Dwight and Mitchell define and explain two important financial terms – beta and standard deviation. Balancing risk and reward is a fundamental aspect of investing, so on this week’s show we discuss strategies that savvy investors are using to better prepare for their retirements.
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8.25.23: 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 Mejan.
Dwight Mejan:
My name is Dwight Mejan. I'm your host. Alongside me here is Mitchell Keiser. It's great to be back. Another week. Just keeps flying by here today to talk about you, your money, your goals, your financial future, your concerns. And we're going to address all that today. But Mitchell, how are we doing today? Over on your side?
Mitchell Keiser:
Yeah, I'm doing well over here. Staying busy. How are you doing over there?
Dwight Mejan:
Doing good. Yeah, we're doing good. We're got a great show planned today. And no, we didn't finish last last week, so we're going to finish some of the points that we were talking about, but just a little bit more about us. We help people win with their money. That's our main objective here. And again, we you can find us if you're new to the show, perhaps just tuning in for the first time, you can find us on Facebook, Instagram, Retire 360 show is where you find us. We have a YouTube channel. You can find out a little bit more about us. If you want to watch some of our previous episodes, you can download them anywhere where you get your podcasts from, but just want to give a shout out to all of our local listeners. We have people broadcast or listening where we broadcast in the mountains. We're in the western part of the state up in the Watauga Avery County area, and we're also in Moore County as well. You can also check us out on our website. That is 360 Dash Smaug. You can go there. Also go to Retire 360. Show.com you can find the same thing. But I always like to direct people most importantly to the core values page.
Dwight Mejan:
We like to say a lot of things that we do are negotiable, but one of the things that's not negotiable are those core values, and we make it a practice here. We talk about it here is we want to live out those values. And we are teachers at heart. We are here to serve you, our listening audience. And just like we do week in, week out, day in and day out with those who listen to our clients. And so a special thanks to all of you that allow us to do what we love to do and what we enjoy doing. And we're just glad that you've taken some time just to tune in and be with us. But we also want to let you know that we have a reports that we sometimes put out to our listeners. And, you know, 2022, as we've said a lot on this show, most of you know this Bonds had their worst year in more than four decades, according to Barclays U.S. Aggregate Bond index, 2022 was the worst year for bonds since they started measuring in 1976. So we meet with a ton of people who don't have any clue what they're paying in the fees, particularly on their bonds they didn't even know they were holding in their portfolios.
Dwight Mejan:
So if you're interested in learning about bond replacement, how it could help you delete fees, establish guaranteed income, we're going to talk a little bit today on the show about pensions. We got a little analogy with a three legged stool. Mitchell's going to take us into that segment, but reach out to us. We're here for you. I know a lot of our listeners have been reaching out to us. I know on last week's show we talked a lot about fees as it relates to something called an expense ratio. We had an opportunity to run that. For some of you who called in and said, Hey, I'd just like to know what my expense ratio is. I know of a couple people in particular. They were shocked to see what they were paying on that side because it's not something that's easily you can't see it coming out of your portfolio. So but let us know. We got a free report on bond replacement. It'll show you some strategies on how to reduce the fees that you're paying if you own bonds in your portfolio. But just call us. We can be reached at (910) 235-0812. If you're in the Moore County area, if you're up in the mountains, you can reach us on that line at (828) 278-7814 or you can go to Retire360Show.com and you can get in touch with us there.
Dwight Mejan:
But we've got a great show lined up for you today. Mitchell's going to hop in here at the quote of the week. We're going to talk about some financial terminology this week that we want people to be more aware of. It's some of what we cover in our sessions when we meet with people on these complimentary meetings that we do, that we offer our listeners, we're going to talk about balancing risk in your savings. And we've got a cost cutter tip on a specific investment in your portfolio that will tell you right now on the front end of today's show, 80% of you hold a specific type of asset allocation, and you might be better off considering what the 20% are doing with a similar asset allocation. It looks somewhat similar, but we're going to talk. About that today as well, and specifically show you ways that you can reduce the expenses in your portfolio further. So that'll be our cost cutter tip. And then Mitchell is going to take us through that three legged stool. So Mitchell, give us our listening audience some wisdom from our Quote of the Week.
Producer:
And now wholesome financial wisdom. It's time for the quote of the Week.
Mitchell Keiser:
Yeah. So this week's wisdom is brought to us by Earl Nightingale, and that is never give up on a dream just because of the time it will take to accomplish it. The time will pass away very much along the lines of the slow and steady wins the race. Or if you guys are Warren Buffett fans, that's kind of Warren Buffett strategy. Just hang in there and ride it out. Eventually it's all going to even itself out there. We'll say there's a maybe a slight modification for that. If you guys are retired, there may be some you might have some time constraints if you're receiving income. But other than that, great stuff. Hey, Dwight, you didn't say anything on this. I did just want to tell our listeners that you guys are in the high country area and you're interested in hearing us speak at one of our classes. We are going to be doing a taxes and retirement seminar in downtown Boone at the Watauga County Library on September 21st, which is a Thursday. We have a morning class and an evening class if you guys are working. So if that is something that interests you, we do not charge for you guys to attend one of our educational events. But if you want to come out and learn some more about taxes and retirement and how to better utilize that, the best way to register is to just give us a call and we can save you a seat. And our office number is (828) 278-7814. Again, our office number is (828) 278-7814. And that will be at the Watauga County Library in downtown Boone. Make sure you give us a call because we do fill up. And if the if our room is full, we can't let anybody in per the librarian.
Dwight Mejan:
So she's she's super.
Mitchell Keiser:
Strict over there.
Dwight Mejan:
Yeah, they will. Yeah. And they will not allow extra capacity in that room for sure. And that room does fill up. But you know Mitchell, we we've had the privilege that is our our biggest workshop that people attend. We do Social Security one as well as estate planning. And we just getting ready to launch a Medicare one here in the near future. So we'll keep our listeners apprised of that. And definitely the taxes is a popular one. But I know one of the things people really enjoy about that is they have an opportunity to get their own personalized tax map as a result of coming to that class, and it costs them nothing. But through that, we lay out, you know, the future plan that could go into them planning around taxes, which is a big, big topic. And, you know, Mitchell, we're seeing a lot more people who are taking an interest because they're realizing it's not always what they're making and what they're earning, but it's what's on the other side, what's lurking that they're not familiar with in the dark that could come and pull some of those gains or even, you know, some of those savings away. And there certainly, we believe, some plans underway to do that for those who are unprepared.
Dwight Mejan:
And that's where getting a personalized tax map, as we call it, will be of benefit to you. And, you know, we just frankly hear a lot of people who tell us, you know, no one's going over this with us in terms of who's advising us right now with our money. And this is just an element that we feel is very important in the whole world of financial planning that our listeners and certainly our clients are aware of. So looking forward to seeing some of you there. But hey, we didn't get to last week. We left off on a couple. We had a few more areas left to talk about and this was the biggest expenses for retirees today. And just to recap that, I'll give you the ones that we had just for those maybe who didn't get to hear that. But health care was was number one. And these are biggest expenses in retirement that people face. So health care. Mitchell, you've shared some stats on this, I know, because you handle the Medicare side, but what are you seeing in that area as far as health care? Just real quick so people can see, you know, be more prepared for the health care side of things.
Mitchell Keiser:
Sure. So even if you guys have an employer sponsored health care plan, I would say it's still important that you have somebody that's pretty well versed in the area of Medicare planning. Take a look. Reason being, there's a ton of areas that you could be overspending, drug plans as your employer sponsored plan, even good compared to what could be offered for free through the state. And I've had people come through that their employer plan, they're like, Oh, this isn't that bad. It's only $300 a month and it's covering all this stuff. My co-pays are low, blah, blah, blah. And there's free plans that work the same exact way in North Carolina. I've seen people that think that they have these great drug plans. They're not paying much. And. Turns out they're paying a fortune in their drugs. There's a lot of different areas that could go wrong. And the area of health care, I will say on the financial side, the biggest, the biggest error that people make, especially early on, is not having long term care insurance, because as soon as one spouse hits a nursing home, that whole portfolio, that whole legacy, everything you've ever worked for, that's the quickest way to watch it all just get sucked down the tubes. So long term care planning is also a big one, just to name a few.
Dwight Mejan:
Yeah, absolutely. Health care is a big one. The second one we talked about just briefly was fitness and wellness. People who invest in health and wellness typically have lower medical costs. This could be anything from a gym membership, yoga classes, stationary bikes and so forth. But don't be afraid. What we were saying there is to spend a little bit of time and money to improve your health and fitness. It pays off in the long run. And then the third item we talked about was taxes. And I was just talking about that at the opening of the show. Even though it might seem like taxes will decline when a person retires, that's not always the case. You got to have a plan in place for taxes before you retire. We talked to people who, you know, wish they would have had more tax planning in the realm of their portfolio because, you know, this RMD that's lurking, you're going to be at the mercy of what the tax code is and how much you have to take out of that account. So there may be some opportunities to reduce that tax liability and that's one of the things that we go deeper in with one of our classes. But that certainly could become a very large expense. And then here we didn't get to the the fourth item and I'll I'll let you take that one. I don't know if I had that or you were going to cover that.
Mitchell Keiser:
But yeah, so the the fourth item that we have here is home maintenance, something that people don't typically account for in their portfolio, be kind of along the lines of the safety net. I think a lot of times when you hear safety net, you're thinking of saving 3 to 6 months or, you know, once you retire, even like a year's worth of your income just in case something screwy happened and it would be an income replacement. But not often enough people do not plan for home maintenance repairs. As somebody ages, you don't think about all the services that you're going to have to hire out that you used to do for yourself, and it didn't cost you anything. But you know, as you creep along in age, you may not feeling feel like doing things like mowing your lawn, cleaning your gutters, washing your windows, or maybe even just cleaning the inside of your house. Not have those services come to your house every month even. I mean, you're talking hundreds or thousands of dollars. I know I can speak from personal experience that just to have somebody come out to my grandparents house to help them in their yard because they're in their 80s now, I know to have somebody come out in the spring and in the fall to run them about $5,000 a season. Now, this is all stuff that they used to do their whole life. They're big gardeners, so they loved, you know, to garden, to mulch, to all that stuff. And they're just getting older now and they can't afford it. And they'll be the first to tell you that, you know, they're dumping their whole retirement into their yard because it's something that they've always just loved and they don't want to part from it. But, you know, little things like that, folks that can just gobble up your retirement if you're not prepared for it. Yeah. So.
Dwight Mejan:
And number five is utility costs. You know, utility costs could be one of the few expenses that decrease potentially in retirement. For one thing, you typically no longer have to pay for children taking long showers, cooking at all hours of the night. I can vouch for that one. Having two boys just dropped off at college this past week and for sure the stove would, you know, get lit up at 11:00 because, you know, when you got teenagers, they eat two dinners at night, you know, one about an hour and a half or two hours after they eat, that's forget how many meals it was. They'd eat a day. Five, maybe six. Depends when you know, when you're 19. But so that could be an item that decreases. But then again, you know, you pick up rent costs when you got teenagers, too. So they're living off campus this year. So that gets to go up as well. But folks do tend to downsize a lot of people their their living arrangements that would require obviously less heating and air. But nevertheless, the rates that utility companies do charge customers will continue to increase just due to inflation. So just bear that in mind.
Mitchell Keiser:
Yeah. And then number six is transportation. So that's something else that a lot of times people don't think about or you think, Oh, well, I'm 65. Realistically, I'm only going to get one more car for the rest of my life. And more often than not, that's not true. You're probably going to get, you know, 3 to 5 more cars because you're going to get bored. You're going to realize that, oh, there's this new shiny thing that's something to equate for in your equation. Another would be the expenses and repairs that you have with a car. A lot of times I know we have a lot of clients that once they both stop working and if they do a lot of things together, they'll just get one car. But nonetheless, the expenses on a car are still pretty expensive. I know that if any of our listeners switch to the EV car, the electric cars, I know to replace a battery in some of those bigger cars is like $20,000. I mean, it's not like just changing your oil or, you know, filling up at the gas tank. It's one huge expense that you have to plan for. So especially where we're going as a country, I would say there's even more electric cars. So if you guys are along those lines, just another expense you kind of have to plan for.
Dwight Mejan:
Yeah.
Dwight Mejan:
Absolutely. Now, number seven is travel. Travel is a big item. We see a lot of our clients enjoy doing. Travel costs, of course, in retirement are going to vary based on where you want to go and where you want to stay and how frequent, but also based on who you want to bring along with you. You know, if you're treating children or grandchildren to a vacation, you know, costs will rise considerably. So you should plan to travel a lot more in early retirement. We always encourage that to our recent clients who just retire. Do it when you're in those go go years versus the go slow years or the slow go years versus the no go years when you would love to do it. But physical reasons perhaps don't permit that to happen. So get those bucket lists, that bucket list destinations checked off your list while you're still young.
Mitchell Keiser:
Yep, absolutely. And kind of leaning off what you just said, number eight, your kids and grandkids. So talking about going on those vacations with your kids, taking them on a lavish trip to Disney, just giving them bigger gifts, the gifts that you maybe couldn't have afforded to give to your children, that now you want to pass that down, That's a pretty common thing. Another would be the grandparents that choose to pitch in for their grandchildren's college expenses or the K through 12 expenses. That's something else that you guys that's something that you have in the plans. We would recommend opening a 529 account, which if you have questions about what that is, we can tell you about that. But basically they can your gains and that can grow tax free. But yeah, your kids and grandkids are another big thing that you guys want to plan for. But we are going to take a quick break. And when we come back, we are going to go over some. Very necessary financial terms that you guys should be aware of. We'll be right back. What's the matter with the clothes I'm wearing?
Billy Joel:
Can't you tell that your ties too wide?
Producer:
At 360 Capital Management. We know you've worked hard to earn your money and you've worked even harder to save it. When it comes to wealth management and planning for retirement, Dwight Mejan is passionate about helping people protect and grow their wealth. Visit Retire360Show.com to schedule your free consultation today. It's a $1,500 value provided at no cost to you. Book yours now at Retire360Show.com. You're listening to Retire 360 with Dwight Mejan. Now back to the show.
Dwight Mejan:
All right. Hey, welcome back to the show. I'm your host, Dwight began. We are shifting gears here on this segment. We're going to talk about some maybe get a little more technical, not too much, but we're going to talk about some terms that maybe some of you have heard. Some of you may know what they are or what they mean. But we just feel like there's some important terminology that we actually cover. For those of you who do take us up on that offer to have a complimentary consultation with us to discuss any item that we talk about on this show or that's a concern to you. It is free of charge. It's complimentary. But one of the things that we look at when we do portfolio analysis is there are certain measures or metrics that we're looking at, and we lay a side by side comparison. You know, when we talk about risk and risk is a very important measure that has to be discussed. And I always say, you know, not to oversimplify our role with clients, but if I had to simplify down into two things of what our role is as fiduciaries, as independent fiduciaries for our clients, number one, it's to manage their risk. And number two is to set expectations. What do I mean by that? We can't predict where the market's going, but what we can do is give a client a certain sense within a reasonable range of what their portfolio might do under certain given market conditions.
Dwight Mejan:
For example, last year, when the market took a big hit, you know, what is a typical portfolio likely to go down based on a person's tolerance for risk? And that's why the risk discussion is a very, very important discussion to have. Certainly if you work with a financial advisor, that is an ongoing discussion. When you meet, when you have conversation, those questions are, you know, how do you feel like your portfolio is doing? And then just the advisor should be bringing that back around to the comfort level that one has with risk. And had somebody this past week, just a couple days ago that was in my office who wasn't getting that discussion and she felt she was taking more risk than she wanted and she wanted to reduce the risk that she had into her portfolio because she was heading within two years, she was going to be retiring and she wanted to make sure she was protecting the money that she had. So, yeah, the first you know, we talked last week, by the way, about strategic and tactical asset allocation. We also discussed the expense ratio, What that is why it matters. And we've had people come in discussing and learning what their expense ratio is.
Dwight Mejan:
Had somebody in this past week where they had an expense ratio of 0.83%, now 0.83, that's on the assets that they own in their portfolio. So, you know, for every $100,000 that they had that was invested, if that was their average expense ratio, 0.83, that's $830 annually. The cost of those particular investments that that individual owns. So you can just kind of do the math and multiply up from there For every 100,000 that you have, if you had a 0.83, you know, there's certainly ways and opportunities to reduce that expense ratio. And we're going to get to that here with specific asset allocation here in a minute. But I want to talk, first of all, and by the way, if you missed last week's episode on that, just go back, go to YouTube and just go to Retire 360 show and you can pull it up and you can learn a little bit about expense ratio and the difference between strategic and tactical asset allocation. So we want to talk about beta. First of all, Beta, beta, what is beta? Beta is a measurement of investment volatility that can help choose investment options based on your desired risk level. So, you know, a person needs to understand and should want to understand how volatile is my portfolio or how volatile is a particular strategy, particularly if you're looking to make a shift in a higher percentage of your portfolio.
Dwight Mejan:
You want to understand what beta is and beta you know, it basically is a measure of volatility of a security compared to the market as a whole. Usually what's being compared is the S&P 500. So, you know, basically if you look at a stock or a mutual fund, what we're doing with beta is we're measuring how much that particular stock mutual fund moves in relation to the overall stock market. In other words, beta is a way to see how much the value of an investment might change compared to the market as a whole. And that's something you would want to know. And how do they measure that? Well, in the report that we run when we're measuring someone's portfolio, we just simply plug in all of the holdings, the positions in that portfolio, and they're given a score of, you know, one or below one or above one. So one is the measure. So, for example, if you have a portfolio and its beta is one, it moves basically in line with the market. So if we're measuring the S&P 500, if the S&P, you know, moves up or down radically, your portfolio is moving in line with that up or down movement.
Dwight Mejan:
If you have a beta that is below one, it tends to be less volatile than the market. And if you have a beta that's above one, it's it's basically more volatile than the market. So lower beta investments, what does that mean? They might provide more stability to you while higher beta investments can offer more potential for gains, but also more risk. Let's say you're getting ready to retire and your portfolio is going to supply a certain amount of monthly income. You know, for you in retirement, it's very important that your beta number is going to be lower than a one. Okay? You don't want to be pulling income from your portfolio when you have a number that's above one that's more volatile than the market, how much lower? I think that's going to depend on how much income you actually need from the portfolio. If you you know, if you need a high percentage like we could talk about the 4% rule and you're planning on taking 4% out and you need that 4% every month to live that lifestyle. You want to live, pay your bills, you know your expenses, do the travel that you want to do. You want to have low beta in your portfolio. You may not get the, you know, the huge gains when the market's doing really well.
Dwight Mejan:
But at the same time, if it's doing poorly, you're not having to, you know, figure out where this income is going to come from because what you don't want to have is high volatility in a bad market, you know, high beta, because what'll happen is, you know, you're going to have to reduce or stop your income potentially and come up with a completely different strategy. And there's no good strategy at that point if the market's going down. So when you're investing in planning for retirement, understanding beta helps in choosing investments that match your desired comfort level with risk. And one of the things that we do, you know, here at our office is we we have risk profiles. We can, you know, send a questionnaire that you fill out online. It takes five minutes to do it and it gives us an idea of where a person is in terms of their comfort level and given scenarios with the market, whether it's, you know, down, up fairly flat, we can gauge what someone's risk tolerance is. And that's one of the most important steps for us in building a portfolio with a client. So if you haven't heard about Beta, that's what beta is. It's a measure of volatility. Mitchell Is anything you want to add to that? Anything I missed there for our listeners that you want to add?
Mitchell Keiser:
No, maybe nothing to add, but I'd say maybe a close cousin to beta would be to see if your assets were correlated. I know that's something that we run on a lot of our Morningstar reports. What that basically means is to see, So if you have a positive beta or whatever your beta is, how it's tracking the market, there is something that you could do to see if your assets are correlated, Meaning if you know it goes up, they're all going up or if it goes down, they're all going down. You want to make sure that you have some assets that are not highly correlated with that. So if you've got some positions going up, you have some positions either staying stable or they're going in the other direction. So that way your portfolio gains a bit more of a steady growth versus a volatile upswing, downswing upswing downswing. So it can give you a better idea of what to expect in a safer manner?
Dwight Mejan:
Yeah, absolutely.
Dwight Mejan:
I think too, you know what, if you're in retirement and you don't necessarily need income from that portfolio, think said this If your objective is growth, you don't necessarily have to be as concerned as long as you can tolerate risk with a beta that's above one, that's going to typically give an investor who's chasing returns, they're going to typically have a beta. Oftentimes it's going to be larger than that because they're just trying to, you know, risk reward, right? You take more risk, you should get more reward. It's not always the case. But typically that's going to be what's going to happen. So the next term I want to talk about here is standard deviation. Another big term. There may be new to some people, but standard deviation, what is it? It's it's a statistic that measures dispersion of a data set relative to its mean. And it's calculated as the. Square root of the variance. Okay. If you got all that, we've got some finance people listening to the show, but simply put, standard deviation is a measurement that helps gauge how unpredictable an investment or portfolio's returns might be. We talk about standard deviation. We run this when we look at a person's portfolio. So just think of computing an average. I'm taking some of you back to, you know, high school or when you studied standard deviation, just think of computing what the average is. Most people know how to do that. Standard deviation is going to look at the dispersion around that average up and down. Okay. And it's important measure to see how much does how much do we deviate from the average in a given data set.
Dwight Mejan:
So standard deviation is a way to see how spread out the returns of an investment are. A high standard deviation means that the returns can vary quite a bit while a low one means they tend to stay a lot closer to the average. So low standard deviation investments might provide more consistent returns, while a higher standard deviation investment are more likely to have more ups and downs. So if you're more prone to say, Hey, I want to, you know, build a portfolio that's got more consistency, I don't want the big roller coaster up. I don't want the big roller coaster drops down. You want to be looking at a standard deviation with a portfolio that isn't dispersed as far away from that average or the norm. Okay. And standard deviation is just as important as the rate of return. And we would argue sometimes it's more important, you know, than your average rate of return. And here again, folks, you've heard me talk about averages, the average rate of return, what I'm more after in my own portfolio and those of our clients is what's the real rate of return on the portfolio. Because remember, as soon as we have a year like last year when there's a negative, I explained this a simple way to have you do this in your head. If you start with $100,000 and the market drops 10% in one year, what do you have at the end of the year? You got 90 grand, right? So let's just say you recover and have a 10% bounce back in year two. Okay. What's the value of your 90,000? Now? It's 99,000. So you're still down $1,000.
Dwight Mejan:
Yet when we compute the average return on that, the average is what? It's zero. Right? So always ask people, where did the $1,000 go? Well, the average would work when there's no losses. You could just, you know, compound that return out. It's going to come out to what the average is. But as soon as you introduce a loss into a period of time with returns, average is not the same as the real rate of return. So just keep in mind, you might be wondering sometimes, hey, what what happens, you know, why is it taking my portfolio so long to recover? It doesn't seem like it's recovering as fast as what the market's doing. And, you know, like I always say, if you lose 30%, you need to earn 43%, 13% more than you lost in a given period of time just to recoup back everything you lost. So those losses matter in retirement. And that's why standard deviation is probably more important than your average rate of return, because you don't want to be in a portfolio. If you're averse to risk, you want to be in one that has a low standard deviation away from its average because you're going to get pretty upset and pretty nervous if the market is tanking and you got a high standard deviation and you're like, I didn't expect this, what's going on? So it's it's definitely something that needs to be run on your portfolio. And if you haven't had it run, reach out to us and we'll be more than happy to run that and we'll give you our contact information here shortly when we go to a break.
Mitchell Keiser:
So I think it's fair to say somebody that may have been more comfortable taking risk or to have had a higher standard deviation, all of their working years. So somebody that's like, well, you know, I never had a problem with risk. I made a ton of money on my portfolio. Here I am getting ready to retire and I still don't have a problem with risk. I think there is probably an age factor with that that factors into how much risk you should be taking, not because you can't stomach it, but what's smart, what is the realistic expectation that you're going to, you know, have another 30 years to make up a potential loss? Because you're talking about, you know, you lose 30% and you have to make did you say 43%?
Dwight Mejan:
43%?
Mitchell Keiser:
Yeah. Yeah. 43% to make that back. Well. Not to be morbid here, but, you know, realistically, when somebody retires, you don't know if you're going to have time to make that 43% back up. I mean, how many years could that potentially take? I know the the crash in oh eight. I mean, that took how long for people to recover their funds?
Dwight Mejan:
Seven years average. Yeah.
Mitchell Keiser:
And if you guys are reliant on those funds and you're drawn down during those seven years mean your portfolio could be just about gone. You know if you were expecting to live off a certain standard of living. So I think what you said was great about standard deviation. I just wanted to throw that in there that I think, you know, even if your comfort level to risk is the same, you may still want to look at it. Just because your age doesn't factor into having as much time statistically that you're going to be able to recover from some losses. But Dwight, I know we went over a lot of important terms there. Why would you say those terms are important for our listeners to understand?
Dwight Mejan:
Well, and I think.
Dwight Mejan:
That, number one, I think safety and risk. You know, we were talking about that understanding data and understanding what standard deviation is. It's going to help pre-retirees and retirees choose the investment allocation that they want to be in that matches their tolerance for risk. Number one, some retirees, retirees, you know, they want to play it safe. They want low beta, they want lower standard deviation investments and portfolios, while others they might be comfortable taking, you know, greater risk, as you said earlier, about chasing, you know, more returns. But I think a lot of that's just going to depend on, you know, their need for income and some of their goals and some of their objectives. But that'd be the first thing. I think you've got something else.
Mitchell Keiser:
Yeah, no, I agree with you. I think something that we've seen quite a lot is even the risk takers that we have coming in here, they say, you know, I want to, you know, take risk with this part of my money. But, you know, I want to make sure that I have at least $5,000 every month coming in for the rest of my life. And I technically don't have that guaranteed on this side. So there is a lot of people that want a steady and more predictable stream of income. Like I just said, even the riskier risk takers out there. But you kind of have to find that balance, like you said, with the beta and with your standard deviation, finding something that works and finding something that's realistic.
Dwight Mejan:
Well, I can think.
Dwight Mejan:
Of a of a client, Mitchell, that has been a client of ours for about a little over a year, maybe, maybe closer to a year and a half. And he called me recently and he just said, Dwight, I've, I can tell. And he's not one that he's put in the calculator to this daily, but he opens up his account every day and he's looking at it. And this was a core discussion point that we were talking about when he was looking to become a client. And we were talking about some of his goals and his objectives. And we did the analysis of his current portfolio. We looked at his beta, we looked at standard deviation, we explained this to him and charted it out. And he can tell just, you know, when he turns the news on at night, he sees how much either the S&P is up. This is what he said to me, exactly what he said. He says, I don't notice any drop of or less return in my portfolio from what I saw from where it was before. But I can tell that it doesn't go down as much in some of these, you know, these lower periods. And some of that just has to do with the allocation and the mix of assets that he has in his portfolio because we introduced some non-traditional asset classes, you know, not just stocks, bonds and mutual funds and cash.
Dwight Mejan:
He's in some alternative instruments that have things like buffers that have downside protection. And we just spread more diversification into his portfolio, which is reducing some of his risk. So, um, yeah. So the other thing, Mitchell, that you had asked, you know, longevity is why this these terms are important to understand, You know, retirees, let's face it, you know, you got a plan that you're going to be here for a long time, and that's the only assumption. We can't assume things when it comes to financial planning about, you know, too many things, except the one assumption I make is everybody who sits down in our office, they're going to live contrary to what they might think or against their family history. They're going to live a long time. You know, we plan to age 100. That's that's the number that we use. And somebody says, man, I'll be lucky to make it to 80. Well, that that might be. But what if you're wrong and you live longer than that? So your portfolio needs to last throughout your lifetime. So as financial professionals, we have to make that assumption and, you know, so that they can make informed decisions and focus on the long term financial security that everybody wants to have. So I'd say longevity is another reason. I think you got one more.
Dwight Mejan:
Mitchell Yep.
Mitchell Keiser:
And I'll just conclude us here with. Diversification. Everybody's heard their whole life diversified, diversified, diversify. So in retirement, that could look like investing in different types of things within the market. So there are stocks, there's annuities, structured notes, bonds, real estate. And why would you invest in an array of things like that to reduce the impact of the poor performance in one specific area? Typically, when one of those areas is going up, another one of them is probably going down and vice versa. So you don't have a whole portfolio, kind of like I was saying earlier, just with your assets all being correlated, all heading in one direction all together, all the time. So you want to try to minimize that. We also would say that a big tip that we have for people as they're either retired or approaching retirement is that the most savvy retirees would diverse their investments to create multiple streams of income, that they're not just reliant on one source. So you may say, well, I just have Social Security and my portfolio. Well, there's different ways that you can take your portfolio to draw income. Some of them you could yield higher income with light risk or some of that options that you could opt for would be guaranteed income for the rest of your life, guaranteed to never outlive you. If you guys have questions on anything that we went over in this last little segment, give us a call or if you guys are tuning in with us earlier and you'd like to attend our Boone event that we have in downtown Boone at the Watauga County Library on taxes and retirement. Again, that is going to be on September 21st. Give us a call at (828) 278-7814. If you guys are in Pinehurst, you can call us at (910) 235-0812.
Producer:
Thanks for listening to Retire 360 with Dwight Mejan if you like what you're hearing, subscribe to the podcast and leave us a review wherever you listen to podcasts.
Dwight Mejan:
We're going to talk about the cost cutter tip strategy here for this week. And it's saving money using ETFs. What is an ETF? Etf is exchange traded funds. They look and somewhat talk like a mutual fund. They're essentially a basket of securities of individual stocks that are being held. It's basically pooled investment security that holds multiple underlying assets rather than just one. That's what an ETF is. And, you know, interesting, I'm going from some memory here recently of something I read that just stated that, you know, if you compare ETFs compared to mutual funds, they're probably the most similar in terms of type of asset. However, if you look at most portfolios today, 80% of the money today that's being managed or people have invested, 80% is still in mutual funds and 20% is in ETFs. And I think you'll have a great opportunity here to learn of a simple way that you can save money and look for ETFs that have similar objectives that fit your risk profile. But bottom line, you're going to lower that expense ratio. We talked about expense ratio last week. Etfs generally have lower expense ratios compared to their mutual fund counterpart and the expense ratios, they're like basically fees that cover the cost of managing that particular investment. So with lower expense ratios, more of your money is going to stay in your pocket. So we'll see. A typical for example, I mentioned earlier here in this show of somebody that came in, listener of this show had a 0.83 expense ratio. The mutual funds were predominantly, you know, probably 85% of their portfolio. They had some individual stocks, but 85% of the portfolio was in mutual funds. Knock on mutual funds.
Dwight Mejan:
There's some good mutual funds out there. But if you're looking at it from a pure cost perspective, then this person, you know, we we showed an ETF portfolio to this individual that was 0.08%, 0.08 compared to 0.83. So that's the difference. You know, the big difference there, particularly, you know, depending on the size of a person's portfolio, we're talking thousands and thousands of dollars of potential savings. The other thing about ETFs that we like is the transparency factor. Transparency about the holdings that they have inside there. A lot of ETFs provide transparency on a daily basis of what is in that ETF. This lets you see exactly what you're invested in. Mutual funds might only disclose their holdings on a quarterly basis or sometimes less frequently than that. So if you want to kind of know what you're actually in and you like to look at that, that may be a good case for looking at ETFs. The other thing is, no load fees. Many ETFs don't charge loads. What's a load? Basically are sales comMejans. When you buy or sell the funds, mutual funds might have a front end charge or they might have a charge when you sell it out of the back end, which cuts into your investment right from the start. So many of the holdings you may currently hold, for example, in your work based plans. So if you have a 401 K or a 403 B or a Sep, they could be burdened by some of these fees, which in turn is going to crank up that expense ratio the wrong direction. You want to keep that fee as low as possible and many people, even within their work plans, they may not even know what they're paying.
Dwight Mejan:
So we always like to encourage our listeners, particularly those of you in this segment, listening now that are 59.5 or you retired and you left an employer sponsored plan where you worked or where you're currently working, if you're working, you might be able to roll that money out of there. But we'll we'll run that expense cost for you, let you see exactly what you might be paying inside of that and potentially give you more options. We just talked about, you know, beta and standard deviation and volatility. We'll run the funds that you're in and see if there's, you know, a better fit for your risk tolerance. That's a complaint. Mitchell We hear that quite often from people is, you know, I just don't have enough choices in my 401. K plan. So where do people go by default if they're risk averse? They tend to go into those cash funds or money market. Now, the good news is money market yields are up from what they were considerably a year ago. You know, many of them right now are north of 5%, which is awesome. But this still doesn't sometimes satisfy people's desire to take a little bit more risk to try to see if they can boost that return, you know, maybe up into that seven, 8% range because they have limited offerings inside the. 401 plan. So you may have an opportunity to just roll that out, get it into an individual account or a Roth. If you have Roth funds and lower the cost or lower that expense ratio by using ETFs And Mitchell, you want to add something there, something I missed?
Mitchell Keiser:
Yeah, no, that was good. I actually wanted to talk to our listeners. Kind of switching gears here. There is a concept called the three legged stool of retirement planning. So I want everybody to think of a three legged bar stool. Now, we all know a stool with one leg, that stool and they had one leg. It would fall. If it had two legs, it would require delicate balance. We know that only a stool with three legs requires the greatest amount of stability. So why am I talking about that? It's not to talk about stools. I want you guys to think of your retirement as a three legged stool. Each leg serves a different purpose and provides different reasons for stability. Dwight, do you want to give us the first leg?
Dwight Mejan:
Yeah, the.
Dwight Mejan:
First leg in that is a pension, sometimes called a defined benefit plan versus your 401. K is a defined contribution plan where you elect to put some of your paycheck each week or each month, biweekly or however you're you get paid into one of these retirement plans. A defined benefit plan is typically funded for you by the employer 100%. You're not making contributions into it. Those are those are great. Unfortunately, most employers no longer sponsor this type of benefit for their employees. And as of 2019, just a few years ago, only about 14% of Fortune 500 companies offered pension plans as a benefit to new hires. So if you don't have a pension plan, don't be too concerned. You're like the majority of people out there. You know, about more than 80% don't have that. But one of the areas that we could help potentially create that pension is we can help you establish your own personal pension based on the best options that are out there today from products through insurance companies. They have them. There's other ways to create an income stream in retirement, and that's one of the areas that we could help in that regard. If you have a pension, you should consider taking a lump sum and investing into a personal pension that's separate from your employer. So I know there's probably a couple people here that are listening to this right now, and they're in that process of getting pension options from your employer.
Dwight Mejan:
And a lot of people have no clue, you know, because they're going to look at sometimes up to 15 or 20 different options. And this is where employers do a pretty good job. My hats off to the employer world for this. They have options where you could take 100% and have the highest payment. They have some where you can take you know, your spouse continues the same payment you get if you whoever passes first, that's going to be a lower amount, obviously. And that list goes on and on. There's a whole menu of choices out there. But when you get an idea of what it is that you're looking to do and maybe you're saying, hey, I want my spouse, we know we want to get 100% to the survivor. We want to get that same payment no matter who's alive. Don't just check that box and sign it and send it back to your employer through the HR department to elect that. Because as soon as you make that decision, as soon as that's signed and set up, as soon as you get that first payment, there's no redos. You can't change that. And one of the things that might be an opportunity for you is to have that shot in the open marketplace to see if there's a higher option for what you're looking to do through your employer.
Dwight Mejan:
So make sure you check with that. We're happy to run that. We do that free of charge. We just had someone and I would tell our listeners, I would say for every five of those that we run, maybe you know, maybe, maybe four, but certainly for every five, we're able to find a higher payout option in the open market than what their employer is offering them. So as long as your employer offers a lump sum benefit option, some don't, some you just have to pick an income payment and you're stuck there. It's better than nothing. You didn't. You worked for it, but you didn't have to contribute any of your money towards it. The employer did it, so it's better than nothing. But if you have an option for a lump sum payout with your employer, don't sign until you get that shopped out somewhere else. Because what if you could get 1,520% more per month for the rest of your life? Now, that could be the difference on, you know, more discretionary income. It will be the difference of more discretionary household income for you in retirement. So just be aware of that.
Mitchell Keiser:
Yeah, I just want to add to that, Dwight. Situations like that where people can outperform their company pension, that's not a needle in a haystack opportunity. That's. Pretty common and we see that I'd say a couple of those every week where we're able to show somebody something that outperforms where they were going to be for, like you said, the rest of their life. So that's a lifestyle adjustment. Leg number two here on the bar stool is the Social Security. So Social Security, if you guys have been listening to us so far, we talk about how they are on track to cut benefits to retirees in 2033 when the trust fund reserves are forecasted to be depleted. The Social Security Administration has estimated that the benefits will be cut by 23%. So that is a 23% reduction in your standard of living if you are fully reliant on Social Security. But if you do, you don't want to touch your portfolio and you're just trying to live off Social Security. It might be a reason for you to start thinking of coming up with some alternative plans. There are strategies and portfolios out there that have. Uh, plans in place if Social Security does do that, where they can fill the gap, there are certain income solutions that would offer you extra money or an extra benefit if that is something that you guys are interested in. We don't have time to talk about that now, but let us know if you guys are interested in insuring yourself for that because that is something that is free to you and it could come in handy by 23% and shorter time than it feels. But do you want to finish this off with number three?
Dwight Mejan:
Yep.
Dwight Mejan:
The third leg is personal savings. You mentioned that a lot of people have access, as we've been talking about, to a 401. K or other work based defined contribution plan. But a lot of people don't understand the fees that they're paying within those accounts. People are preparing for retirement. You know, they need to consider money that they have invested in those 401. Ks and IRAs and other tax deferred accounts. You know, the IRS, you do not want to partner with the IRS in retirement because those types of accounts are going to be subject to required minimum distributions as well as, you know, future taxation. So we teach a class on this. We Mitchell's mentioned where that's going to be coming later in September. We'd love to have you in that class. If you're up in that listening area, you will definitely, I will tell you learn a ton in that class. But yeah, you know that that personal savings, a very important leg because as we've been talking about on this show, you might need that for income. And just to give our listeners an example, let's say you've got 700 grand sitting in your retirement account and you're in mutual funds in that account and you could reduce I'm just talking about exchange traded funds. You could reduce the expense ratio just to half of 1%. People here, a half of 1%, they're like, that's not a lot of money. But that's almost the point of putting $300 more a month in your pocket if you're taking income or just putting it back in your portfolio where it can compound.
Dwight Mejan:
So just important that you understand those three legs that we went through. You know, first leg is the pension. We can help create that if you don't have a pension from your employer. The second is Mitchell talked about with Social Security and there's a whole planning strategy today around the best time to take Social Security. We'll run a free Social Security analysis for you if you'd like to. You know, a lot of people struggle over that decision. Mitchell We see that with a lot of people who come into our office. They're like, hey, you know, what should I do? And there's not a one size fits all. We're going to ask you questions. That's what we do. And those questions, those answers to those questions are going to help you make an informed decision. And there's nothing better than seeing people leave our office, is there? Mitchell When they leave confident, knowing that they're on the right track, it's when they come in, they have that look of confusion, but they leave with a lot more confidence coming in there. So and then that third leg, of course, like I mentioned, is the personal savings. So we'd be more than happy to go over this with you. So if you are listening and you're up in the western part of North Carolina, call us, reach out to us. We're at (828) 278-7814.
Dwight Mejan:
And if you're down in the Moore County area, you can reach out to us at (910) 235-0812. And you can also reach out to us at Retire 360. Show.com, I know some folks have reached out to us. There's a little tab there. You can actually set an appointment with us on that website. Let us know a good time that works for you and somebody from our office will be in touch with you folks. We don't we don't break elbows, twist kneecaps here. We are here to educate. That's why we do this show. We want to give you valuable information. But as I say, it's not we don't want it to just to be information that doesn't lead to transformation, because that'll be frustration. And we don't want that with our listeners. We want to empower you and to be able to take this and begin to to work with it in your portfolio will help you understand. It will help you determine if you are on track. So Mitchell got maybe give those dates. I know we're wrapping up the show here. We got about a minute or so left. So rather than dive into the next segment, we'll pick up where we left off next week, but maybe share those dates one more time with our listeners and I'll let you sign off. But thanks for taking time, folks, out of your day to be with us and we want to continue to help you win with your money.
Mitchell Keiser:
Yep. So just one last time here. If you guys are in the boom blowing rock banner Elk area, we are having a class at the Watauga County Library on September 21st. We are going to have a morning and an evening class. If that is something that is of interest to you, give us a call so we can reserve your seat. They do fill up our office number is (828) 278-7814. We hope to see you guys and we hope you all have a great week. Have a great week.
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. 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. With soaring inflation continuing to wreak havoc on everyday budgets, there's never been a more important time to cut costs, but do you know where to begin? I'm Matt McClure with the Retirement.Radio Network Powered by AmeriLife. There is no question costs have been soaring.
Sharon Epperson:
About one third, 34%, say they are worse off financially this year than a year ago. Almost half, 46%, say they've had to cut household spending due to inflation.
Producer:
Cnbc correspondent Sharon Epperson recently reported on a survey that sheds more light on how inflation has been impacting us all. Even those who earn six figures a year.
Sharon Epperson:
These high earners say the first expenses to go are dining out at restaurants, entertainment outside the home and travel and vacations. More than half also say they'll delay big household purchases.
Producer:
That high inflation has led the Federal Reserve to respond with interest rate hikes. The goal is to increase costs to tamp down demand. Esther George is president of the Kansas City Fed.
Esther George:
Already we've seen the committee's policy actions lead to a very sharp tightening of financial conditions.
Producer:
But it hasn't done enough yet and costs still keep rising. So what should you do? Well, we have a free resource called 23 retirement cost cutters for 2023. It's full of ideas to help you make the most of every penny. Things like take advantage of senior discounts, eliminate unnecessary subscriptions and cut back on clothing expenses.
Sharon Epperson:
Look at your needs and wants, Figure out what's optional and what you can cut out.
Producer:
The last one on the list of 23 retirement cost cutters for 2023 is perhaps the most important. Seek advice from a trusted financial professional. That's the best way to get in-depth financial advice and retirement planning that's customized to you and your goals. Just make sure whoever you consult for financial advice has years of experience and credibility you can verify. So do you know the best way to cut costs in 2023? That's a key question to consider as our budgets get stretched to the max with the Retirement.Radio Network Powered by AmeriLife, I'm Matt McClure.
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