Preparing for Possible Summer Volatility

Transcript

Announcer (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 (00:31):

I’ve gotten a lot of questions. People calling into the office, current clients and also listeners, wondering about this recent volatility. Am I right?

Mike Lester (00:40):

Well, of course. We keep getting close to this 35,000 on the Dow. Not everybody pays attention to this, Kristen, but I’m watching this all the time. We get to 34,700 and something, and then we fall back a bit. They call that, basically, a point of resistance. But we’re looking at markets. We’re looking at our portfolios. We’re looking at politics. We’re looking at the fed. We’re looking at interest rates. We’re looking at summertime coming out of COVID and wondering what’s going to happen. And it’s frustrating.

Kristen (01:08):

Well, and when the fed speaks, especially, it can get frustrating, because Wall Street listens. And these words sparked the worst sell-off on Wall Street since last Fall.

Jerome Powell (01:17):

With regard to interest rates, we continue to expect that it will be appropriate to maintain the current zero-to-one quarter percent target range for the federal funds rate until labor market conditions have reached levels consistent with the committee’s assessment of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. As is evident in the SEP, many participants forecast that these favorable economic conditions will be met somewhat sooner than previously projected.

Kristen (01:45):

Fed Chief, Jerome Powell, signaled that interest rate hikes could come in 2023. Other fed officials say it may be as soon as the next year. Mike, you’ve seen a lot of things happen. You’ve helped a lot of people. Break down, in plain English, what this really means for our bottom line.

Mike Lester (02:01):

Well, if anybody is awake, I’ll do that. Do you realize that people are driving a lot of times, listening to our show on the weekends?

Kristen (02:06):

I know. This doesn’t-

Mike Lester (02:07):

And then you pull [crosstalk 00:02:10].

Kristen (02:10):

Well, that’s not helpful.

Mike Lester (02:11):

Anytime somebody uses the term, as is evident in any conversation, just walk away. However, let’s break it down. So yeah, markets were off over 500 points, because the fed basically came and said, “Hey, listen, we are considering raising interest rates sooner than we had previously expected.” Why would they do that? Well, a lot of things, but they’re assuming the economy might do better sooner and that there could be some inflation in there. But I think they’re reacting to a lot of things that are potentially short-term. Things like automobiles, that’s an issue. Well, is it an issue because of COVID or is it an issue because of the chips that they can’t get for the automobiles? Lumber, that’s an issue. Housing, it’s an issue, because of lumber and other building supplies. Is that an issue because of actual lumber or because it took a little while for factories to come online to start making enough lumber to meet the demand?

Mike Lester (03:04):

It’s a question of, is it because they’re printing so much money causing inflation or is it because just other economic factors going in? So yeah, markets sold off. It was not shocking to us that it happened. The market has been doing very, very well for a long period of time. But you have to apply this to real-life situations. That’s what we’re doing every single week with clients. And that’s what we’re doing for our listeners on the radio, Kristen, is how is this likely to affect you long-term? If markets crash for our clients that are in the market, that’s probably pretty bad. Most of our clients are in the market. They’re in the market with 401ks, IRAs, TSP accounts. Maybe they’re in markets with other financial advisors that are managing their accounts. My question to everybody listening would be, what are you doing about the volatility that we know is down the road?

Mike Lester (03:50):

Kristen, you know very well, we’ve been pretty optimistic about markets for a very long time. I can’t remember being on the radio saying, “Hey, listen, you need to do take your money, pull it out of the market, because things are going to get terrible.” We just don’t do that. The last time in our portfolios that we got very, very bearish on markets, meaning we thought markets would do very poorly, would have gone all the way back to 2007 or 2008 before the markets crashed, because things just didn’t look good.

Mike Lester (04:17):

So my fear right now, looking at everything, is I’m starting to get that feeling. We’re starting to take a close look at portfolios. We’re coming up with strategies for our existing clients that say, “All right, we’re going to watch this close. This can’t continue. The fed can’t talk about this with interest rates without a potential problem down the road. The government can’t spend money without a potential problem down the road, the way that they’re spending it. They can’t raise taxes without a potential problem down the road.” We all know this.

Mike Lester (04:43):

But my fear is a lot of people listening that aren’t currently working with us are just sort of doing what we do, Kristen. It’s very, very easy to put it off and put it off and put it off. Things look pretty good in the markets right now. We can become sort of complacent in returns, because our portfolios are probably close to all-time highs or, if not, at all-time highs right now. We’re feeling okay about that and concentrating on other things. It’s summertime. It’s time with grandkids. It’s time with traveling. It’s time with kids. It’s all of that, but let’s take just a second, Kristen. A phone call to us is, at most, a three-minute phone call.

Mike Lester (05:20):

We can get some information from you. We can schedule an appointment at one of our offices to help do an analysis of your current portfolio. Find out what’s likely to happen moving forward. If markets are doing great, moving forward, we can tell you that. But what if markets don’t do so good? Which again, we’re projecting this is going to end badly. Again, we haven’t done that in a long time. But we would love to help you understand what your portfolio is likely to do if things don’t do well into 2022, 2023, and come up with a strategy because again, it’s your life savings. It’s your 401k. It’s your 403b. You’re selling your business at a good time now, because markets are doing very well and the economy is doing very well. But now you got to find out what to do with that money to make it work for you for the rest of your life without taking too much risk.

Mike Lester (06:06):

If you’d like a measure of what you’re likely to do moving forward in your existing portfolio, but also what your alternatives are, how much risk you’re taking in your existing portfolio, also how much risk you’d be taking in other portfolios that are available to you, do a comparison and just inform yourself. Informed investors do better. Our job is to help you make informed decisions. If you want to have that conversation with us, give us a call. We’ll do the analysis and complete financial plan complimentary.

Kristen (06:34):

As you get closer to retirement, you do start to wonder what choices you have, where you’re going to go for help. It’s not just you. So many people feel unprepared. So don’t feel awkward about that. We all love this great country and nothing feels more wholesome and American than a kid with a lemonade stand during the summer. My neighbor’s son does one every single year. This past weekend I asked him, “How does the whole thing work?”

Speaker 1 (06:58):

It’s kind of a fun thing. And also for the money.

Kristen (07:01):

How do you decide how much to charge per cup?

Speaker 1 (07:04):

Well, if you do like sit, some people won’t want to make change so they won’t do it. So we would charge a dollar so they don’t have to make any change. Half of it we save, so we can next time have money to buy cups and lemonade.

Kristen (07:19):

How much did you make today?

Speaker 1 (07:20):

Today I made around $50 after I took out the supply cost. And I was there for three hours.

Kristen (07:26):

Why do you think people stop and buy lemonade from you?

Speaker 1 (07:29):

Sometimes it’s because they’re thirsty. And sometimes they like us doing it, because they think it’s a good idea, because we’re making our own money. They just think it’s cool that we’re doing it.

Kristen (07:38):

He’s 12. And by the way, he also does my lawn. He’s got a little lawn business, too. But been doing this every season for about four years or so.

Mike Lester (07:46):

First of all, Kristen, that was a fantastic clip. Probably one of my favorites that you’ve done. That was really, really good.

Kristen (07:51):

Thank you. I think I’ll be working for him one day, honestly.

Mike Lester (07:54):

Second, I’m afraid you just put a big bulls-eye on this poor kid’s back. He’s an entrepreneur. Chances are, this is cash under the table.

Kristen (08:00):

Uh oh!

Mike Lester (08:01):

They’re going to be taxing this poor kid.

Kristen (08:02):

Oh, my goodness.

Mike Lester (08:03):

You’re talking profits. You’re saying he’s got a whole nother business.

Kristen (08:05):

You’re probably right.

Mike Lester (08:08):

It’s the world we live in, right? You go out. You work hard. You’re doing the right thing. You’re doing the math. You’re a young entrepreneur. He’s probably going to go off and do great things. And now his name is mud because, now he’s-

Kristen (08:18):

Well, I didn’t say his name, so see?

Mike Lester (08:20):

That’s true. It’s hard not to feel that way with everything going on right now. Our clients have worked hard. They’ve done the right thing. If you’re prepared for retirement right now, and you’ve done a good job of setting money aside, it means you worked hard. It means you saved right. It means you didn’t live outside of your means. You made sacrifices along the way. And now you’re at a point where you can retire, whether you are an entrepreneur and you built your own business, whether you went to work for a company and you were committed and whether you liked it every day or not, you did your job. You got paid. You built that 401k, whether you’re a government employee and you’ve got a TSP account. The people that we’re talking to week after week were committed. They made sacrifices. They did a good job of preparing for retirement.

Mike Lester (09:05):

Now, they’re at this point where they’re looking to make that transition, or they’ve already made the transition, and they just want to make sure they can retire and stay that way. It’s very, very confusing right now. People are confused about tax policies moving forward. They’re confused about things like required minimum distributions and when are they going to have to take them, because that keeps changing. They’re concerned about things like IRA versus Roth IRA. Is it taxable? Is it not taxable? What are the tax rates going to be in the future? How are we going to pay for all of the government spending? What is employment going to look like this summer? All of this, it’s so confusing. Kristen, I think that sometimes it’s just information overload for so many people that we talk to. It’s easy sometimes just to sit back and say, “Hey, listen, the stock market’s doing pretty good, regardless of everything.”

Mike Lester (09:52):

But I would encourage our listeners, because this is what we’re doing with clients, I would encourage you to take the time to find out more about your investments, your portfolio, whether that’s a 401k, a TSP account, 403b. Take the time to find out what it’s likely to do if markets are good, but also if markets are bad. Kristen, I think markets are going to be good probably through the summer. I think we’re in a volatility. I hope markets are good through the end of the year, because people are going back to work. These unemployment benefits are ending. People will have to go back to work, which will make employment numbers better, hopefully, spending numbers better, hopefully, consumer confidence numbers better. But again, this bill is going to come due and the government hasn’t come up with a way to fund this other than taxing people.

Mike Lester (10:36):

The people that they’re most likely to tax are the people who make the most money or the people who have saved the most money. Our clients are typically the people who have saved the most money. So we have to come up with strategies ahead of time. We can’t be in a situation where we’re reacting to a problem. We have to be in a situation where we’re preparing for a potential problem. Really, what we’re doing when we sit down with individuals is just helping them prepare. We hope this doesn’t come to fruition.

Kristen (11:01):

Find out more at guardingyournestegg.com. Have you ever wondered what’s hidden in the thousands of pages or the federal budget? Well, unless you were bored and watching C-SPAN, you might’ve missed this little nugget from Idaho Senator Mike Crapo in a recent hearing on Capitol Hill, as he questioned the head of the IRS.

Mike Crapo (11:22):

The President’s budget calls for a new change in the law, allowing the IRS to have what I see as near universal access to the reporting of Americans’ financial account information to the IRS, transactions over $600. This proposal will carry with it a significant amount of privacy concerns, in my opinion.

Kristen (11:46):

Why would the tax man need to know about transactions that small?

Mike Lester (11:50):

I’m thinking of this kid you just put on the air making 50 bucks a day in three hours with a lemonade stand. This guy’s going to have to start reporting stuff as a 12 year old. Kristen, it’s just more Big Brother stuff. That’s the world we live in right now. If we go back to what we were doing prior to Biden, it was more pro-business. Now, it’s more pro-spending. And pro-spending means pro-tax. Where are they going to get the money for all the spending? They haven’t told everybody. There isn’t this specific plan. They haven’t gotten anything passed. But what we do know is you can’t spend this much money, you can’t print this much money and not at some point have it come back and tax corporations, tax individuals, tax retirees. My biggest concern is, and we don’t talk about this a lot on the show, Kristen, but my biggest concern is that what the government knows is the majority of the taxable assets in the U.S. right now are in retirement plans. They know this.

Mike Lester (12:50):

If you think about it, why do they let us put money aside in IRA accounts, 401k accounts, TSP accounts, 403b accounts? Those accounts, and all the other accounts that allow money to sit there and grow tax deferred. You haven’t paid tax on it yet. But when you do start pulling money out of that in retirement, it gets taxed as ordinary income. If things get really bad, all they have to do is raise income tax rates, because when you start to lean on that retirement savings, your nest egg for retirement, the tax rates could potentially get really, really high. To me, it’s not a secret, because it’s right out there in the open. It’s just nobody’s really paying attention to it.

Mike Lester (13:35):

But it comes into fruition in several different ways. When they raise income tax, they’re raising the tax on your retirement income, because your retirement income is either coming from Social Security, which is taxed for most people, or pensions, which is going to be taxed, or your retirement accounts, which are taxed as ordinary income. They also require you to take a minimum distribution, the required minimum distribution. So you can’t sit back and do nothing. All of these things are really, really important. We have to make taxes, income planning, retirement planning, a part of the complete financial plan.

Announcer (14:08):

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 into today’s show. And we’ll see you next time on The Retirement Wealth Podcast.

Announcer (14:41):

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