(Photo | Courtesy of Rosell Wealth Management)
We have all heard the old adage — be careful what you wish for. Central Oregonians are typically clad in puffer coats throughout June as we long for the arrival of summer heat. 2021 has certainly been an anomaly as outdoor temperatures break all-time records all throughout the Pacific Northwest. I’m grateful to be writing this column in an airconditioned room with an ice-cold glass of Sauvignon Blanc as temperatures are a sweltering 108°!
Just as most of us have felt overwhelmed with the heat, many investors feel beleaguered when it comes to investing and planning for one’s financial future. This often includes:
- How to choose the right investments inside of your retirement accounts
- Trying to time the markets
- Maintaining your standard of living in retirement
Choosing your investments:
For many personal investors I recommend target-date funds. As their name suggests, they have a target date for retirement. This strategy makes a complicated scenario — how to invest over 30 or more years — simple. Or at least simpler. These funds start out more heavily weighted in equities, then grow more conservative in bonds as your retirement date draws closer. Speaking of simplification, these target-date funds take the responsibility for rebalancing out of the investors’ hands. Even if investors do a great job of picking the right funds initially, it’s unlikely they’re going to review and rebalance them every quarter. Target-date funds can be a great long-term solution for people who want a highly diversified portfolio and professional investment management with a “set it and forget it” approach.
Timing the markets:
During this recent heat wave, it has been unbearable to leave the comfortable temperatures of your car, home or office. However, we all understand that temperatures will eventually return to a more comfortable normalcy, so we don’t make desperate decisions to put our house on the market and move to a cooler climate. It’s important to have a similar mindset when it comes to your investments for retirement and stay the course when things feel uncomfortable. Many choose to time the markets. I remember meeting a gentleman who shared his perceived success story of such market timing during the last recession when all investors were sweating. In an excited tone he explained how he liquidated his entire equity portfolio in October of 2007 when the Dow Jones Industrial Average was near its peak-closing price at that time of 14,164. He went on to give details about how the Dow hit a market low of 6,443 on March 6, 2009, having lost over 54 percent of its value since the October 2007 high. I asked him when he got back in the market. He stated in a less fervent tone that he had not done that yet as he was waiting for the markets to decline first. I informed him that the markets had since experienced momentous growth and the Dow has more than recently achieved a new all-time high breaking the 18,000 mark. It dawned on him that he had lost out. This gentleman was lucky once but not twice, and consequently now faces a serious dilemma.
I saw investors make a similar mistake just last year as the pandemic became a reality. Based on fear of the unknown, the markets plummeted 34 percent in March of 2020! Millions of investors liquidated their portfolios as they felt “this time was different.” Within months, the markets had not only recovered but went on to hit an all-time high. The Dow is currently sitting above 34,000, up over 500 percent since March of 2009. When you time the markets, you must be lucky twice. You must not only get out of the markets at the right time, but you need to get back in at the right time. To be successful over the long term, it is time in the markets not timing the markets that counts.
Maintaining your standard of living in retirement:
One of my favorite television shows from childhood was Gilligan’s Island, the story of seven castaways deserted on a beautiful tropical island. Gilligan’s companions were the Skipper, the Hollywood actress and the Professor, but perhaps the most inspiring characters were “the millionaire and his wife”, Thurston and Lovey Howell. They lived in a Beverly Hills mansion, traveled the world and owned every material possession imaginable. I still find it perplexing how they fit most of it on the Minnow for their three-hour tour. Being a millionaire in the 1960’s was a dream for many as it meant a lifestyle of complete luxury. Today, the concept of being a millionaire has dramatically changed. Although one should feel blessed to have a million dollars — as most people in the United States and around the world will never experience such wealth — have they really hit the big time like the Howells?
In today’s world, a million dollars will not enable one to live in a mansion, own a yacht or send three children to Ivy League Universities. Even covering basic living expenses is no easy feat for the modern-day retiree. This may seem difficult to fathom, but let’s take a close look at this scenario. Morningstar’s comprehensive research states that if one has a balanced portfolio in retirement made up of stocks and bonds (I believe we need stocks in our portfolio if we want to live well but bonds if we want to sleep well), one has the highest probability (97 percent) of not outliving their resources over a 25-year retirement if they live on only 4 percent of the principle. Panic sets in for many when they see the statistics drop to just better than a 50 percent chance of success with a 6 percent withdrawal. The recommended 4 percent withdrawal from a $1 million equates to a $40,000 annual income stream and this has not factored in the IRS’s portion or inflation. In today’s new world economy of extremely low interest rates, banks are offering under 1 percent on deposits. This would sadly yield under $10,000 annually on that $1 million.
Here are a few things to contemplate as you prepare for or enter your years of financial independence. It is imperative that you can maintain purchasing power. Although it is highly recommended to have a rainy-day account, cash does not possess this attribute to keep up with increased cost of living. In 2020 inflation hovered around 1.5 percent, however, many economists believe inflation will increase over the next few years. The annual inflation rate in the United States is 5.0 percent for the 12 months ended May 2021.(1) Keep in mind that the inflation rate soared to 13.5 percent in 1980, but I like to look at the law of averages. Historically, the average annual inflation rate is 3.5 percent.(2) This may not sound too bad until we realize that at that rate, prices will double every 20 years. How does this impact your retirement? Imagine retiring at age 60 with an annual income of $100,000. Twenty years later at the age of 80 you will need to withdraw $200,000 just to maintain that standard of living and this does not factor in the additional costs of health care and possible long-term care expenses. If you find this hard to gage, consider that you probably spent more money on your last automobile than your parents spent purchasing their first home!
There will always be heat waves, forest fires, market turbulence and recessions to navigate. On my podcast; Recession-Proof Your Retirement, I share financial tools and concepts that can help investors navigate these important topics and more. As we work our way out of the global pandemic, I hope you have a wonderful summer with friends and family.
(1)usinflationcalculator.com
(2)officialdata.org
David Rosell is president of Rosell Wealth Management in Bend. RosellWealthManagement.com. He is the host of the Recession-Proof Your Retirement Podcast and author of Failure is Not an Option — Creating Certainty in the Uncertainty of Retirement and Keep Climbing — A Millennial’s Guide to Financial Planning. Find David’s books on Audible and iBooks as well as Amazon.com
Investment advisory services offered through Valmark Advisers, Inc. an SEC Registered Investment Advisor Securities offered through Valmark Securities, Inc. Member FINRA, SIPC 130 Springside Drive, Ste. 300 Akron, Ohio 44333-2431. 800-765-5201. Rosell Wealth Management is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc.
