Planning for Retirement During These Uncertain Times

Mike Lester

by Mike Lester

Sep 27, 2020

Transcript

Speaker 1 (00:02):

Welcome to the Retirement Wealth Podcast. Our goal is to help those retired or soon-to-be retired investors make more informed financial decisions and live an enjoyable retirement. Our host, Mike Lester, is the founder and CEO of Talon Wealth Management. Mike is an investment advisor representative of Retirement Wealth Advisors Inc., an SEC registered investment advisor. Thanks for joining us today and let’s get started.

Kristen Charles (00:34):

From 1968, The Moody Blues. Thank you so much for joining us this weekend. We realize that things are a little different right now. Some of you are listening on smart speakers. Some of you are listening on demand to the podcast. We really appreciate you joining us and making us a part of what’s going on during your day. Stay with us as Mike tells you what you do not want to do with your money right now and how hindsight is truly 20/20 here in 2020, coming up in just a few minutes.

Kristen Charles (01:07):

You know, Mike, the fact that so many young couples have been cooped up inside with no place to go raises an interesting question. Are we going to see a coronavirus baby boom? I’ve been wondering that because what else do young couples have to do?

Mike Lester (01:21):

I think history shows that we probably will, right? There were some statistics and that would be that the divorce rate goes way up because people haven’t spent this much time together. But the other one was that the birthrate goes way up. Kristen, this should be top of mind. You may know it. There was some period, when was the last one? Something happened and I forget what it was. Our listeners know. I sound like an idiot right now, but there was something that happened where everybody had to stay home historically and the birthrate went way up. Anyway, I feel stupid right now for doing that.

Kristen Charles (01:53):

No. I will tell you this, I grew up in Charleston, South Carolina, a good ways away from here. When we had Hurricane Hugo, there was a baby boom nine months after that because there was no power and nothing going on for quite some time. But guess what? The folks at CNN say that what’s going on right now, no, this is not the kind of environment in which people say, “You know what? Let’s bring a new child into the world.” And that does make sense to me that people are not going, “Yes, let’s try to intentionally have a baby right now,” because-

Mike Lester (02:25):

Yeah. But more time at home, let’s see. You run out of things to do, Kristen.

Kristen Charles (02:31):

You do.

Mike Lester (02:31):

There’s only so much Netflix and Amazon Prime and all that.

Kristen Charles (02:36):

Very true, Mike. Steve and Courtney Adcock are a retired couple in Pierce, Arizona. And like many of us, they’ve watched their accounts go down in the past few months. In fact, Steve talked to Yahoo Finance about the adjustments that they’re going to have to make because of the accounts going down.

Steve Adcock (02:54):

The key is to build an efficient support system for when you don’t have all that money coming in, whether that’s cost of living, you keep that down, moving to another place. Maybe it’s taking on some more work. Maybe it’s a side hustle. Whatever that looks like, don’t just assume that the market’s always going to be great. Because as we’ve seen recently, clearly it’s not.

Kristen Charles (03:13):

Clearly, it’s not and it sounds like their lifestyle is directly connected to how well the stock market is doing too.

Mike Lester (03:19):

I think for a lot of people, they feel that way and, particularly, individuals that are really close to retirement, Kristen. It’s not great if your lifestyle moving forward is based on volatility in markets because it’s going to create problems. I mean imagine a situation where your living high on the hog when markets are doing well. Then suddenly you’re not doing anything when markets are doing poorly. Obviously, we’ve seen a ton of volatility here lately. We’ve been down as low as 18,500 on the Dow. Now we’re bouncing around the 24,000 mark.

Mike Lester (03:50):

That kind of volatility creates a lot of tension, and so what it boils down to, I think if you’re 20, 30, 40 years old and you’re just making contributions to your retirement plan, this volatility as you make contributions on a monthly basis means you’re just dollar cost averaging into this crazy mark. But we’re working with individuals that are retired or very close to it, so their situation is they’ve got their nest egg. They can’t afford this amount of volatility, but ultimately, they still need returns in their portfolio to live off for the rest of their life.

Mike Lester (04:21):

I mean most people didn’t plan to set enough aside for retirement and just have it earn 0% so that it could be safe and just dwindle that portfolio down for the rest of their life. That doesn’t make sense. So the process of investment planning and financial advice and being a fiduciary and helping people as a fee-based advisor means let’s sit down and calculate the average rate of return that you’re going to need throughout retirement to be successful. We would define that as maintaining your current standard of living adjusted for inflation and taxes moving forward. So let’s find out what that average rate of return is, and then first of all, let’s see if that’s attainable.

Mike Lester (04:59):

So one of the first conversations we’re going to have with someone when they come to our office is finding out whether or not their goals are realistic. Our idea of realistic returns might be different than another advisor’s idea of realistic returns, but we don’t believe in just a hang-in-there portfolio. Hang-in-there portfolios may have worked pretty well when markets are on average going up by a high percentage, something like 1980s, 1990s, back when people were buying mutual funds and hanging in there. But we’re in a very, very different world, and here we are living it.

Mike Lester (05:29):

I mean we had 11 years that were great, right. After the last crash we got all the way to 2020 before we saw any real issues, and then it turned out the issues that we saw weren’t initially economic. The issues that we saw were a forced shutdown because of a virus and a pandemic. We’re in a very, very different situation. So going back to the question, should I make adjustments? Should I do this? Should I do that? I think that our future can’t be 100% reliant on a hang in there approach in the stock market.

Kristen Charles (06:00):

Okay.

Mike Lester (06:00):

Early retirement means different things to different people, but that was the question. I’ll give you an example of a great client and friend of mine, Joe. He ran a successful business, grew it with some partners. They sold it in their fifties, and now they’re retired. He’s got his nest egg, and he has to be in a situation where he can live on it for the rest of his life. He didn’t retire in his mid to late sixties, Kristen. He retired in his early fifties, which means his life expectancy is a little bit longer, and the money’s going to have to last a longer time.

Mike Lester (06:32):

When we’re having conversations about how his portfolio needs to be invested moving forward, it starts with a written financial plan. It starts with active management of his portfolio, but it’s also not looking just at a, I don’t know, I’ll call it traditional. I don’t know that it should be what we do moving forward, but it’s not just these stocks and these bonds and hey, you’re a moderate investor. And if you just hang in there, it’ll be okay. We’re having conversations about what’s going on right now and the fact that this is a very different time. We’re coming up with unique solutions to these problems.

Mike Lester (07:06):

Kristen, I don’t think that should be all that strange for anyone. If somebody’s just telling you to hang in on the portfolio you rode down, this is a very different situation. We’ve never seen this before. You may be in a situation where riding back up in the portfolio they told you to hang in on isn’t the greatest idea because there are areas that are going to do very poorly, and we can estimate what areas or sectors those may be. Then there are also areas that are likely to do very well with all the stimulus that they’re dumping in our economy. Unless you’re having that conversation and applying it to your specific portfolio and your needs moving forward, I think you might be missing out.

Kristen Charles (07:40):

You know, Mike, over the past few years we’ve been fortunate to have a manageable rate of inflation for the most part, but I saw an opinion piece in the Wall Street Journal saying that this unfortunately about to change. So if we are entering a new higher inflationary period, is there anything those approaching retirement can do to protect their buying power?

Mike Lester (08:01):

Well, I think it’s also if, so if we are, and nobody knows for sure. But I think they’re pointing out the obvious here. I would guess that the numbers of the data that they’re looking at is listen, for a long time inflation really hasn’t been an issue, but how can you dump this much money on an economy. We’re talking trillions of dollars. It’s never been done before. I do believe it’s going to help the economy in a big way in the short term, but it is creating this scenario, I think, where down the road we are looking at things like inflation.

Mike Lester (08:31):

My job, Kristen, is to look at how inflation is going to affect our clients, and our clients aren’t everyone. Our clients are individuals that are retired or pretty close to it. If you’ve got your nest egg and you’re working with an advisor that’s pretty aware of inflation and what it’s likely to do moving forward and if they’re planning around it, I think we could almost take advantage of it. I’ll explain why in a minute. But if you’re younger and you want to finance something or a house or this or that, so inflation probably leads to higher interest rates as well.

Mike Lester (09:02):

As things inflate in price or inflation, they get more expensive over time, but if you’re invested in the stock market, typically that same inflation increases the returns in the stock market. Imagine this, if the cost of goods that you’re buying are going up and up and up, then it would stand to reason that the company that you’re invested in, their stock price goes up. That’s why the best way historically, maybe not forever but historically, to combat inflation is the stock market. It’s not things like real estate because there’s not a correlation between inflation and real estate.

Mike Lester (09:33):

Just moving forward with that, when it comes to inflation, I think they’re pointing out the obvious. Yeah, I think we’re going to have inflation because how do you dump this much money on an economy and not have it?

Kristen Charles (09:41):

Right.

Mike Lester (09:42):

We’ve been talking about that for a long time. The other part is, how do we pay for this? It’s very expensive, trillions of dollars. Kristen, this money-

Kristen Charles (09:50):

I mean that’s a number I can’t even fathom.

Mike Lester (09:52):

And it’s not free money.

Kristen Charles (09:53):

Right.

Mike Lester (09:53):

Okay. So eventually we’re going to have to pay that bill. You can’t keep kicking the can down the road, so that’s where inflation comes in. Back to our clients and who we’re talking to, individuals that are retired or very, very close to it, what I think, and this could change next week, Kristen, but this is what we’re watching and informing our clients on. I think that markets are likely to do well with all of the stimulus, but I do think that we’re going to get inflation out of it. I think that we probably have a period where we can do pretty well in markets and get back some of the losses that we’ve had. So we’ve encouraged clients to participate in these markets.

Mike Lester (10:26):

We don’t want them to stick their head in the sand and not participate, but we still need to be active in management of the portfolios and ready for what’s likely to happen down the road, which I think is problems. If we start getting inflation, if the government starts raising interest rates and if they start raising taxes to pay for all of this, then we get the opposite, which is markets go down. Now, is there a situation where individuals or retirees could benefit from markets going up right now and then maybe benefit from higher interest rates later, things like fixed investments that aren’t paying anything right now? Kristen, that could very well happen.

Mike Lester (11:01):

I can see a future where we could benefit from markets here for a little while but be poised and ready to get out before anything really, really bad happens. We would want to do that but then be able to move to fixed interest rate investments, things like CDs and savings and all these things that haven’t been paying very much for a really long time. That could happen, but the point is you have to be flexible and you have to be active in management of your portfolio. And you have to communicate.

Kristen Charles (11:30):

Take the Money and Run from 1976, the Steve Miller Band. Here’s an interesting piece of trivia. Back in 1967, rock legend Chuck Berry recorded a live album at the Fillmore Auditorium, and his backup group was the then unknown Steve Miller Blues Band, which later of course became the Steve Miller Band.

Kristen Charles (11:55):

Speaking of taking the money and run and this being such a big song, Mike, you’re an investment investor and have been an advisor helping people with their retirement well over 20 years now with their investments specifically. If you could have taken your personal money and run back in February, where do you think you would’ve taken it? If you somehow had the psychic ability to know what was coming, what would you have done personally?

Mike Lester (12:22):

Well, I mean if you had that crystal ball and you knew everything that was going to happen, which by the way, nobody knew this. It’s pretty crazy. Honestly, Kristen, you would’ve probably just gone to cash, waited for markets to trade down to their lows. Maybe that was 18,500 on the Dow, and you would’ve bought back in because it’s already way back up. Also, you would’ve taken a really, really close look at energy. I mean nobody knew there would be this perfect storm to drive oil prices to all-time lows.

Mike Lester (12:52):

We knew that Saudi Arabia and Russia were going to duke it out in a price war, but when you take that and you compound it by shutting down all… They’re not shut down, but airlines aren’t flying. Cruise ships aren’t going. People aren’t driving. So you shut down economies around the world. Oil got absolutely clobbered and still struggling, although I think there’s some opportunities there. That’s what you would’ve done. You would’ve just gone to cash and waited for this thing to pass us by and then get back in. The best time to get back in would’ve been March 23rd if you look. That was close to the low.

Kristen Charles (13:25):

Again, there was no crystal ball to know that.

Mike Lester (13:26):

There’s no crystal ball, but because there isn’t a crystal ball and we need to be prepared for the unknown. And COVID-19 was the unknown. I mean I could share with our listeners what we’ve done and how we handled that. I mean we can be smart about investing and build portfolios based on historical data that basically it’s all about probabilities, Kristen.

Kristen Charles (13:49):

Right.

Mike Lester (13:49):

What’s the probability that markets do well? What’s the probability that markets do poorly based on historical data? That’s what active management is all about. I want to be more aggressively invested at certain points in time, and I want to be more conservatively invested at other points in time. But we’ve never seen COVID-19. That’s never happened. The entire world has never just shut down basically overnight, and so it’s thrown markets for… well, thrown them a curveball here. It was obviously pretty bad.

Mike Lester (14:18):

One of the things that we do at Talon Wealth through our portfolios is we do have, I call it a plan B, and plan A, which is using all that historical data and building smart portfolios. And then plan B is well, hey, what if for some reason that doesn’t work and we wind up with a big problem? So for us it’s some technology called WealthGuard.

Kristen Charles (14:38):

Okay.

Mike Lester (14:40):

Basically, it sets triggers on the accounts. And if any one of our client accounts drops by a predetermined percentage, the account is then moved. And again, this is electronic, so we get the indicators and the portfolio is moved either to a more conservative position or straight to cash. We had situations with COVID, things dropped so fast for no particular fundamental reason other than overnight market shutdown. Through that and having that technology, we’re able to help our clients protect assets. I think that’s a very, very big deal. We need a plan B. We can’t just not have a plan for if things don’t go as expected because they don’t always go as expected, Kristen.

Mike Lester (15:21):

So we were able to protect client assets. But now if clients are more conservative or out of the market because we had these parameters in place ahead of time, well, a plan to manage money has to have both sides. It has to have the get clients out of the market side but also get clients back in the market.

Kristen Charles (15:37):

True. Because I don’t want to be sitting on the sidelines while things pick back up.

Mike Lester (15:41):

That’s right. I mean hey, great. I mean there are advisors out there that sort of brag about getting clients out of the market but then never get them back in the market. It’s great to save your clients from losses, but if they miss out on gains, that’s a problem too. Anyway, I mean a lot of our clients we had more conservative were out of the market, but now we’re taking a close look at it. I don’t know the exact date, Kristen, but I know it’s been a while we’ve been encouraging clients to get back in markets. It wasn’t because we have a crystal ball. It’s because we’re looking at how come markets crashed? I mean what was the cause? Well, it was a forced shutdown.

Mike Lester (16:19):

Where was the economy before it crashed? It was very, very good. We had an extremely hot economy, arguably, one of the best economies we’ve ever seen, if not the best economy we’ve ever seen. All these restaurants and hotels and everything that shut down basically overnight, what is the likelihood of them opening back up? Well, those employees didn’t just go take other jobs. They were essentially laid off or furloughed, but they’re still available to come back to be employed. So as soon as this country opens back up, I think things move pretty quickly.

Kristen Charles (16:47):

Okay.

Mike Lester (16:48):

This is not something that historically we have a test for or a measurement for, so we’ve been encouraging clients to get back in. Because I just don’t know how you dump this much stimulus on the economy and not see good things happen. Again, this has been several weeks that we’ve been doing this, and again, I didn’t have a crystal ball. But it turns out it would’ve been a good idea to get back into the market, back in late March would’ve been a good idea because markets have come up quite a bit. In this particular situation we turned out to be right on that, and I’m glad that we were.

Mike Lester (17:20):

But I guess what I’m illustrating, Kristen, is the importance of being active in management of the portfolio, having a smart plan, but then also being willing to just get out if things don’t look good enough and then also working with somebody that’s committed because they’re an investment advisor, because they’re a fiduciary, because they’re fee based. Kristen, when our clients do well, we do well. When our clients do poorly, we do poorly. So we have a vested interest in them doing well. And one of the things that we do a lot of is just communication.

Mike Lester (17:48):

Again, it comes down to management of portfolios, being logical in how you’re invested, and having a relationship with an advisor. For anybody out there who’s retired or close to it, if you’d like to have a conversation with us about who we are, what we do and how we do it, all it takes is a phone call.

Kristen Charles (18:04):

That phone call is so simple. If you take your cellphone, you dial #250, when prompted for a keyword, say nest egg. You will be immediately connected to Mike and the team at Talon Wealth Management. #250 on your cellphone, keyword nest egg to speak to Mike or a team at Talon Wealth Management off the air and let them explain to you how they could do a complete financial plan of $1,500 value at no charge if you reach out within the next 10 minutes. #250, keyword nest egg, and you can always set that up too at guardingyournestegg.com.

Kristen Charles (18:43):

There was a study by PayScale, which is apparently a workplace compensation company. So they do studies about a lot of different financial matters, warning that it could take some as long as five years to financially recover from this downturn. Now, I know several people who were planning to retire in the next two years. Is that still going to be possible in most cases, or are they going to probably need to rethink their plans?

Mike Lester (19:06):

Well, Kristen, we don’t have a crystal ball. We’ve been talking about that on today’s show, but I do think this situation’s very different. When you look at historical numbers and historical times and how long it took somebody to recover from something like the 2008 crash, it was five years or more in a lot of cases for people who had hang-in-there portfolios for their portfolios to get back to where they were prior to the last crash we saw ’08 to ’09. That seems like a really, really long time to get really, really beat up in your 401(k) or your retirement account or savings account or trust account to have all those losses in basically a year, a little bit over a year. And then to have to wait five years to get it back, that’s a long time.

Mike Lester (19:46):

This is a scenario where I don’t think we can rely on historical averages because we’re in uncharted territory right now and we’re dumping tons and tons of money on this economy. I personally feel things are going to spike. We’re going to do well in the relative short term because of the all the money. We have to be careful long term, but we also need a unique strategy moving forward. I don’t think we can just rely on what we were relying on in the past. We need to take a close look at our portfolio and identify what’s likely to do well moving forward, what’s likely to do poorly moving forward, and also the differences and measure what’s well.

Mike Lester (20:20):

Well, a lot of people were invested, let’s say, in the S&P 500, Kristen. Well, it’s likely to do well, but that might go up 20%. Historically, that would be very, very good return, but there are also other investments out there that are likely to double or even triple in value over time. So just understanding the difference between doing well, understanding how you should be invested, it’s all going to be very important moving forward.

Kristen Charles (20:43):

Stay here to find out a rather sobering forecast from one of the talking heads and to find out if it’s true.

Speaker 5 (20:54):

WealthGuard is a complete portfolio monitoring system designed by determining the amount of downside risk a client is willing to tolerate. WealthGuard is added to client accounts to help protect from downside risk. WealthGuard is not a stop-loss strategy. When the account value in the portfolio hits the target of downside value, an alert is sent to the client, advisor and money manager. There is no guarantee the exact WealthGuard value will be captured or assets will be traded or liquidated the same day the WealthGuard the value is reached due to time of day and/or market restrictions.

Kristen Charles (21:23):

In 1964, The Beach Boys released this one, I Get Around. Although they had a lot of hits before this, I Get Around was their first number one hit here in the US. Thanks for joining us this weekend. We talk a lot, Mike, about having a meeting to see if our financial plan is still on track, and you do those with your current clients every year at least, if not more often. A good example is that if you have a restaurant and retail holding in your portfolio, something you might want to see if it’s still on track because investor consultant Jan Kniffen gave a rather sobering forecast about that on CNBC.

Jan Kniffen (22:03):

I think that tsunami that someone mentioned is real. We’re going to see a lot of bankruptcies both in restaurants and in retailing, and that’s inevitable. I mean if there are 600,000-plus restaurants, we could see 100,000 close. If there are 500,000 stores, we could see 30,000 close. I’ve been saying to you forever that we’re going to see 300 malls fail. Now I think we could see 400 or 500 malls fail.

Kristen Charles (22:26):

What’s up, Captain Positive? My gosh.

Mike Lester (22:28):

I know. Guy’s bringing me down, Kristen. Holy cow.

Kristen Charles (22:31):

Well, here’s the thing. I want to hear the truth. Is he right and are you making changes like this now and encouraging your clients to do so? Or are you telling them to ride it out and that this restaurant and malls, that sector is going to be okay?

Mike Lester (22:47):

I think again, he’s stating the obvious. We see this all the time in media.

Kristen Charles (22:50):

Well, duh. They’re closed. They’re not making as much money.

Mike Lester (22:52):

Yeah. I mean okay, shocker. Your favorite restaurant, their numbers probably aren’t going to look great for the past couple quarters because they’ve been closed, right?

Kristen Charles (22:59):

Or to go only.

Mike Lester (23:00):

Or they’ve been doing takeout or they aren’t seating people. Now in some states, 25% capacity. It’s going to be ugly. It’s going to hurt. Part of that that I would agree with is that there are going to be businesses that go out of business. They aren’t all going to go out of business. I’ve been talking to some individuals that have called in about this. We’ve been taking a close look at their portfolios. Sometimes we’re seeing individual positions and individual companies that, frankly, may not do well at all, and we just don’t know. That’s where this term we all hear about is diversification comes in.

Mike Lester (23:34):

I don’t know that I want to try to be a stock picker right now. There are times when I want to be a stock picker, but there’s a lot of speculation associated with picking certain companies. I could go on the computer. I could do some research. I could find companies in the hospitality industry, in the cruise ship industry, in the airline industry, several industries that have just been absolutely clobbered. And I could go back and I could look and see that well, gee whiz, back in January their stock price was, I don’t know, two times, three times, four times, 10 times what it is right now. I bet that’s a really, really good buy if it just goes back up.

Mike Lester (24:11):

I understand why somebody would be interested in doing that. The problem is you don’t know… You can look at their financials online, but certain questions like, where they prepared for corona? The answer is no. They didn’t know it was coming. How much cash do they have on hand? How much leverage do they have in that business? The fundamentals to that business being able to survive are a big, big component, and then how much help is the government actually going to provide? They haven’t talked about bailouts specifically for the hospitality industry. I know they’ve talked a little bit about bailouts for airlines and stuff like that because it’s fundamental to our economy moving forward. The airlines have to be there.

Mike Lester (24:49):

But all things being said, we want to take a very, very close look at our portfolio. We want to understand what’s in there. I realize that it might be tempting to invest in individual stocks, but I think we want to do it in a diversified way. You don’t want to bet too much on one specific position because you don’t have that diversification in there. Historically, there are times to buy individual stocks and there are times to use things like ETFs where we get a lot more diversification. Then that way certainly there are certain positions in an ETF that aren’t going to do well, but then there are other positions that are going to do well, and we’re sort of averaging that out.

Mike Lester (25:23):

Kristen, if I wanted to bet on something right now and get kind of specific, I don’t know that I would bet on restaurants and malls. That’s a tough one. I’ve said this on previous programs. I’d be willing to bet on oil because again, historically it can’t be where it is now, and I don’t know how it doesn’t go up at some point in time. I can’t tell you when it’s going to go up, but I do like the idea of investing in energy because long term that’s probably a good investment. And I can find ways to do that in a diversified manner where I don’t have to bet on just one oil company.

Mike Lester (25:55):

I think let’s be smart moving forward. Let’s pick industries that are likely to do well in this situation. Let’s get rid of positions that either aren’t likely to do well or, frankly, Kristen, we just don’t know. Because when you’re comparing two investments, if you have investment A and investment B and you look at the fundamentals, maybe both of them are likely to do well moving forward if this economy recovers, but the other one’s half as risky or a third as risky. That’s important data. I need to know not just what they might get back to if we get back to a more normal economy, but how much risk am I taking to get there?

Mike Lester (26:30):

These fundamentals are important moving forward, and that’s the kind of stuff we do when we sit down with individuals and we’re talking about just having smarter portfolios. If you’re unsure about where you are, and Kristen, frankly, usually in a 401(k) you’re fairly unsure because the investment options are so limited.

Kristen Charles (26:44):

Right.

Mike Lester (26:45):

We can sit down with you. We can take a look at that 401(k) or that 403(b), whatever your retirement is through work. And we can look at how to position it best moving forward given the options that you have. Frankly, Kristen, if you’re 59-1/2 or older, you probably have way more options than you’re even aware of in that plan. It starts with a conversation. We can help you moving forward, but again, we’re only helping individuals that are retired or very close to it.

Mike Lester (27:09):

If you’re in your twenties or thirties or forties, we’re probably not the company for you because the type of investing we do is not for young people. It’s for people that are preparing for retirement. They have the nest egg, and they’re almost there.

Kristen Charles (27:22):

It’s natural to be a little nervous about the unknown. I know I surely am in my life. It includes the unknowns of retirement too. Some of the common ones that come to mind for me, Mike, in all the years of doing this show with you and the conversations I’ve had with people, number one, of course, running out of money is the top one. But also, the fear of being hit by out of control healthcare costs.

Kristen Charles (27:43):

Now obviously, we need to sign up for Medicare. We know that, but Mike, this is hitting home for me. My mom is going through a bit of a rough patch with some back issues, and we’re working on home health and some other things. We can cover it, but at the same time it does really add up. That is so glaring to me right now as to how much this could eat away from someone’s retirement.

Mike Lester (28:07):

Oh, absolutely. I think a lot of us transition from our working years into retirement, and not for everyone, Kristen. I realize there are people out there that don’t have great healthcare through work, but a lot of people do have really good healthcare. When you go to the doctor, your understanding is that you may have a copay or you may have a maximum out of pocket, but for the most part you know worst case scenario, going to the doctor. Well, things change when you retire.

Mike Lester (28:33):

If you retire prior to the age of 65, you’ve got to cover the gap yourself. When you get to 65, you can get Medicare, but Medicare doesn’t pay for everything. Because it doesn’t pay for everything, you can go out and get a Medicare supplement or what they call a Medicare Advantage plan. But then there are still some things that it’s not paying for. Part of what your parents are experiencing is that.

Kristen Charles (28:53):

Yes.

Mike Lester (28:53):

And it’s the unknown that frankly is really, really scary when it comes to retirement planning. Because I can take a look at things like if I had a car payment, I can take a look at that. If I have a house payment, I can take a look at that. I know about what my electric bill is, about what my cellphone bill is, about what my food bill is. All of these things are predictable. When we sit down and draw up financial plans for individuals, those predictable things are easy questions for them to answer, but the unknown is healthcare.

Mike Lester (29:21):

You could be extremely healthy throughout retirement and have minimal healthcare costs, or you could get thrown that curveball and just be blindsided by something. And it could get extremely expensive because healthcare when you’re retired, it doesn’t cover all the costs. And one of the big ones it doesn’t cover is long-term care, things like home healthcare costs and all of that. That’s not a big component or really a component at all of the Medicare system. That’s why you’ll find people out there searching for or shopping for long-term care.

Mike Lester (29:51):

Kristen, the way that we address that in our financial planning process is, like I said, it always starts with taking a look at your current situation and helping individuals make sure that they can maintain their current standard of living adjusted for inflation and taxes moving forward. We hate the hang in there approach. I can’t see how that works for people long term in retirement. We’re in a different world than we were before, and we’re seeing that type of volatility now. So having an investment advisor that takes an active role in management of the portfolio I think is very, very critical.

Mike Lester (30:20):

Having an investment advisor that sits down and gives you the good news and the bad news is also important, Kristen. If we do a financial plan for someone and we’re seeing some things that are pretty glaring, realizing that their goals in retirement are unattainable based on the amount they’ve set aside for retirement or the income they’re going to have from things like Social Security and pensions, it’s my job to tell them right now and either encourage them to work longer and set more aside for retirement or let them know ahead of time that the goals are unattainable, so let’s lower those goals a little bit. People appreciate the hard truth.

Mike Lester (30:56):

At the same time, if people are prepared, helping them make that transition and showing them how their money needs to be invested to accomplish those goals long terms is important, and a part of that is this healthcare issue, this unknown cost. We’re not quite sure what it’s going to be, but we can plan for a worst-case scenario in financial planning so that people can have that confidence moving forward.

Kristen Charles (31:20):

I mean Mike, I can tell you that even when you’re going through the process, you don’t know how much it’s going to be. But, so knowing that you help people plan for that unknown as part of a complete financial plan, very helpful.

Mike Lester (31:32):

Sure. I mean, I can’t tell them what’s going to be either, but what we can do is understand how healthcare works in retirement, understand what their potential outlay would be if they had to pay for something, whether it’s for long-term care, whether it’s for a surgery or long hospital stays. I mean all of these things that can… We know our healthcare system isn’t perfect, right?

Kristen Charles (31:51):

Right.

Mike Lester (31:51):

So we have to build that into a financial plan. Acknowledging that and just being honest with people and saying, “Hey listen, let’s put together a plan that is going to offset costs.” In addition to just your daily costs, we talk about just utilities and all of that, you have to set aside money for emergencies. You have to set aside money for healthcare. It has to be in the plan. Otherwise, Kristen, it’s not a good plan. It’s not a responsible plan.

Mike Lester (32:18):

I see this time and time again, financial plans that don’t allow for things like inflation, financial plans that don’t allow for taxes, financial plans that don’t allow for healthcare. That might work well in the short term, but long term that’s irresponsible of the advisor to put that together because frankly, it’s misrepresenting the real life situation that your family’s going through right now that could happen to anyone. That being said, these are the conversations we’re having every single week with people, whether it’s a phone call, whether it’s a Zoom meeting. These days we’re getting to a point where we can start actually sitting down in person.

Mike Lester (32:51):

This is what we’re doing. I love my job. Kristen, I get to wake up every single day and do exactly what I want to do. It doesn’t even feel like work. But for some reason I grew up a numbers kid, kind of nerdy, I guess. Helping people with retirement I realize doesn’t sound exciting to everyone, but I do enjoy it.

Kristen Charles (33:11):

The godfather of soul, James Brown. He released I Feel Good 55 years ago. I can’t believe it’s been that long. You know, Mike, in your over 20-plus years as a financial advisor, how long do you think it’s going to take until we start to feel good about our investments again and we go… What we got, a couple months on this?

Mike Lester (33:34):

Oh, wow. Obviously, Kristen, I don’t have that crystal ball, but it is going to depend on how you’re invested. Listen, there are people that were probably way too conservative in their investing for the past, I don’t know, 10 years. I mean we were having those conversations. People were out of the market and they were wishing they were in because they had seen how much things had gone up. Right now they’re feeling pretty good if they weren’t in. I’d say if you’re in that situation, I would look at this as a buying opportunity, this big, big selloff that we’ve had.

Mike Lester (34:04):

At the same time, people are calling us that maybe they were working with one of the big banks, which in my experience tend to be more of a sort of hang in there approach, or one of the big firms. Or they had an advisor that they just don’t feel like is communicating or doing much. They call them about the crisis because they weren’t getting a phone call, and then when they do get them on the phone, they say, “Well, hey, don’t worry. You have a diversified portfolio. Just hang in there.” That probably doesn’t feel very good. I think that it’ll take a while to feel good. Because if you look at numbers, I’m not saying everybody’s 50% down on their portfolio, but-

Kristen Charles (34:36):

Some are.

Mike Lester (34:37):

Some are, but whatever you’re down in your portfolio, the way numbers work, and I’ll give you an example. If I had, I’m going to use a million dollars just because it’s a round number, but if I had a million dollars in my portfolio and I lost 50%, I would have $500,000. If the very next year the market goes up 50%, my average return is zero. I lost 50% one year, I made 50% the next year. The average is zero. So our brains tend to feel like well, if I lost 50, then made 50, I’d be back to a million. That’s not how it works.

Kristen Charles (35:09):

Yeah. It feels like it would be even, but that’s not the case.

Mike Lester (35:11):

It’s not, right. If I started with a million and I lost 50%, I’d have $500,000. If the next year I made 50%, I’d make 50% on 500, not 50% on a million. So I’d make $250,000. I’d be up to $750,000. So going back to how long before we feel good, it’s probably longer than it took to feel bad, right? You felt bad-

Kristen Charles (35:33):

I just want to feel good like that, man.

Mike Lester (35:36):

We just want to feel good, but we felt bad pretty quick, right? I mean this happened very, very quickly on portfolios, and there are a lot of people out there that don’t have active management in the portfolios. I’m not saying active managers knew coronavirus was coming and protected their clients, but they do at least have a plan, I hope, moving forward. That’s what we have. When we talk about planning, it was very easy to get hurt in the portfolio that you have likely if you’re invested because things dropped so fast. What’s your plan moving forward?

Mike Lester (36:03):

We’ve been doing this for weeks now, but Kristen, encouraging people not to just bury their head in the sand and go, “Well, I’m just going to wait until it gets back to where it was before I do anything because I hate this idea of taking a loss.” It’s paper, Kristen. I deal with this at home even with Katie when it comes to investing. She has a position and says, “Well, I’m just going to wait for it to get back to where it was.” Again, it happens in my life, and I have a hard time encouraging her, “No, no, don’t do that because it might be a very long time before you feel good about that investment again. But if you were to move it to this other investment, it might be a short period of time.” Okay.

Kristen Charles (36:37):

True.

Mike Lester (36:37):

Because fundamentally, right now in this situation with what’s going on, the investment you rode down is not likely to do well, but this one over here is likely to do well. And yeah, she’s married to an investment advisor so she gets to ask me that over coffee or whatever in the morning.

Kristen Charles (36:52):

And she gets to argue with you about it because you’re married.

Mike Lester (36:55):

Yeah. Then the problem is if it doesn’t do well, it’s all my fault, right, too. Anyway, but I can give her statistics. I can give her details. I can try to help her make more informed decisions, and that’s really what we’re talking about. How long before we feel good? Kristen, that depends on your portfolio and how it’s invested, right?

Kristen Charles (37:14):

Okay.

Mike Lester (37:14):

I know positions that have doubled or tripled in the past few weeks, right. So if somebody had invested in that, they’d be feeling pretty good right now. There are also positions that have been terrible over the past few weeks. I didn’t have a crystal ball a few weeks ago when somebody was looking at that position. I don’t have one right now. But we can help people make informed decisions. And yes, it depends on how quickly what you’re invested in goes back up, but please don’t just bury your head in the sand.

Mike Lester (37:41):

Let’s do an analysis of your current portfolio. Let’s find out probabilities moving forward, but if there’s a way to tweak that portfolio and help you feel good faster, I think that’s going to be helpful for anyone, particularly if you’re close to retirement.

Kristen Charles (37:53):

For you listening on the radio or through your smart speakers or maybe on demand via podcast to this, how would you describe your investing style? Are you the type who wishes you could just hide your money under a mattress, or do you like to roll the dice, go for broke? Well, Jack Otter is an associate publisher for Barron’s, and he tells Fox Business that most of us fall into one of two extremes.

Jack Otter (38:17):

When Fidelity and other companies look at the retirement accounts, they see conservative people putting everything in bonds or cash, which is wrong. And then the risk takers put everything in high flying stocks, which is also wrong. You have to be widely diversified.

Kristen Charles (38:33):

Widely diversified, we get that, but what do you tell your clients about the amount of risk they should be taking with the money that they’ve saved for retirement? Mike, I would assume that it’s kind of an obvious answer because you only help people that are near retirement or already there.

Mike Lester (38:48):

Well, Kristen, we have clients that they want to be more aggressive, which clearly Jack Otter thinks that wrong. You can’t have all your money… It’s like, no, that’s wrong. Then according to him, you’re also wrong if you’re a very, very conservative investor. Wrong is a relative term and I don’t know that you could say if you’re an aggressive investor and somebody comes to me and they go, “Mike, listen. I’m an aggressive investor. I understand what’s involved with that. I just want you to be active in the management of my aggressive portfolio.” I don’t know how that’s wrong, okay, as long as we put together a financial plan and I know that that client can sustain that type of volatility because an aggressive portfolio’s going to have more volatility. And maybe they have other sources of income. Maybe their objective is long-term growth. Well, long-term growth would be a more aggressive type of an investment.

Mike Lester (39:38):

The opposite of that would be a client who comes to me and goes, “Hey listen, I’ve set aside X amount of money. I’m really not looking for long-term growth. In fact, I’m a little bit older. I don’t imagine my life expectancy is 30 years-plus.” Or, “I’ve got health complications. I don’t imagine my life expectancy is 15 or 20 years-plus. I don’t like the idea of volatility. I just want a really, really conservative investment, and I realize that if I live a long enough period of time, the distribution rate I have, I might run out of money.” I mean, that’s a real conversation, Kristen, right.

Mike Lester (40:09):

So you can’t just lump people into a category which says, “Well, nobody should be all aggressive or nobody should be all conservative. And everybody should just be somewhere in between with a diversified portfolio.” Advisors throw this word diversification around all the time. I use it, but I try to define it. Diversification doesn’t mean you’ve got a percentage of stocks and a percentage of bonds and you just hang in there. To me what it means is you’re working with an advisor that has a vested interest in you doing well, which in my opinion is a fee-based advisor, which is what we do.

Mike Lester (40:39):

When our clients do well, we do well. When our clients do poorly, we do poorly. I like that idea of a symbiotic relationship, not one that’s more brokerage or just selling financial products that do commissions, that sort of a thing. In doing so, I believe that an investor that is retired or close to it probably doesn’t want to be aggressive all the time, but also doesn’t want to be conservative all the time as long as they have a partner in that that can help guide them, help them make decisions moving forward based on statistics and probabilities on at what points in time would I want to be more aggressively invested? And at what points in time would I want to be more conservatively invested?

Mike Lester (41:16):

Please just don’t leave me in a portfolio and bill me for it and then just go on to the next person and bill them for it. That’s not a relationship. That’s just, I don’t know, paying somebody for something you could probably get for free somewhere else is how I feel about it. As we wrap up today’s program, I know there’s a lot of confusion out there. I know people are concerned about markets. They’re concerned about elections. They’re concerned about corona. They’re concerned about when is this economy going to get back on track.

Mike Lester (41:43):

To get your personal finances back on track, just understand more about them and what they’re likely to do moving forward and have a written financial plan that you can follow. And then also work with someone that’s going to help you update that financial plan on a semiannual or annual basis.

Speaker 1 (41:58):

If you would like to have a comprehensive financial plan and an analysis of your current portfolio, go ahead and visit our website at retirement.tips/plan, and we can do that for you complimentary. Thanks so much for joining us on today’s show. Be sure to subscribe to our podcast. Visit our website at retirement.tips for more free retirement planning and investment resources. Thanks for tuning in to today’s show and we’ll see you next time on the Retirement Wealth Podcast.

Speaker 1 (42:33):

Exposure to ideas and financial vehicles discussed should not be considered investment advice or a recommendation to buy or sell any financial vehicle. This information should not be considered tax or legal advice. Individuals should consult with professionals specializing in the fields of tax, legal, accounting or investments regarding the applicability of this information to their situation. Past performance is not a guarantee of future results. Investments may fluctuate and when redeemed, may be worth more or less than originally invested.

Mike Lester

Mike Lester

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Planning for Retirement During These Uncertain Times
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