll see you next week.
