Paul Winkler: All right. I am back here, Paul Winkler. Paulwinkler.com is our website that you can go to for audio, video, and all kinds of educational material, or if you just feel like talking to somebody, you can get literally on our calendars right there.
There we go. A little blast of America at the end.
Jeff Malinoff: Little board issue there for those that understand producing.
PW: Yeah. You know what? It’s not like the old days. It’s all computers, and you can’t trust them.
JM: Honestly, you know what’s funny? Some people tell me when I was producing, we had tape recorders, and this kind of thing, and cassette tapes we had to put in, take out, put in, take out.
I’m like, “All I know is my stuff. I’m sorry. I started in 2014 with this board, so this is all I know.”
PW: Yeah, this is funny because I used to watch in my mom’s radio station, I would watch them queue up records and it was fun to watch them pop in those … oh gosh, I can’t even think of the name of it now.
JM: Cassette tapes?
PW: They used to play commercials.
JM: Oh, oh, for commercials? Oh, I don’t know.
PW: Oh, now I’m just drawing a blank. I can’t believe it.
JM: You know what’s funny is in about 20 years from now, they’ll be using their minds or something.
PW: Carts, carts. They call them carts. I had to think of it, sorry.
JM: Oh, carts?
PW: Yeah.
JM: But 20 years from now, this board will be non-existent, and it’ll be something even simpler. It’ll be something easier.
PW: It’ll be virtual. It’ll be virtual or it’ll be in the middle of the air and you just point to stuff.
JM: Back in my day it was something really that you could touch.
PW: Yeah, exactly.
JM: Not this hologram nonsense.
PW: Yeah, it’ll be a hologram. That’s exactly what it’s going to be.
Boomers and Retirement Savings
Okay, so my friend Jay Harr sent me an article. It was “Five Signs You Have Enough Savings.” If you’re a boomer, do you have enough savings to last in retirement?
So it was just getting into those things. What are we actually dealing with out there? Of peak boomers, 52.5% have assets of $250,000 or less and will rely primarily on social security as a source of income in retirement.
Now, social security was only meant to be 40% of what you needed in retirement for the average person. You’d throw out those statistics and for some people, it would be a pittance of what they need, depending on what your income was or that may be what you need because your income was so, so low when you were working that you didn’t really have much income, but social security replaced a higher percentage of that income.
What they’ve said here is that only 14.6% of peak boomers have assets of $500,000 or less and most will struggle to meet their financial needs.
Now, that was kind of surprising. Only 14.6% have assets of $500,000 or less and most will struggle to meet their financial needs.
So you’re looking at saying, “Hey, I have plenty of clients that have had less than 500 and they have just done fine. I don’t know where that’s coming from.” I guess it really depends on how you handle the assets when you invest in retirement.
Now a big mistake that I see people making is being too conservative on that and then you’re going to be eaten up by inflation. That’s one of the things I’ll get to in just a second. One of the things they actually recommended would cause those problems, but more on that in a second.
You’ve Maximized Your Retirement Plans
So if you’re a boomer and you’ve made these five financial moves, you probably have enough savings to last in retirement is what they said according to SmartAsset. Number one, it says you’ve maximized your retirement plans. Well, that does help because if you’ve put a lot in your retirement plans and you’ve put as much as you can, which is for 401(k)s, it’s going to be just over $30,000.
If you’ve done that, chances are you’re living on a whole lot less, but the question is, what’s your income? If you have a very high income but are just now starting to do that, of course, that’s not going to work really well. You don’t have enough years. So this is for the younger person.
The greatest amount of money you will have in the future will likely just be gains on the money that you did put away.
So let’s say I had $10,000 and I put it away, and let’s say that the money doubles every seven years, for example. So the rule of 72—72 divided by your rate of return, let’s say it’s 10 in my example—that tells you how long it takes for money to double. Seventy-two divided by 10% is about seven years.
So in seven years, your 10,000 is 20, then 14 years it’s 40, and then you go to 21 years, now it’s 80, and then you go to 28 years and now it’s 160, and you can see how exponentially it grows because of that doubling of the money. Now if you’re just starting later on and you’re just starting to max out your retirement plan in your 50s, that doesn’t mean you’re going to have enough money in retirement. So I think that’s a really, really short-sighted answer right there.
Target Date Fund
Number two, you’ve made the catch-up contributions. Well, that just allows you to put a little bit more over the age of 50.
The reality of it is, again, back to the first one, if you didn’t start early enough, the catch-up contribution isn’t going to be terribly helpful.
The next one is you used a HSA. Well, so what if I’ve used an HSA? Does that mean I’m going to have enough money in retirement? That’s another bad answer.
I mean, just reading this article I’m going, “Okay, strike three.” I guess they’re going to give them a couple of more strikes though.
You used a brokerage account. Now that can help. A lot of people have 401(k)s and they have core choices at their 401(k)s, like you’ll hear me talk about target date funds and then you’ll have a couple of other choices because they don’t want to be sued for not giving you lots of choices in your 401(k).
So they’ll have a target date fund—target date 2040 if you’re going to retire in 2040, target date 2050 if you’re going to retire in 2050. And they’ll say, “Hey, you can just put it there.”
The problem that I’ve talked about over and over here on the show is with most of the money in these target date funds, and I haven’t seen one that has broken this rule yet. Let me just put it this way, not one out of hundreds of plans that I’ve actually looked at, and I have a software program that has every one of them on there. But literally, what you have going on is most of the money is going to big U.S. companies because of the familiarity we have with big U.S. companies.
Where Investors Can Get in Trouble
Now here’s where investors can get in real trouble. Right now, that area of the market has been doing fairly well compared to other areas of the market in recent years. So they can get this complacency and feeling, “Hey, you know what? This is just great. What’s wrong with it?”
Well, if you look back at history, right now as we speak, this was on the TV the other day. This lady was on there talking about the S&P 500 and she said, “Do you realize that big U.S. companies, which predominantly make up these portfolios, is at its highest level when you look at price compared to earnings than it was back in the year 2000?”
Now those of you who lived in 2000, 2001, 2002 saw a 40% decline in large U.S. stocks and an 80% decline in technology companies. I did a show the other day, I was talking about the S&P 500—the 500 biggest companies. Eight out of 10 of those biggest companies in there, eight out of 10 are technology companies.
So you look at that and go, “Wait, what could possibly go wrong, right?” So you look at these companies selling for very, very high multiples compared to earnings and compared to book value. Right now, compared to assets, the S&P is at $4.50. The next closest asset category is large value at $2, and then you’ve got some international asset classes at less than $1.
So you see the prices can be very, very high. So recognize what a brokerage account can do. You can actually have an account in your 401(k) and they’ll give you a brokerage option.
Now, it opens up your options a bit. It’s not a panacea; it doesn’t fix everything because typically the best thing that you’ve got options on is you might have some more indexes, and indexes can be okay in some asset categories. They can be adequate, is the way I like to put it.
It’s adequate. It’s okay during the accumulation phase. It’s not what I would want to own during distribution.
One of the things they do right is they don’t pick stocks and they don’t time the market, but the problem is the way they’re actually designed: They overweigh areas that shouldn’t be overweighted, is the brief version.
Brokerage Accounts and Diversification
Now, a brokerage account can help because you can get better levels of diversification. And there are two different types of diversification. People don’t recognize this. One type of diversification is you’ll hear a broker say, “Oh, you’re really, really well diversified,” and I’ll go, “No, you’re not.”
They’ll go, “Well, my advisor said I was. No, you’re not. Let me show you,” and what you’ll find is you can be diversified within a market segment.
You could have owned every single technology company in the year 2000, but it didn’t stop that area of the market from going down 80%. You could have owned them all. You could have been diversified within them all.
Diversification is how the things you own tend to move in different directions with each other or to different degrees.
You might have a year where, let’s say, large U.S. stocks go up 28% and then small companies may go up in the 70% range. That’s happened many times in history, but you can have a situation where that happens. You can have a situation where large U.S. stocks in 2000 went down 10%, but value companies went up 10%.
You can have a situation where they move opposite like that. You can have a situation where they just move fairly similarly, but it’s just in a little bit of a different fashion that they recover from market downturns, for example, or how soon they go down. So there are a lot of different things. Like in 2022, you had large growth companies, the S&P 500, go down 18%.
Well, small value companies, they went down, but they only went down three. So comparatively, that was a big difference between the two of them. So it’s a dissimilar price.
You’ll hear me say dissimilar price movement is the big deal. So using a brokerage account just gives you the ability to get a little bit more diversified, and you just have to watch the expenses because sometimes they charge you extra for those things.
Safety Comes With Risk
So this is something that when we’re reviewing people’s 401(k)s, we say, “Hey, they have this option. Do the expected benefits outweigh the cost?” That’s how you make that decision.
Number five, this is where it gets into a sales pitch. It’s a banking website that actually had this, so no surprise here. You purchased an annuity, and banks love selling these products right now because the commissions can be so good on them.
But they’re saying, “Hey, it’s another option. You can get guarantees and so on and so forth.”
Well, the problem that you have there is because the insurance company is investing primarily, unless you have variable annuities, which are variable contracts that look like mutual funds, but it’s well less than 15% of contracts sold are of that variety, and it’s a fraction of that 15% that are no load. In other words, there are no commissions on them.
So you look at the types of deferred annuities that I would say, “That’s okay, that’s acceptable to me.” It’s such a tiny fraction of what’s actually being sold that it’s almost not worth mentioning.
So back to this, they say, “Did you purchase one?” Well, typically you’re going to find that they’re using these deferred annuities that are fixed income, and that’s really what they’re touting here, is that. They’re saying, “Hey, safety, safety, safety.”
Well, what comes with safety is risk, and that’s inflation risk. As I like to talk about, in the early 1980s, you could get by. You could live on $10,000 just fine. Now it’s 70, 80, $90,000.
Inflation destroys the purchasing power of the dollar and you have no protection against that.
You may not run out of money, but you run out of purchasing power. So that is the issue.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
