Benjamin Beck, CFP®All the talk in the news about whatever the headline is today, provides plenty of fodder for people to worry. These days the headlines may be inflation and interest rates, or the range of active conflicts that are in motion throughout the world. As financial advisors, we are in some way the first line of defense against whatever the last thing is that our clients heard. That ‘last thing’ could have been a conversation with their brother-in-law, their neighbor, or some opinion piece they watched on cable news or read about in their social feed.
My experience is that whatever a client brings to the table as the source of their anxiety, is really not that. Inflation and interest rates, wars, and elections, all these are just things that people latch onto. While people think that their stress is about the prevailing issue of the day, these are in fact merely the objects of their anxiety. Consider, for example, rising interest rates. Someone may get quite emotional on this topic, which may sound like, “My gosh, interest rates are going through the roof, this is going to result in a crash of the housing market, and soon thereafter the entire economy…”
Whoa. Take a step back for a minute and think about this. First, interest rates have been at historic lows for many years now, and while they are now tremendously higher than before, they still aren’t tremendously high, and nowhere near as high as they have ever been. Not to mention the fact that we need higher interest rates right now in order to slow down the pace of the inflation we face. You see how people can quickly get carried away with this kind of “logic?” I put logic in quotes because it’s not really logic, it’s simply emotion.
Retiring in a Bear Market
Thinking and speaking about all this led me to consider what is really keeping folks up at night. As I think about the conversations I have with clients, the recurring topic (among those who tend to worry out loud) is a concern around the timing of their retirement during a bear market. By the way, in every single bear market I have experienced in my career, this is a concern that I have heard repeatedly. I can paraphrase it like this: the client may say, “Ben, I know and I understand everything you said about bear markets being temporary, but before, when I was still working I didn’t worry so much about bear markets, because I was working.”
The client acknowledges that the bear market is indeed no different than before. What has changed though is their perception of the bear market. The client is now concerned that if the market hits a rough spot, they can’t do what they did before – namely go to work, make more money, and not worry about being down. To have worked their whole lives so that they could have a time when they would no longer work, and then to feel that their economic engine is shutting down, is of course unsettling to people. Again, here it’s important for the financial advisor to realize that the client is not really worried about the markets being down at this point in their life. What underlies the concern is the loss of control. While they were working, they felt like that had some control over their income, but in retirement, they feel that they are subject to the ups and downs of the market. That can be scary.
How to Survive a Bear Market that Coincides with Retirement
This is why it’s critically important to explain to folks what role a properly designed portfolio plays in fueling their future goals, and how their behavior as investors can make the difference between accomplishing their vision versus outliving their assets. The way I describe what happens in the transition from working to not working is this.
Before you retire, you are getting paid a salary from your job, or if you’re a business owner you’re taking a draw from your company. Your job or your business is the machine that is generating your income, some of which you may be investing toward the future. As you accumulate wealth in your portfolio, you do it with the intention that one day when you stop working, the portfolio will be the machine that will be paying your salary. And the assumption is that when you retire, if you have saved enough money to hit your reasonable retirement goals, you can provide yourself with a salary for the rest of your life. If your financial advisor tells you that it's okay to retire, then the further assumption is that “I'm in a comfortable enough spot where it's very, very probable that my assets are going to outlive me.”
That’s the plan at least. But it’s conditional and it’s conditional upon several things. One big thing is that the “machine” that is your portfolio is properly optimized to be able to not only produce the level of retirement income you need in Year One to satisfy your goals, but that it is also built properly to grow and generate an ever-increasing salary as the years go by, since the one thing we know for sure is that costs are always going up.
Further, it’s conditional upon acknowledgment of the fact that we are going to go through tough market times, not once or twice, but probably six or seven times over the course of your retirement, and that those cycles cannot be interrupted by “taking a break,” or “sitting out this bear market,” or “going to cash for a while.” No, for the machine to work as intended, it needs to be continuously operating.
What Does the Ideal Portfolio Look Like?
Your retirement machine needs to be structured and optimized so it doesn't ever sit doing nothing, like an idling engine. In fact, the engine needs to be able to accelerate your income year over year and for that to happen, it requires high quality inputs over time. In a real engine, this would be the fuel you put in, it and whatever additives to optimize the running of the machinery. At Beck Bode, we believe those inputs are a carefully constructed and properly diversified basket of around 15 or so stocks that we select according to our time tested and proven methodology of picking great companies that are only getting better. The idea is to produce performance over the long haul that will increase the income from the portfolio at a rate that is faster than the pace of inflation.
So, when an existing (or prospective) client comes to us expressing a concern about the transition from earning an income to solely relying on their portfolio (meaning they are concerned about losing control), we must remember that the way we can counteract it is by helping them understand the role a properly constructed portfolio plays in this process. A portfolio that is built to deliver not just today but into the future. A portfolio that is designed not for the client’s emotional comfort, but for the client’s long-term wellbeing.
Some people express their concerns openly, and others may not admit their deepest concerns – even to themselves. Most people don’t know how they are invested, and how those investments will result in their goals being achieved. Talk about a source of anxiety.
I can think of many people, outwardly financially successful executives or business owners and others, who think that they have everything figured out for retirement, but deep down don’t want to admit that they really don’t know. All it takes is to ask folks how much they spend on a yearly basis. Most people don’t know. How can you know how much capital you will need to pay for the next 30 years of your life if you don’t know how much you’re spending today? Wouldn’t that keep you up at night? If it doesn’t, it should.
A prospective client who is working with a conventional advisor may be under the impression that they are “all set” or that their existing advisor has a strategy that accounts for all the things I just described. My question is, “Really? Are you sure enough to the point that you're not going to lose any sleep at night over this?” It doesn’t hurt to get a second opinion. I mean, this is your livelihood for the rest of your life and, and it is the source of money that will help achieve your lifestyle, all the experiences you want with your family while you are alive, all that you want to leave behind when you pass on, the impact that you want to leave in this life.
Retire with the Help of a Carefully THOUGHT-OUT Financial Plan
It turns out that it's easier (and human) to worry about the things that are outside of one’s control – like interest rates, inflation, and all the other things you hear about in the news than it is to address what can be addressed. Namely, do I have a plan that captures my cherished goals and dreams? Do I have a strategy for implementing that plan? Do I have a portfolio that can fuel it? And am I working with a competent advisor I can trust, who can explain to me exactly how this will all happen?
Once those questions can be answered with confidence, all the other worries (about one’s financial future, at least), can be assigned to a spot of lesser relevance.
Get started on your financial planning journey with Beck Bode