Paul Winkler: Welcome to “The Investor Coaching Show.”
I’m Paul Winkler, talking world of money and investing, retirement planning, putting money away for the future. It will come sooner than you think.
You know, for as much as people pick on the younger generation, this is interesting. In a recent study on younger people, they are saving more for retirement years earlier than boomers.
I would submit that some of the things that they’re saving into may not be so great, but it’s encouraging that they’re actually giving it a shot.
And hopefully, listening to a show like this, they’ll maybe change some things that they’re doing and fix some things that they’re doing.
Because typically, 401(k), a lot of times you just go and set it and forget it with the things that they tell you to put the money in. You’re often investing with the crowd, and the crowd doesn’t necessarily invest very well.
We’ve known from studies. We can see the research.
Matter of fact, it ought to be any time that the new research comes out from DALBAR, that they put out regarding investor returns versus the stock market.
I don’t know when that’s going to come out. It’s got to be any time now.
But typically, if we look at the data on that, the return of the stock market is so much higher than the return of investors in the stock market.
Why Are Market Returns Higher Than Investor Returns?
Morningstar actually does this where they actually look at investor returns, and it’s kind of ingenious the way they do it.
They look at cash flows because mutual funds will report how much in assets that they’re managing. And they can look at: Did money flow in? Did money flow out?
When did it flow in? When did it flow out?
If it flowed in just before a market downturn, well, that’s not so good. If it flowed out just before an upturn, well, that’s not so good either.
They can actually come up with the estimates on what the returns of investors in funds are versus the returns of the funds.
That’s basically what DALBAR has been doing. They look at the asset allocation: investing between stocks, bonds, cash, allocating the assets between different major segments of the market.
What they do is they look at what the returns in the funds are versus the market, and it’s not so good.
It’s typically under the inflation rate for asset allocation. It’s really pretty bad.
And then it’s because a lot of times we get information about investing at the workplace.
We go in there, and they say, “Well, if you don’t really know what to do, just stick it all in this target-date fund.”
That’s about as much information as they give because they don’t want to give a lot of information.
Not because they don’t like you. It’s just simply because they are afraid of being sued if they give bad advice.
Who can blame them? Lawsuits are all over the place, and people do have a tendency to get a little bit sue happy.
So what they do is they manage the portfolio with a target-date type of an approach.
You think, “Well, can they get sued for that?”
Well, everybody’s doing it. It would be like pulling everybody over that’s driving 75 miles per hour in a 70.
Are they going over the speed limit? Yeah, technically they are, but everybody does it, right?
It’s hard to just go and punish everybody for doing what everybody else is doing.
The Importance of Early Retirement Savings
So millennials, what they found is they’re saving for retirement years earlier than boomers did. Pretty significantly too.
They’re looking at their financial futures, what they’re saying in this study, and they’re realizing, eh, kind of bleak.
“The YOLO generation”—as they call them, you only live once—“started saving for retirement— stuffing money away in 401(k)-type accounts—nine years earlier than their baby boomer parents did.”
You may have heard me say this before. Every seven years you start saving earlier, or every seven years—usually, the way I put it is this.
I put it, “Every seven years you wait, you cut your retirement in half.”
It’s kind of daunting when you look at it that way. Now, that’s not—if you invest and get the returns that the average investor has gotten, you probably only cut your retirement just a little bit because the returns are so bad.
But no. If you look at market returns for large U.S. companies: 10%.
You’ve got the rule of 72: 72 divided by the rate of return, 10, is 7.2. That tells you how long it takes for money to double.
Well, conversely, you can look at that and say, well, that tells you how long, if you actually wait— or how much income that you cut from your retirement years, if you wait.
If, every seven years, money typically doubles—now, sometimes people get caught up on this. They hear me say this, and go, “Well, I invested this for this seven-year period, and the money didn’t double.”
Well, no, but you invested in this other seven-year period and it tripled or quadrupled over that period of time. It’s just an average, so you can’t really look at that.
But you look at the delay, and it has a huge impact. Because if you have a doubling, well, then you have double the amount of money.
That’s double the amount of income that you can take.
If you’re using a distribution formula for how much income you can take, it just stands to reason that you’re going to cut your income in retirement, right?
The Demise of Pension Plans
So what’s going on here is Schwab did this Retirement Reimagined study, and they looked at—people lack pension plans because companies can’t do pensions anymore. They’re competing with companies all around the world that don’t necessarily have pensions.
A lot of them have government programs that are pretty robust.
Hence, the companies don’t have to have pensions. That makes them more competitive in international marketplaces.
Then U.S. companies are going, “How do we compete with that? How do we keep our prices low?”
Well, guys, you’re going to have to save for yourself. American workers, you’re going to have to save for yourself.
Here. Here’s a 401(k).
We’ll do a match to incentivize your saving. That’s about it.
That’s about all we can do.
So they do this study, and they said that because they don’t have pensions, and companies aren’t doing this, that’s a big factor pushing millennials to start saving for retirement on their own.
Because they’re talking to their parents and going, “How are you guys able to sit back and do nothing?”
They’re like, “We’ve got Social Security, and we’ve got this pension.”
They’re like, “Great. What’s a pension?”
“Well, we used to have those things.”
They’re still out there, here and there, but just not nearly what they used to be.
Why Are Millennials Saving So Much Earlier?
What’s happening is, in a lot of ways, millennials are far worse off than their parents.
We’re finding that they’re less likely to own homes.
And a lot of that’s because they move around a lot. That’s one of the reasons, and maybe they didn’t—
They’re starting their families later. That’s something that—they didn’t really mention that here, but that tends to be a big factor.
I remember when my wife and I first got married, and our thing—this isn’t everybody, but this was just our thing, that she wanted to stop work when we had kids.
That’s basically what she did.
I was like, “Oh boy, step up to the bar time. Time to do something.”
Because here we are with kids, and I’m going, “Okay, so what do we do?”
But then again, I was a financial planner, and we did some really interesting things to get into a house faster.
Like, we bought a piece of land, and what happened—we bought this piece of land while we owned this little house.
And you had these assumable mortgages back then. You could assume somebody else’s mortgage.
So I could actually take over, without a down payment, and assume somebody’s mortgage. Or to have a really small down payment because they wanted to get the heck out, and then just assume, take over, their mortgage.
That’s basically what we did, building up some equity right away.
Then, that piece of land that we bought for a pittance doubled in value, and that became the down payment on the next house.
Financial Planning Can Help Investors Get Ahead
There are just a lot of little things that I look at it and go, “That’s why financial planning is so important.”
You can look at the atmosphere and go, “Okay, so we don’t have assumables anymore, but what else can we do?”
You can look at a situation and figure out, “Is there some other way to get this person into a house that may be a little bit outside the box in thinking, and how can we rearrange the furniture?”
This is why I’m doing these workshops, as matter of fact, pretty much every week.
I think even every other Saturday, I think it is, I’m doing some workshops where I’m actually looking at money beliefs and looking at attitudes that we have and how you can change how you look at things to get ahead more.
If you go on the website, might as well just tell you about it right now, paulwinkler.com/thinkmoney.
It’s paulwinkler.com/thinkmoney. On there, you can actually go to this and sign up for a workshop.
There are very limited numbers of seats because I’m actually going to be working pretty one-on-one with people in there as I go through things, and just walking through attitudes and looking at our beliefs, where they come from, what our parents believed, and how we pick up on these things.
We tend to repeat things that prior generations did, and they may not work so well anymore. Sometimes we have to challenge those lines of thinking that we develop.
Anyway, so you can check that out.
Issues and Worries Faced by Millennials
But you look at millennials, and they’ve got a few things that they’re up against. Less likely to own homes.
Despite their efforts to put money aside earlier, a lot of times they’re worried that they won’t be able to retire, so they’re getting a little bit more motivated. And they spend about 24% less time on financial matters than boomers do.
They’re “using their savings to pursue desired lifestyle and passions,” according to the report. They’re not spending a lot of time really doing the planning, which can come back to bite them for sure.
What they did is they looked at, okay, so what else is going on here?
They said, “Recently, millennials say that they’ve taken a pause in putting money aside. Nearly half of 18- to 35-year-olds are waiting ‘until things return to normal’” to start putting money aside.
Now, that’s a problem right there, because if you look at when things are normal, that’s when returns tend to be the lowest.
If things are going well, then what happens is people get out of the fear mode. They get out of the worry mode, and there’s not as much risk in their perception.
Therefore, when there’s not as much risk, they’re willing to pay more, and they have to pay more for things. They actually hurt the return in the future for the investments that they get into when they do that.
Now, the other part of the Schwab study predicts that “millennial retirees will be more than 150% more likely to invest in crypto and digital investments in retirement than boomers.”
That bodes poorly for them as well, because it’s not an investment. An investment, by definition, is somebody paying to use your money.
Now, if you look at crypto and those types of things, it just goes up and down based on supply and demand. The reality of it is you don’t really know which one’s actually going to win the race, number one.
If you look at it versus the other currencies, other currencies go up and down in value. But haven’t we given up on investing in currency markets, unless you’re somebody that stays up late at night and sees these commercials telling you that you can get rich?
Well, most people that have tried it go, “Well, it’s a really easy way to get poor, is more what I’ve seen from it.”
Learn From the Mistakes of Others
That’s one of those things that—previous generations have gone down those paths as well. If you look at previous generations, they had their tech stocks, right?
They had their electronics stocks in the 1960s. They had their oil stocks in the 1970s.
They had their bonds in the 1980s. They had their biotech as well in that decade.
Then you just have literally one thing after another that people try. And then what they do is they get burned, and they go, “Maybe I shouldn’t do it this way.”
Rather than learn from your own mistakes, it’s probably better to learn from other people’s mistakes, but it just doesn’t seem that that is a norm for humanity to do that.
They don’t really do that very well, do they? It’s just, we typically have to learn from our own mistakes and then recover over a series of Lord-knows-how-many years before you finally recover, but then you’ve got lost time.
We get back to that whole thing about time and the doubling of money. And how long I have to wait for money to double is not that long, historically.
But every seven years, like I said, if you wait, you cut your retirement in half. So you can’t really afford to make a whole lot of mistakes.
It’s best to avoid those types of mistakes.
When I was talking about when things are good, that goes back to—I remember studying, it was the Roman “prestiti.” It was the Venetian—it was a bond that was actually issued.
And I’ve talked about this before, but it’s just an interesting study just to help you understand this. This goes back 2,000 years.
Issued a bond. Forced wealthy people to buy it.
Didn’t force them to keep it, so they could trade it. They actually have trading records on this thing.
They found that at the height of the Roman Empire, when things were the most safe, that the return was actually the lowest. When things were a little bit more shaky in the Roman Empire, the returns were higher.
It makes complete sense because, to get access to your money, people have to pay more when there’s more risk and vice versa.
401(k) Auto-Enrollment Increases Savings
They were talking about it in this study that the reason that younger people were actually saving more is partly because they’re being auto-enrolled into 401(k)s. So you go to work someplace, and they automatically enroll you, and you have to disenroll to get out.
Most people won’t put forth the effort to get out. They’ll just say, “Yeah, yeah. I probably should be saving for retirement.”
They let them take the money out of their paycheck to do that.
The other thing is these auto-escalation clauses, where they actually bump up your savings amount, like a percent or 2% per year. Before long, you’re above 10%, which is a good level to be saving at: 10–15% of your income.
Finding True Retirement Success
Now the final paragraph I heartily agree with. They said—this is in Advisor—let’s see.
What is the publication? I have to think about this.
I see so many different publications I pull from.
Advisor Perspectives, so this is written for financial advisors.
“‘The good news is that millennials have more time before they retire to take risk,’ says Rob Williams, managing director of financial planning, retirement income, [and] wealth management [at] Charles Schwab. ‘But over time retirement success comes from tried and true things like diversification’”—
Don’t put all your eggs in one basket.
—“‘having ownership of the growth of the U.S. and global economy through traditional stocks’”—
That’s the beauty of it. You’re buying companies that their sole purpose for being is to continue to grow and broaden their influence in the economy.
Then he says in “‘things that have cash flows and generate growth.’”
Now, cash flows. There has to be a cost of capital.
Somebody has to be paying to use your money, in other words.
Right now, crypto just “‘doesn’t qualify as having that.’”
Exactly.
Good. I think the sooner that people learn that lesson, the better, in my humble opinion, but good.
Start early, invest often.
They didn’t even mention it in here, but people worry about Social Security and those types of things. I don’t think it’s going to be gone, but it’s never been something that is supposed to be there for your entire retirement and to handle your entire retirement.
You’d be shocked at how many people are retiring and that is their entire retirement. Social Security.
I think it’s sad because I think it’s why there’s such a silent or an invisible group of people, older population. It’s because they can’t afford to get out and get around and do things because they just don’t have enough income for retirement.
It’s an unfortunate thing, but hopefully millennials will turn that around, and hopefully they won’t do it by investing in things that aren’t really investments.
Make sure that you actually get involved in this process. Take charge early.
Don’t wait until things look better to start investing because that’s usually too late.
Paul Winkler, “The Investor Coaching Show.”
SuperTalk 99.7 WTN. Be right back after this.
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