On this week’s show, Dwight outlines some essential tax strategies to help you win with your money in retirement. Plus, all our listeners are invited to join Dwight for a free class about taxes in retirement – listen to this week’s show for all the details!
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9.8.23: Audio automatically transcribed by Sonix
9.8.23: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.
Producer:
Any examples used are for illustrative purposes only and do not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to predict the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.
Producer:
Welcome to Retire 360 with your host, Dwight Mejan. Dwight is a licensed fiduciary and financial advisor who always places your needs first. Dwight works hard each day to educate Americans like you on how to reach the financial freedom they've worked so hard for. And he can help you, too. So now let's start the show. Here's Dwight.
Dwight Mejan:
Well, hey, welcome back to the show here, The Retire 360 Show. I'm your host, Dwight. Mejan I'm going solo today. Mitchell is out taking care of a busy week that he's got. But my faithful executive producer, Sam, is with me and glad to have him here with me. We'll probably bring Sam into the program a little bit. Sam, are you How's your week been, by the way? Things are going well. Dwight Summer is starting to turn into fall. There's a bit of a crispness in the air.
Producer:
And fall is one of my favorite times of year, so I'm in a good mood.
Dwight Mejan:
The mornings definitely have been a little nicer, so I can relate to that. I'm an early morning riser out the door a little before five to head to the gym, and I've noticed a little cooler there in the morning, but we've still got a little heat with us. But don't think it'll be with us very long. But hey, we want to dive into today's show. This is brought to you by our company, 360 Capital Management. We have two offices. We're located in Southern Pines in Moore County. Where am broadcasting from here today? And then we also have another office up in the mountains that is up in Banner Elk. So glad to have listeners from both of those locations tuning in to us this weekend. We're glad that you chose to spend some of your day with us. We have a real simple goal here at Retire 360 Radio and we are basically here to help you win with your money. We want to help you grow it, but we want to help you preserve it and protect it responsibly. So always encourage people. If you want to check out us a little bit more, you can go to our our website. We are at Retire360Show.com again, that's Retire360Show.com anything i'm talking about on today's radio program or anything you'd like to ask us. If you're in the mountains you can reach out to us at (828) 278-7814. You've got retirement questions, questions about your money, your savings, anything that has to do with your finances.
Dwight Mejan:
We'd love to hear from our listeners. Happy to hear from you. If you're in Moore County, you can call us at (910) 235-0812. Again, I encourage everyone to go to our website. I love what I do, but more importantly, I love who I do it with. And of course couldn't do it without you. The listeners and many of you listeners are clients as well, so want to welcome our clients to the show. If you want to go to our podcast, this is more of the on demand segment of our show. You can go anywhere that you download podcasts, Apple, wherever, and you can just go to retire 360. You'll find us there. We're also on Facebook and Instagram, but don't hesitate to reach out to us and give us a call so we don't have a quote of the week. Mitchell normally brings us that quote of the week, but I do want to make our listeners aware, particularly if you're in the mountains. We have an upcoming taxes in retirement workshop that we're going to be doing at the Watauga Library. So folks, if you are listening to that and you said, hey, this taxes is is getting very complicated. I know many of our listeners right now who have not yet filed that deadline is looming. And you might be wondering about your own taxes. It's never a bad time to learn about taxes because in retirement it becomes, I believe, even more crucial to understand taxes because it's what you end up keeping that really matters off of those returns.
Dwight Mejan:
Right? If you're making good money, but you're paying a lot in taxes that little extra you might be making above, maybe you know someone else, it may be all for naught if you're paying more in taxes. So taxes in retirement, it's a great place. It's a great program for you to attend. And it's going to be at the Watauga Library. It's on September 21st. We are going to have two classes that day. We're going to have one at 11:00 and we're going to have another one at 6 p.m. So those of you who are working and want to get to that class, it's a little over an hour. I'm the one that teaches the class. I'm going to give you a little outline here in just a minute of what we're teaching on. But if you're definitely in that area and you can attend that or you've said, Hey, I've been meaning to call you guys, I want to get in that class. I've heard you guys talk about it a lot. I can tell you it's the most popular class that we do. You will not leave without having learned several things. I guarantee you that. Okay. (828) 278-7814. Leave a message. Leave your name. Leave your. Phone number. Someone from my office will reach out to you and confirm space.
Dwight Mejan:
Could tell you the the space will be full. It always is. We have limited seating in. That doesn't cost you anything. And like I said, we have 11 a.m. and a 6 p.m. class. Here's a little bit of what we're going to talk about. I'm going to take you through historical taxes so you can kind of see where we've been in recent decades, where we're at today with current taxes. And I'm going to show you what's being discussed in Congress right now with the Congressional Budget Office. As far as tax rates, a little teaser there. We currently have seven brackets that we currently operate in, ranging from 10% to 37% for ordinary income. And there's discussion right now those tax brackets moving to three brackets, and that would be at the low end of 25% and is high, folks, as 88%. Just imagine that 25 to 88% were currently from 10 to 37%. I think it's just worth everybody noting, you know, in retirement, most of our money is in tax deferred buckets. There's three buckets of money that you could put taxes in. You could put or your assets, you can have a taxable bucket, which is money that you've invested after you've already been taxed on it. So the growth would be taxed. That's your taxable bucket. Your tax deferred bucket is the largest bucket that most people today are coming into retirement with because many of you who are either in retirement, maybe just recently retired or you're getting ready to retire, you're in that critical five year stretch.
Dwight Mejan:
You're going to be retiring sometime in the next five years. Your largest bucket of money is in a tax deferred bucket where you contributed money pre-tax. So you got to take a deduction on your taxes. But all of that money has to start coming out and all the earnings on it are going to be taxable subject to your tax bracket. So imagine today, if you're in that 12% bracket, I'm just using that as an example. What if that bracket for you in the next, I don't know, year to five years doubles or would even triple in taxes? How would you feel about that? And more importantly, how would you feel if there were ways that you could implement a strategy today to combat what could be coming, which is possibly three tax brackets, simplifying it, but raising taxes on every bracket? Okay. And some people want to know why. You know, why would that necessarily happen? There's two programs that specifically cost a lot of money to provide our retirees. One is Medicare. That's the health care program. And the second one is Social Security. And what's compounding the problem today is when you look at the segment of the population that is the largest and the fastest growing segment of our population, that demographic is baby boomers. So if you're listening to this and you're a baby boomer, you're looking at strategies right now.
Dwight Mejan:
We're going to talk a little bit if I get to it today, we're going to talk a little bit about Social Security. I also cover Social Security on some of the slides that I go over in this taxes and retirement workshop. That's going to be happening September 21st at the Watauga Library. So we'll cover some of that. But Social Security is a huge drain on the tax base. And the future of Social Security is is bleak unless we raise taxes. It's the only way to bring revenue in. One of the few ways many people are concerned about taxes going up. If you're counting on retirement to be the same tax structure you're in now or you're planning a retirement, perhaps in the 10 or 12% bracket, you might need to plan again. Okay. And when you start taking money between pensions, people want to know, hey, how much of my Social Security am I going to pay tax on? Is my Social Security subject to taxation? I cover that in this class. I'll show you exactly some examples of how much of your Social Security could be subject to taxes. How does that play with your pension? How does that come into play with money that you have to take for required minimum distributions which start at a specific age in retirement? For some of you, you're already doing that. If you're listening to this program now, you might be already taking required minimum distributions.
Dwight Mejan:
Some of you haven't started yet. If that's the case and you haven't started, they're either going to start for you at age 73 or they're going to start for you at age 75. And a lot of people just defer taking that money out until they're told to start doing that, which could be, you know, ten years for some of you right now who are listening to this. So if you're in your 60s and you're like, man, don't plan to take any money until I'm required to start doing this, until the government tells me I have to. The government used to have an age set at 70.5 when you had to start pulling money out. In fact, it stayed there for decades. It was a long, long time. That 70.5 was the age required when money had to start coming out of these pre retirement accounts out of these old 401 seconds. Well, they pushed it back to 72. Now they. Pushed it back to 73, and in 2034, it's going to be pushed back again to to age 75 was share with people. That's not necessarily a good thing that they're doing that the government knows exactly everybody that's in a shout of my voice listening right now. If they knew every one of us that was listening to the sound of my voice who you were, they know exactly how much money is in all of the listeners listening to my voice right now, they know exactly how much money is sitting in those tax deferred accounts.
Dwight Mejan:
They know it to the penny as of the end of last year because the the company who manages that money, they have to report those numbers to the IRS. And the IRS uses that to make sure based on your date of birth, that you're pulling the right amount out of that account. So how does taxes play into that? If you're taking a pension, let's say, if you're fortunate to be one of the few people today who have a pension and you're pulling money out of that account and you have to start then taking money out, I don't know, five, six, ten years from now. And that adds more ordinary income to your tax return. How would you feel if that took your current tax bracket at 10 or 12% potentially puts you in the 30, 40, 50% tax bracket. So a question I ask you is if there was a way to put all of that money by that time into a bucket that was not subject to taxes when you and didn't even you didn't even have to take it out at that age, that would be your Roth account. But if there was a strategy to move that into that Roth bucket, would you want to know about it and how to go about doing that? What would that what would that look like? We're going to be talking about all of that in this class, taxes and retirement.
Dwight Mejan:
In fact, this is one of the strategies that us at 360 capital management we don't just manage wealth. Wealth management is a big part of what we do. We come up with an investment plan. If you have a financial advisor, someone who you work with that manages that wealth, we all do that. We all come up with a wealth management plan, investment plan. We call it second part of this class that we that we teach is we give people an opportunity one on one with us. It costs them nothing. They can do this on a Zoom call. They can come to our office and do this. We run what's called a tax map. It's a personalized strategy of what we would do if someone chose to work with us. How would we set up a tax map, an efficient map for them, so that they can strategically begin to move money and actually see what their tax bracket would look like, assuming tax rates stay the same. But most people believe they're going up. So we can show people that, you know, under a current day scenario and if taxes do go up, you're just going to be that much better off. So we'll take you through historical tax rates. We're going to explain things to you like the marginal tax rate, What that is why that's important. We're going to talk about the treatment of capital gains and dividends, because those are taxed differently.
Dwight Mejan:
And retirement than ordinary income. We're going to distinguish, you know, the differences between those. And we're going to give you examples of how capital gains are calculated compared to ordinary income. I'm going to show you slides, but I'm going to show you specific examples and you can start to plug in some things in your own mind. I know there's people listening to this who have a home listed and they're wondering, you know, what could that home, if it sells this year, what could that do to my tax return? Because maybe you just retired this year and you're selling a home or you sold a home, What is that going to look like on my taxes? Guess when the bad news usually comes. Those of you listening here right now, when is the bad news? Usually come when something happened on the tax return. That was a real gotcha. Normally you find out about it in about February, March, just before April 15th, when the Tax office calls you and says, hey, Bill, hey, Sue, you know, my your return is ready. You can come pick it up. You know, we're going to cover that in the class. We're going to talk about deductions, the difference between deductions and credits. And I'm going to specifically talk about some ideas for what's called a saver's credit, which is one of the ways if you're working part time in retirement, I'm going to show you a way that you can get some income off the tax return legally and participate in something called the Saver's Credit.
Dwight Mejan:
We're going to look at that and then we're going to look at the real tax system. The real tax system takes all of these things that I've been talking about, and we put it all together. We talk about required minimum distributions, capital gains, how Social Security works on the tax return. We're going to look at Medicare premiums because those are different depending on your income. We'll talk about the different costs of Medicare premiums. And then we're going to get into potential Roth conversions and large withdrawals from some of these taxable accounts. And then we're going to talk about a couple other areas, like the 3.8% net investment income tax. We're going to take a look at that. And then I'm going to show you some examples on an actual tax return. And we'll end up talking about a. Study of a couple who has Social Security, capital gains and a little bit other income on the tax return. And we're going to show you how an average household could end up paying under current tax laws on a segment of their money if they're not careful. Up to 50% tax, depending on where they pull that money from. And all this is strategically going to be showing you how to get more money evenly distributed between those tax buckets, between tax free money, tax deferred money.
Dwight Mejan:
So now I'm taking a lot of time, but I've had people call the show and they say, hey, what is the outline of the class? That's what people want to know is. So I'm giving you a little bit of that. We're going to talk about something else on today's show here I'm going to hop into after we take a break. We'll hop into this. We're going to talk about sequence of return risk and why that's an important thing right now because there's a lot of uncertainty still in the market. We'll also talk about after I get back from break, some renewed uncertainty that's in the market from a famed hedge fund manager who's expecting a big drop in the stock market. In fact, he he accurately bet on the housing collapse back in oh eight and built a name for himself in a movie, actually, as well. So we're going to look at sequence of return risk, but I'm going to talk about that as well and a little bit more depth in the class and that case study I'm going to talk about, it's going to really tie all that together. So a lot of detailed information there, but I wanted you to have it so that you can evaluate that. And hey, if you're in Moore County and I haven't given you dates yet for that next class, feel free to contact us. We will still run that tax map for you.
Dwight Mejan:
And I can give you a little bit of a mini version of that class through the analysis part. Okay. You're still going to want to take the class. I have people who are clients as a result of listening to us on the radio and they end up coming to our class and they learn just as much as they would have before becoming a client. So we're always, you know, we are a fiduciary firm, so we always want to be bringing educational events to the listing areas where we work. And that's what this is all about. That's what this show is about. That's what these classes are about, is we want to empower you with information. As I like to say, it's not necessarily what you know or how much you know. It's what you do with what you know. But you first got to know some things. And that's what the purpose of the class is. We want to teach you some very basic and fundamental principles and then you can take your specific situation. Our tax map will help guide you in that and you can begin to see, hey, what can I do to combat what could be higher taxes coming my way? And that's exactly what this class is all about. So we're going to take a quick break. And when I come back, we'll jump into today's show and a few more topics. And we'll be right back.
Producer:
Helping bring you one step closer to financial freedom. You're listening to Retire 360. There is.
Clapton:
Nothing that is wrong with wanting you to stay here with.
Producer:
Me. You're listening to Retire 360 with Dwight Mejan. Now back to the show.
Dwight Mejan:
All right, everybody. Welcome back. I'm your host. Dwight Mejan with me today is our executive producer, Sam. And I'll bring Sam into this segment here a little bit, but want to bring some information. Some of you may have already come across this news, but there's some renewed uncertainty right now in the markets. There's a famed hedge fund manager by the name of Michael Burry. That name might ring a bell for some of you. He was a focal point of a book. And the film called The Big Short. He's a renowned hedge fund manager. As I mentioned, he successfully wagered against the US housing bubble in 2008. It was a gutsy call at the time, but made him a pretty big name. So the guy is is no dummy by any means. And he has in his latest filing, he had to file what's called a 13 F, and that's basically a quarterly report that asset managers who have more than $100 million under management are required by the SEC, the Securities and Exchange ComMejan, to file a quarterly form that essentially lists the positions of their assets in their funds, and it's fully disclosed to the public. A lot of firms sometimes will use these to see what other asset managers kind of where they're hedging. So a lot of these it's a little bit of a game. Some of these companies that are required to file these wait until the very last day of the filing deadline to do this because they don't want to disclose too early where their positions are. But what Michael Burry has done, according to his latest 13 F filing, he is basically betting against the market right now. He's basically shorting the market.
Dwight Mejan:
And what that basically is, he's betting against the stock market in his latest filings. And you can go to Reuters and you can find this. The headline is Burry famous for the Big Short bought bearish options against the S&P 500 and the Nasdaq 100. So Burry is betting against the stock market and his firm is Skyon Asset Management. They disclosed a substantial amount of what are called put options. Some of you are familiar with options. This is a put option against exchange traded funds that track major US stock market indices. So put option is basically what it does is it provides the holder of that put option the right to sell an asset at a predetermined price. And what would that look like? Well, if the market's going down and you're betting it's going down, you're going to sell at a price that is higher than that downward momentum. And the value of that put option typically increases when the price of the underlying asset drops. So there's a combined value of 1.6 billion. You heard that right, 1.6 billion. These put options accounted for in 93.6% of Burry's portfolio at the end of June. So if you're wary about the market's future like Burry is, there's investment opportunities outside the realm of stocks. But I'm just going to ask Sam, Sam, if you want to come in here on this, don't if there's anything else. I know you've looked at this a little bit, Sam, as well. Is there anything else about this that, you know, maybe our listeners need to be wary about or anything that you would say that would cause them to just say, hey, I need to, you know, be a little cautious here?
Producer:
Well, it's always interesting when a notable investor and Michael Burry is definitely a name of note in that world. I wouldn't say he's got quite the cachet in the in the legacy of Warren Buffett, but in more modern times, he's he's a bigger name in the investing world. And if you've ever seen the movie The Big Short, he is the character that is portrayed by Christian Bale. So if you go back and watch The Big Short, you see the actor Christian Bale. He's playing Michael Burry, and to see that he is Dwight taking a position that is about 93.6% of that portfolio, which you mentioned as a value of 1.6 billion and taking a short position against some very popular exchange traded funds in the US stock market. It definitely brings some concern because he has been right before about these sort of things and you know, the market has certainly been better than it was in 2022. But according to Michael Burry, he's putting his money where his where his mouth is literally, and he expects that we have some volatility ahead. And I know we've got an election year coming up, which tends to do some things to the market as well. And so everybody's going to have their eye on the stock market. So if you're in that retirement red zone, so you're maybe a few years, five years within retirement or you've just recently retired, we're about to talk about sequence of returns risk and why that's important. You may want to consider some strategies that are a bit more conservative that allow you to participate. In some gains of the stock market, but also offer you that protection in case what Michael Burry predicts does come to reality, you'll still be protected. Well, you.
Dwight Mejan:
Know, there's the old saying, Sam, you know, when a lot of people are buying, it might be time to start considering what you need to sell. And there's some other, you know, big names out there. I saw a recent article about a week ago from Kevin O'Leary. That name might ring a bell with some people. He's the the bald headed guy on Shark Tank that is out there, big, you know, small business guru. And he's trying to get the attention of a lot of people in Congress right now just over the banking crisis. It's very hard for smaller businesses, which make up 60% of our economy here in the United States to get their hands on money right now because banks are tightening their lending. And he believes that we have about 4000 regional banks that are going to be cut in half over the next few years. Some of that, he believes, is just through banks not being able to make it. And he believes there's a quiet push right now for some of these companies to move checking accounts out of regional banks into some of the bigger, bigger name banks. Yeah, there's you know, the market's been surprisingly steady up until the last couple of weeks. We've seen more volatility. But for the most part this year it's taken a lot of the analysts predictions and we've seen a pretty good growth market. But there is some uncertainty on the horizon. And the word of the day here is just, you know, caution. Just be cautious. So, Sam, we you know, we talk about this. You just mentioned it. You know, what are some of the defensive positions that people might want to consider looking at without giving up some of the gains if they're wrong? What are some of those areas in the market where investors could go? And Sam, I'll just I'll let you cover the first one. And you're familiar with these and just mention and I'll give us a couple other ones where clients might want to be looking here if they're concerned. Absolutely.
Producer:
Yeah, absolutely. It's an important conversation. And for all of our retired 360 show listeners, if you are hearing what Dwight's explaining about what Kevin O'Leary is is talking about, and if you're watching our YouTube, we've got a picture of him up on the screen from Shark Tank, which you may have seen the banking crisis from earlier this spring is something that we covered on our show. And so if you'd like to go back and visit some of that information and review those topics, you can check out our podcast feed and check out our episode about the banking failures that happened earlier this year. But if you're looking to get a bit more conservative but still take advantage of any gains that may happen in the stock market, one of the strategies is a tool that we discuss pretty regularly on the show, and that's fixed indexed annuities and annuity that is fixed, but it's also indexed, which means that it's tied to the performance of an underlying stock market index, which will allow an investor a guaranteed income stream for life, but also the potential for upside gains depending on how that underlying index does.
Dwight Mejan:
Yeah, that's exactly right. Sam And the other part to those products for some people where it's even another option inside of those, some of those are built for growth index annuities. The other ones offer kind of a dual feature, or a person could take a rider and attach an income option on that where they're essentially what they're doing is there's a guaranteed factor that even if the market doesn't grow the account value, there's a side account called an income account that is guaranteed certain levels of growth. Some of these can range anywhere from 7 to 8% per year. That's on the income account. So even if your account value doesn't grow, this income account does grow. And this would be for a person who maybe in future years isn't sure but thinks they might want more systematic income in retirement, it could offer that. So that's just one area to look if you're considering more safe alternative ideas for your portfolio. Another one I would tell you about would be structured notes. You may have heard me talk about those before on the show, but these are basically investment products that offer customized risk and return profiles. They may not be available through other conventional investment vehicles. Structured notes essentially provide a buffer of protection so investors aren't completely exposed to the ups and downs of the stock market. So what's a buffer? Okay.
Dwight Mejan:
A buffer is, is essentially how much of what you purchased in, for example, a structured note, it basically tracks how much an index has to go down or needs to go down before any of your principal is in jeopardy. So, for example, if you had a 30% buffer and you had a structured note that had a fixed interest rate, which they do, they have a fixed yield that they pay over a 12 month period of time. I'll just use an example of a round number here of 10%. If you had a note that was paying 10%, your principal wouldn't be in jeopardy on the downside unless that buffer was exceeded. So if you had a 30% buffer, it means all of your principal would be protected even if there was a down market of 20 or 25%, you haven't reached that that buffer. So none of your principal at that point is in risk. So that just gives you a little bit of protection if there is a downside, but still can provide you a certain amount of yield that you can count on during that 12 month period. So that's a structured note. And one other instrument I would say that kind of works a little bit the same way is you can get into what's called a buffer ETF. Same thing. A buffer is simply downside protection up to a certain level.
Dwight Mejan:
Okay. So you can get downside protection, for example, of 15% or 30%. Obviously, if you have downside protection, you have upside caps. So you have a cap. For example, let's just say you had a 15% downside protection in the market dropped 20 over the next 12 months, you would absorb 5% of that. Anything over 15%, you would absorb that additional amount. So if it went down 20 and you had a 15% buffer, you're only down five. Now, there's a cap on the upside of that because they're protecting you for so much on the downside. But you could call our office. I'd be happy to go over those more specifically with you. I could tell you caps are very generous. They're in the double digit range as far as the upside that you can be credited. But this is these are great products for you to consider if you're, you know, risk averse and you're thinking, hey, I just want to protect my money. I want to shelter it. I don't want to face downside. These might be some of the products that you want to look at. And Sam, I'll let you if there's anything I've missed there or you want to add anything to that for our listeners, I'll let you go ahead and do that a minute.
Producer:
Yeah, absolutely. You know, all of these different investment vehicles, be it a fixed indexed annuity, a structured note or a buffered ETF, and we know that's a lot of information. So if you want to hear that again, check out our podcast feed and you can listen back. All of them have an element of protection in common and if you are invested solely in an ETF or solely in a portfolio of stocks, you're completely exposed to any downside that that investment may experience over the period that you're holding that investment. But if you are investing in one of these vehicles that has that downside protection, you can sleep a little better at night knowing that regardless of what happens, you don't have to ride the whole downside of the market should that occur.
Dwight Mejan:
Yeah, and that's a great point, Sam, because we've got a I've got a chart. I know listeners can't see it, but we're going to go through a chart after our last segment here with a break that we'll talk about why losses matter in retirement. And we're going to do that when we get back. So we'll take a quick break and we'll be right back.
Producer:
You're listening to Retire 360 to schedule your free No obligation consultation with Dwight Visit Retire360Show.com.
Dwight Mejan:
Okay. Welcome back to the Retire 360 Show. I'm your host, Dwight Mejan, and didn't give our number here at the last break. But I do want to get that to you because I know some of you have questions on that last segment. So if you want to reach out to us, if you're in the Moore County area, you want to learn a little bit more of what we were talking about here in that last segment or any question for that matter. You can call us at (910) 235-0812. Again, that's (910) 235-0812. If you're in the mountains, you can reach out to us there at (828) 278-7814. Again it's (828) 278-7814. And we were just chatting at the break Sam and I and did want to just point out one thing from that last segment we were talking about structured notes is something that some of you might want to take a look at. And we're talking specifically here about structured income notes. And some of you might be wondering, well, what if I need income? Why wouldn't I just go to bonds? Mean yields are up pretty good on bonds right now? I would tell you that some of the yields on structured notes and they're different depending on, you know, some of the notes. You could find the yields on these right now to be double what a lot of bonds are and some of them even more than that. So we don't want to get too specific on those specific returns, but there are double digit secured or structured note yields out there right now.
Dwight Mejan:
So if you're wondering why didn't why not go to a bond? Well, bonds carry interest rate risk, right? If you had bonds last year in that traditional 60 over 40 portfolio where 40% of your portfolio was bonds, we had the double whammy against us last year. If we were in, you know, a security portfolio, 60%, 40% bonds, interest rates went up, the value of the bond portfolio dropped considerably. That hurt a lot of investors last year. If you had structured notes in your portfolio last year, those changing interest rates, when the feds every session they met and decided they were going to raise rates, you know, a quarter or sometimes three quarters or half a point, the value of the bond portfolio that you have, if you stayed in bonds, it went down. That was not the case in structured notes because they're not impacted by changing interest rates. If you have a structured note, for example, that has a 10% yield on on the note, that 10% was consistent every month, you got 1/12 of that that kicked out. If you didn't need the income, it just reinvested into the portfolio. Treasury bonds last year had their worst year since the birth of the nation. Okay. 20 year US government bonds lost 29% and ten year lost over 12%. And there's a chart on that that I've got up. You can go back and actually see it if you want to go back on the podcast and view it. But annual ten year Treasury bonds from 1871, It's a long period, folks.
Dwight Mejan:
It was the biggest drop in history. So Structured Notes would have been a similar asset class. And there's some characteristics that are different, but it's a debt obligation of a of a major investment bank. That's where we're getting structured notes from for our clients. But they have a fixed yield on it and they're 12 months in length. So imagine being able to go last year and not lose any money on that segment. That would be an alternative asset class and have that where you didn't lose any money in the bond market because you were using these instead. We like some of these alternative asset classes and if you don't have them in your portfolio and you're just using traditional asset classes, this may be the time to start looking at that, particularly if you're concerned about where we're at and how fragile this economy is. This is a good segue into our topic here on sequence of return risk returns Risk. What is sequence of returns? Risk sequence of returns. Risk is risk that retirees and pre-retirees face when they experience poor investment returns early. That's the key word early in their retirement years, which can lead to basically the depletion of their portfolio and it can significantly affect their ability to sustain their lifestyle during retirement, particularly if you you're having to take money out of your portfolio. Maybe you're taking out three, 4% for income. And while you're doing that, the market's going down.
Dwight Mejan:
We have no control when you retire or the markets don't have any control, the markets are going to do what they're going to do. But if you're fortunate enough to have retired after the, you know, the housing bubble or, you know, halfway through, let's say, the last decade, five, six years ago, you got to experience some pretty good returns, you know, in the market up until last year. So if your portfolio was fairly aggressive and you had 60 over 40 portfolio, you know, last year on average, you were probably down somewhere, you know, 15 to 25%. I spoke to somebody last week who had a portfolio that was down about 55%. They were getting a newsletter from I won't say the name of the the folks that sent him the newsletter, but he was using stock picks from them his mid 50s. So he had a little time to make up some of those those losses but still lost the portfolio about 55. So very significant. But it plays sequence of return risk is very real and it can significantly impact your portfolio. You know, one of the things that happens is if negative investment returns occur during the initial years of retirement, the portfolio's value is going to be significantly reduced. When you withdraw funds to cover those living expenses from a shrinking portfolio. That just exacerbates the problem. And the remaining funds have less potential to recover when markets eventually improve. So that's impact on the portfolio. The long term consequences are a depleted portfolio early in retirement can lead to a higher likelihood of running out of money later in life.
Dwight Mejan:
This is especially if the market doesn't recover fast enough. This will force retirees to make drastic changes to their lifestyle or rely more heavily on other income sources like Social Security. You don't want to have to just have that be your main source of income in retirement. And then finally, you know, it's nonreversible. Unlike individuals in their working years who can continue to contributing to their retirement accounts during down market cycles. Retirees don't have that luxury or the ability to replenish their portfolio once they start to draw from it. So let's say we're we're looking at a portfolio that loses 20% in a down year. Let's just say that's the case. If that portfolio achieves a 20% gain in the following year. A lot of you listening would assume that the portfolio is back to its original value before the loss. But this is not correct. You got to keep in mind that compound interest can work for you, but compound interest can also work against you because the 20% gain was from a lower starting point. So you actually would need to gain 25% in order to return the original value before the 20% loss. So if you lose 20%, like many of you did last year, to get all that back, you've got to earn 25% of a gain just to recover that loss. And it compounds even further if you lose 30%. You've got to earn just under 43% return to get your money back to where it was.
Dwight Mejan:
And it just compounds from there. If you lose 40% loss, you got to earn 66.67% to to make that back. And if you lose 50% of your money, you need to earn 100% to earn it back. So sequence of return, risk it, folks. It matters. It really, really matters. And I'm going to give you a chart now, not another chart here, but I'm going to share another statistic with you. This is how market losses take a toll on a portfolio. There was a famous researcher. He's still alive today, from what I know, Jack Marion, he looked at a 50 year time frame. He did some research on the S&P 500 and he went from January 1st of 1960 and he went through January 1st of 2010. So he took a 50 year period. And here's what he set out to to research. He looked at the S&P and how it would have performed under three different scenarios. One of the scenarios with no dividends. So just investing in the S&P 500, not getting the dividends, but just getting the gain, the growth on the S&P, that was the first scenario. He wanted to look at the second scenario, same S&P 500, but this time he accounted for dividends. And the third scenario was like the first one, no dividends. But in the years where there were losses, he just assumed that you had your money somewhere during that time where you didn't lose the money.
Dwight Mejan:
So it was basically no dividends, but no losses either. And here's what he found out. He took $1,000 investment and he looked at the first scenario, which was S&P growth with a $1,000 over 50 years with no dividends. It was $18,615. That's how much the $1,000 would have grown in 50 years. In the second, it was getting those dividends and having them reinvested. So getting S&P dividends, reinvesting them, that 1000 would have grown to just under 85,000, $84,260. So pretty big jump from 18,600. No dividends to $84,260. The third scenario, no dividends, but no losses. Take a guess in your head how much At 18,000. Almost 85,000. And the third was $179,624. Okay. More than more than doubled, you know, with no losses. The point of this article was. Losses make a huge difference and they matter really big when you get to retirement. So got to be careful, folks. You got to sequence of returns. Risk is very, very real. Many of you listening this impacted you, particularly if you saw your portfolio in 2008. Average investor then needed just about seven years to get back what they lost. Some of you also heard of the lost decade. That was from late 1999 through 2009, the end of 2009. That was basically the only time I believe it was the only time for a decade, ten years, any other ten year period in history you could try to do this and it wouldn't have happened. But that period of time, the S&P had an aggregate return of -0.1, minus -0.1 -1%.
Dwight Mejan:
So they call that the lost decade because for that ten year period, if you were invested similar to the S&P 500, you didn't make any money that was a ten year period where you were just trying to to to go into recovery mode to make up what you lost. So you don't want to spend those golden years in the years and your retirement tilting that portfolio too much into risk. You got to have a balance. Yes, you should have some money strategically placed in the market, but you should also have some money set aside that's protected, you know, against, you know, big catastrophic losses and large drawdowns. That's what we always work with our clients on, is saying, hey, we don't want catastrophic losses and we don't want large drawdowns in retirement, particularly if you're a person that, you know, depends on income that comes from that portfolio. So why is this all matter? The closer you get to retirement or if you're just recently in retirement or retired now, the more losses are going to matter to you in your account. Okay. So, Sam, what we can talk here in just a second, but we're going to let the listeners know what they could do to protect from sequence or return risk. And if you don't have anything, Sam, you could just maybe take the first one. But if you want to add to anything for our listeners that may have missed or left out there, once you go ahead and do that.
Producer:
If you really looking to protect yourself from sequence of returns, risk is one of the fundamentals of investing, and that's diversification. You could also put this into terms of don't put all your eggs in one basket, right? Because if that basket falls, you don't want all your eggs to crack. So having a diversified portfolio of investments that includes both growth, but also some defensive assets, some of which we talked about earlier, that can help mitigate the impact of poor market performance. Yep.
Dwight Mejan:
Absolutely. Um, so diversification is one way you can protect against sequence or return risk. Second one is guaranteed income. This is including guaranteed income sources. Sam talked about them earlier. We like indexed annuities, a certain amount of a person's portfolio in there that can help protect against that. It can provide a consistent stream of income regardless of how the market's performing. So that would be the second one. The second thing that you can do and then there's a third thing as well, Sam, that we'd recommend for our listeners.
Producer:
Yeah. And this is another fundamental is an emergency fund. Having that emergency fund outside of your investment portfolio can give you that cushion during market downturn, downturn. So you're not overleveraged with all of your money in the market, not too liquid. You've actually got something just in case of emergencies for anything. You know, household emergencies need a new roof appliance, something like that. Or maybe as you get older, you're more likely to incur some sort of medical need and you'll need some free cash for for that sort of thing. And so having an emergency fund outside of that portfolio can really cushion things during any downturns.
Dwight Mejan:
Absolutely. Well, there you have it, folks. There's three. Good examples for you of what you could do to help combat the effects of sequence of returns risk and just want to listen or call out to everybody if you're, you know, concerned or you're worrying about your future, worry about your portfolio. Sam mentioned earlier, you know, we're going into an election cycle. If this all concerns you and you're wondering, hey, am I am I defensive enough in my portfolio and you want to work with somebody who sits on the same side of the table as you are, give us a call. Reach out to us. We'd love to hear from you. We love genuinely talking to our listeners, meeting with them, and we want to help you on your road to retirement. So let us help you strengthen that portfolio. You can reach out to us. You can go to Retire360Show.com or you can reach out to us by phone. (910) 235-0812. Or if you're in the mountains you can go to (828) 278-7814. And we'll be glad to connect with you there. So we'll take one more break and we'll be right back to wrap up today's show.
Producer:
Thanks for listening to Retire 360 with Dwight. If you like what you're hearing, subscribe to the podcast and leave us a review wherever you listen to podcasts.
Dwight Mejan:
All right. Hey, we're back to Retire 360 Show wrapping up our last segment here. What we're going to talk about here to close out today's show is basically mistakes that people make when preparing for retirement. And Sam, we all have regrets to some degree, even with our finances. And, you know, the key to a successful retirement or I think even in life is we're going to make mistakes, but we don't want to repeat the mistakes, you know, that we make. Um, my dad always talked to me about that. It was it was all about, you know, Dwight, keep making decisions, learn from your bad mistakes, but just don't get frozen in this whole process of making decisions. And unfortunately, we see people who sometimes come into our office or that we talk to even on a Zoom call. And I've met people a ton over the last 30 years that they just shut down, even some of them on a unconscious level. They just can't make decisions anymore because they made one that hurt. It might have hurt financially. It could have hurt them personally, emotionally, whatever mistakes are going to happen. But we like to lay out some mistakes that we see, you know, other people make. And that's the best way to learn, right? If we could pick, we'd we'd watch the mistakes of others and we'd really pay attention and go, Boy, I'm going to make sure I don't do that. Some of us, you know, for honest, hopefully we've learned from those as well. We've watched somebody close to us not at their expense that we learn, but, you know, we're going to hear the story and hopefully we pay attention and go, hey, I'm going to make sure I don't do that same thing.
Dwight Mejan:
We may not say it consciously, but these are mistakes people make in retirement. And we want to let our listeners know about these. And I'll just give us the first one here. Number one, probably most important is putting off saving for retirement. You know, a lot of you, you know, are thinking as you're listening to this show right now, you know, I'm just behind. I don't know what I'm going to be able to do. I'm going to probably be working until the day I die. Whatever the situation is, it's never too late to start saving. Okay. Even if you've just got a few years left, there's things that you can do to try to get yourself a little nest egg and get a little bit ahead. So Americans are in trouble when it comes to saving for retirement. There's millions of older workers approaching golden years with nothing saved. If you've skimped on savings for retirement this year, you know, it's understandable, especially, you know, the volatile economy environment we're in. But it's a mistake you can fix as soon as possible. You know, writing this wrong is entirely doable. So don't put off saving. Get a hold of us. We'll give our contact information at the end of the show. Get with a fiduciary, someone that's got your back. There's some things you can start doing immediately to start saving for your retirement. I would tell you the first one is if you're working for an employer and they've got a 401. K, that's the first place you start. Okay? Because you're likely going to get some matching funds there. So there's your first step. Sam, you got another one for our listeners. Yeah.
Producer:
And that first one's a great point, Dwight, and it's important to note, if you're coming up on retirement and you're feeling a little behind, the government has provisions called catch up contributions. So as you get closer to retirement, you actually have some more flexibility and they provide you that greater ability to save. So give Dwight and the folks a call and they can let you know exactly how much you can catch up. So the second thing is something we just mentioned before the break, and that's not building an emergency fund. So having that emergency fund is key. But many Americans are a bit behind in this area as well, Dwight. So in fact, most Americans would be unable to cover a $1,000 surprise expense and that could be a common auto accident on the highway. So you want to have that emergency fund. And, you know, this isn't really anybody's fault, but you need to remedy that problem because as years go by, the chances of those unexpected expenses will increase. You know, the number one fear of retirees is that they're going to run out of money and become a burden on their families. And as you get older, that's when you are in more and more need of what is often a very expensive medical procedure or appointments, prescriptions, things of that nature. So having that emergency fund for whatever may come up is very important.
Dwight Mejan:
Yeah. You know, Sam, on that along those lines, too, you know, we recommend to, you know, the emergency fund that people have. It should cover at least three months of your living expenses. You should know what your budget is for three months. But we like to see people have it closer to six months. We just think that's a good idea in today's environment that we're in. Just try to get towards, you know, at least five months, if you can, of your expenses set aside for that emergency because stuff happens. You know, it just absolutely does. Another thing that we see a mistake is selling investments when the markets swing. This is really a sign that you're probably not in the right mix. Of assets in your portfolio. If you get jittery and you watch your on that logs on every day and there's nothing wrong if you do that. But if you're watching your portfolio and then you start making changes all the time to it, you probably don't have the correct asset allocation in your portfolio. You know, the markets got off to a rough start at the beginning of this year, but they've they've since stabilized a little bit. You know, we talked about the beginning of the show, some concerns for the next few months and into next year with the election year. But it's just important.
Dwight Mejan:
And this is what we focus on at Retire 360 is we ask a lot of thoughtful questions. A lot of things have to do with risk. And then we build a portfolio so that you're not having to make those trades when the market's down, whether the market's up or whether it's down, you're getting you know, you're seeing your portfolio do what you're comfortable seeing it do, knowing markets go down and knowing they go up. And that's really called emotional investing. You want to get, you know, away from that roller coaster because that's that's, you know, a lot of times you're going to end up doing things the wrong way and you'll be selling when you should be buying and you'll be buying when you should be selling. So you want to stay away from, you know, emotional investing. And that's the you know, the riskiest time is called the euphoric state. You know, I should quit my day job and do this full time and look at the money I'm making. So you just you want to leave that to the professionals unless you have a good track record doing that, build a smart portfolio. Very, very important. And we can help you do that. Or at least look at the one that you have. I've got a couple more here. Sam, What's the next one?
Producer:
Yeah, along similar lines, Dwight is moving into cash or staying in cash when the stock market volatility is getting to be a little too much for you. And I've heard you mention on this show multiple times, Dwight, that the bank, the checking account, the savings account may be the safest place to lose money with what we've seen inflation doing to people's accounts over the last few years.
Dwight Mejan:
Yep, absolutely. The only place, Sam, to really, really make out and you should have money in CDs, you know, for some of that money, particularly if you're really conservative. But the only time you really make money on the spread of where inflation is is if you're lucky enough to lock into a five year CD or something along those lines where you get a rate that might be, you know, 5.5%, and immediately after you do that, rates start to diminish and inflation starts to go down really, really fast to where it maybe gets down to three, two and a half, 3%. Now you've got some inflation protection on those earnings because current inflation is lower than what your current rates are. But most of the time the rates that you're getting in, those instruments are just barely keeping up, sometimes even still lagging behind the purchasing power of the of those dollars because we're inflation is okay. And that's why rates went up because inflation went up. Finally here. Going it alone. Money can be a very personal topic, and we understand why that's the case. But it really shouldn't be that way. Not only is it wise, you know, for us to engage in a in a fruitful dialogue about our financial lives, but we should be proactive and enlist the guidance of financial professionals if we want to make the best choices to implement those strategies.
Dwight Mejan:
This true story of somebody who came into the office recently, they were self directing, had done a great, great job, but and this person also acknowledged this. I was investing in the last decade where I could have thrown darts and I don't know, I could have made out better. But when last year came, what he found out was a lot of the stocks that he was getting through, you know, picks that from newsletters he was getting, they didn't correlate his portfolio. You want to go back a couple episodes. We were talking about the importance of correlating our assets. He had a lot of assets that were highly correlated in the technology sector. Well, it's bouncing back a little bit this year, but he's still down about 38% from where he was about a year and a half, two years ago. So still a long way to go for him to make that up. But don't go it alone, folks. There's no reason to do that. At least take advantage of getting a second opinion on that. That's what we do here at the Retire 360 Show. I would be more than happy to talk with you about any topic that we discussed on today's show. I'd be happy to talk with you about anything that we didn't discuss.
Dwight Mejan:
So reach out to us. I'll give our numbers here in just a moment. But I just want to remind our listeners in the western part of the state, if you want to come to the taxes and retirement workshop that we have, we talked about that for a good part of the of the segment of today's show at the beginning September. It's a Thursday, September 21st. We have two optional classes. You can come to the 11 a.m. class or you can come to the 6:00 evening class. They're both going to be at the Watauga County Library. We've got limited space there. But reach out to us. If you are in the western part of the state, you can call us our number. There is (828) 278-7814. One more time. That number is (828) 278-7814. You can reach out to me on our website that is Retire360Show.com you can just hit the comment tab there. You can reach out to us. We'll get a copy of that and we'll reach out to you and we'll confirm a space for you. If you want to come with a friend, feel free to do that as well. We just need to know how many are coming and we'll be sure to reserve your seat. I can't promise we'll have space because when we talk about this on the radio, we typically get calls for people that it does fill up quick.
Dwight Mejan:
So please do that. And again, I just want to have a last shout out on this Monday. We commemorate nine over 11. It's a very important date in our nation's history. It's a it's a dreary date for sure, but it's one that I believe as a country we've bounced back stronger as a people. I wouldn't necessarily say that politically. I'm not wanting to go political here, but we certainly had lives that were impacted by thousands of people, about 3000 people that day. I know of a person who lost a brother in those towers. Many of you might know somebody as well. But certainly a day to commemorate and be grateful for where we are today as a country and what our military is continuing to do to eradicate the evil that is around this globe. So hats off to all you men and women in service, in uniform, past, present and future. The bottom of my heart. Thank you for your service. And I think I speak for all of our listeners. Thank you for those of you who serve this country in that capacity. So we'll be back next week, same time. Thank you for sharing some of your day with us. We'll look forward to seeing you back on our next episode. Have a great weekend, everybody.
Producer:
Thanks for listening. To Retire 360. You deserve to work with an experienced and licensed expert who will strategically work to protect and grow your hard earned assets. To schedule your free no obligation consultation with Dwight, visit Retire360Show.com or pick up the phone and call (910) 235-0812. That's (910) 235-0812.
Producer:
Investment Advisory Services offered through Brookstone Capital Management, LLC, BCM A Registered investment Advisor. Bcm and 360 Capital Management are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results.
Producer:
Fixed annuities, including multi year guaranteed rate annuities, are not designed for short term investments and may. Be subject to restrictions, fees and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims paying ability of the issuer. Structured notes involve risks not associated with an investment in ordinary debt securities. The securities are not bank deposits and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency. Nor are they obligations of or guaranteed by a bank. The securities will not be listed on any securities exchange and the secondary trading may be limited. Therefore, there may be little or no secondary market for the securities. Accordingly, you should be willing to hold your securities to maturity. The securities are subject to the credit risk of the issuing bank and any actual or anticipated changes to its credit rating or credit spreads may adversely affect the market value of the securities.
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