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.
Coca-Cola recently announced that they’re changing their Coke Zero recipe to taste more like regular full calorie Coke. I’m wondering if maybe we should shoot a text or give the folks at Coca-Cola a call and remind them about their 1985 recipe change disaster.
And the campaign. They had to launch to save their brand back then. New Coke made consumers so angry, cost Coca-Cola tons of money, lasted only 77 days.
And by the way, I don’t know what the kids are studying these days, but when I was in college, we studied that in marketing as one of the biggest marketing blunders of all time.
Like all time.
And his name is notorious in that arena too, for what not to do.
Yeah. Never ever do this. And now they’re doing it again. That so odd. I remember as a kid, we hoarded classic Coke.
Yes. People would have it stacked up in their basements.
And then we would go to gas stations and try to find it in the bottom of the cooler somewhere. And yeah, it was like gold. If you found it and then you wouldn’t drink because you were afraid. Yeah.
Because we were so afraid. We wouldn’t have it. I know it proves new isn’t always better, but there are so many new ways to invest our money compared to generations before us, even one generation before us, Mike. There’s what? Bitcoin, meme stocks, NFTs. And those are a few of the confusing new ones that come to mind, but you help people age 55 and up. Should they stick with what they know, or should they look into some of the new options that are available even beyond what I mentioned there?
Well, not everybody, but what most people know if they worked for a corporation or any company, and that company gave you the opportunity to invest in the company retirement plan. And so that’s typically a 401k or some sort of profit sharing, maybe a 403(b). It depends on who your employer is, but it was the opportunity to set money aside pre-tax, have it grow pre-tax until you take it as an income at some point in the future. Most people, if you realized that you weren’t going to have a pension from the company anymore, and you were given this option, made contributions, and fortunately it worked out pretty well.
Kristen, we meet people from all walks of life who’ve, over a 20, 30, 40 year period done very, very well since the eighties, when these retirement plans were first offered and they’ve grown as they should. And now they’re in a situation where, okay, so I’m either retired or I’m about to retire, now, what? What do I do with this money? It’s a transition. And so the advantage of those plans at work was really the ease. The money came out of your paycheck before you ever saw it. It went and it got invested in markets and markets grew significantly over time. Now we’re faced with market volatility. We’re faced with COVID, and new COVID fears. We’re faced with inflation. We’re faced with politics. We’re faced with potential increases in taxes. All of these things. And people are looking at their portfolio going well, Hey, listen… Particularly this weekend, they’re going, “well, despite all the volatility of last week, I’m still higher in my portfolio than I was a few years back. And what should I do about that right now? Should I pull my money out of the market? Should I stay committed?”
Well, if you’re in one of these retirement plans through work, you have limited investment options by design. They want to make them as easy as possible to invest in, so they don’t complicate it with too many options. The other thing is there’s no active management. So there’s nobody typically to sit there and say, “well, things look like they’re going to be pretty good moving forward. You should stay committed to your current plan,” or “Hey, things look like they’re going to be terrible moving forward. You should move that money into something conservative.” And so people, all they really get is a 24-hour news cycle, which by design scares people. And we have to find a way to navigate the emotion, navigate the back and forth and know when to be committed to the market. And again, if probabilities are high that markets will do well, we want to be more committed. If probability is that markets are going to do terrible are high, then we want to be less committed. And so that’s where active management comes in.
As you get closer to retirement, you do start wondering, what are my choices and where do I turn for insight about this? Connect any time guardingyournestegg.com. The couple recently reached out to our team with what sounds to me like an excellent retirement plan. So he’s 60, retired from the military, and now works for another branch of government. I’m sure he has some great benefits there. His portfolio is worth about $1 million, and his wife is still working at a job she loves as well. They’re both happy and they’re excited about their future together, but like everyone else, they reached out to our team, because they want to make sure that they’re going to be okay, that they have enough? Where do you typically start the planning process with a couple like this?
Again, that’s pretty typical. Not everybody that we work with had a military background, but a lot of the people that we work with, or families that we work with did. So in this situation, what we know about them is the military, there’s typically, if you were in a branch of government for a long enough period of time, there’s income, there’s a pension there. It’s one of the great things about our military is the ability to earn the pension, but then also the ability to grow funds in a retirement account. And now with this particular couple, what we’re doing is having a conversation about, not just how the money is currently invested, but what their goals are long-term. And when I say long-term it’s, well, how much income are you going to need in retirement to maintain your current standard of living adjusted for things like inflation and taxes moving forward.
So when we’re working with a couple that has a combination of pension income and then social security income, we’re going to take a look at first at how much of their total needs is that going to cover in retirement? In some cases that income is substantial enough to cover the majority, if not all of their income needs.
And in that case, we’re going to take a look at the portfolio and I have a portfolio worth an excess of a million dollars here. Again, this is money that he set aside that’s been growing tax deferred. And we started to get concerned about things like taxation down the road, because if they don’t need distributions from that retirement account, then the money sits there and grows until they’re forced to take distributions for RMD requirement distribution at the age of 72.
And so what I’m looking at is I’m going, well, I want to make sure that when those distributions are forced to be taken, it’s not pushing them in a tax bracket that’s unfavorable, because those distributions can get really high. So by the time you add social security income, pension income, requirement and distributions, and you’re getting taxed at a really, really high level, it becomes inefficient. Again, it’s not everybody’s situation, but with this particular couple, we’re spending a lot of time looking at what’s called Roth conversion. So how do we take the money and the portfolio that’s going to be taxed as ordinary income when it comes out, how do we convert that to Roths that doesn’t have to be taxed in the future? Also, so that they’re not in a situation where they have to take a requirement of distribution in the future. And so that’s financial planning, that’s tax planning, that’s estate planning. It’s all of those things in one, Kristin.
But also point out that often we work with individuals that don’t have a military background, or who aren’t going to have a pension in retirement. Their situation’s a little bit different. So maybe a Roth conversion doesn’t make as much sense in their situation as it would for somebody who has a pension income. Everybody’s situation is different. Everybody’s unique. And again, I talked earlier in the program about how much I love my job. It’s that ability to sit down with people, talk to them about their concerns. Kristen, we still get people in the office who bring in their statements. They’re apprehensive. I had an appointment last week, a gentleman and his wife, great people, and the first words out of his mouth is I know you’re going to think. I made some really stupid decisions when it comes to investing in the past, but I finally had to come in and sit down and talk to you.
And Kristen, that always hurts me a little bit. I feel like maybe on the radio show, we didn’t come across clear enough to say, “Hey, listen, what’s happened in the past when it comes to investing… Just because I do this for a living, and because I sit down with a lot of people and have these conversations, it doesn’t mean that what you’ve done historically is bad.” Now he was concerned, because he’s been very, very conservative right in the past, really pretty much his entire investing career, and certainly in the past 10 years or five years, when markets have been going up and up and up. And with the benefit of hindsight, he can take a look at his portfolio and go, well, gee whiz, if I had not been in these conservative investments, I would have done a lot better. And he felt like I’d be critical of that.
And here’s the thing. After our conversation, we got to know each other a little bit. And he was like, “listen, I wish I would have done this a long time ago. It’s been great talking to you.” He didn’t feel awkward, but he’s a conservative investor. There’s nothing wrong with that. Here’s what I’m going to do. I’m going to sit down with him and continue to have conversations about conservative options that are available that may be paying more than the bank that’s not paying very much. So whether you’re conservative or aggressive, whether you have a pension or you don’t have a pension, the financial planning process is a little bit different for everybody.
Mike, overall Wall Street has been making us happy in the last year or so, with the exception of some volatility in recent days, not a big deal. Question here, what are your thoughts on the outlook of the market for the rest of the year?
Oh, so you want me to tell you what the Dow is going to be at on December 31st of 2021?
Yeah. Just be psychic. Do you mind?
No, but really.
Well rest of the year, what are market’s likely to do? Literally I’m having that conversation, obviously every single week at the office, and people are asking us the same question. We’ve got a lot going on, Kristen, and people are concerned. Obviously, inflation’s in the news. That is an issue, but the economy has to do really, really well moving forward for inflation to continue to be an issue. We’ve got some good things going on. Companies are doing well, earnings have been good. Consumer confidence is high, but now we’ve got this Delta variant for COVID, that’s becoming an issue. And it’s created a lot of volatility in markets. Now, I would I guess, challenge our listeners to take some time as you’re looking at this volatility. I know that the world is opening up. I know that things are getting better, but we have to take a look at not just what’s likely to happen next week or next month, but towards the end of the year, which was your question.
And I think because confidence is high. I think because people are going out and spending money. I think because people are traveling. I don’t know that the world is ready for another shutdown even if there is a Delta variant. At some point, we all have to get up and go back to work and live our lives even if there is a variant out there to COVID. It has to happen. It can’t shut down forever. So markets are probably going to do okay, at least for the next quarter, hopefully through the end of the year. We are watching that really, really carefully. I’m not saying there’s not going to be volatility, but when consumer confidence is high, when people are out spending money, when people are going back to work, when states are open, now, it probably looks pretty good in the short term.
But again, what’s happening is not sustainable. Housing prices can’t stay as high as they are. Car prices can’t stay as high as they are. The price for a hotel, if you want to stay on the beach somewhere, it can’t be as high as it is. All of these things, it’s not sustainable, and it’s reminiscent of 2008, when things seemed really, really good, they seem too good to be true. Now, if you’re selling your home… And you know you’re getting way more than your home is worth. You know you are. It should seem too good to be true. I sold my boat the other day. I got way more than it was worth.
You were on cloud nine about that.
Yeah. I was like, “Hey, this is nuts but if you want it that bad, you can have it.” But, what I realize is that’s not sustainable. And any time it’s not sustainable, it feels nice for a minute, but take a couple steps back and apply that to your portfolio, apply it to your personal economy, apply it to your retirement plans. What are you doing about the fact that it’s not sustainable? And again, that’s my opinion. I shouldn’t say fact. My opinion it’s not sustainable. And I think it’s going to get pretty ugly in the future. And ugly means different things to different people. For me, ugly is markets crash, economies crash, and all of that. But we want to take the time to protect our client’s money, because if we’re protecting money and let’s say, we’re not in the market next time markets crash, that’s an opportunity. So, really, really bad things create opportunities in the future, but you have to have a plan in place to take advantage of this and also protect yourself from loss.
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 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. Exposure to ideas and financial vehicles discussed should not be considered investment advice or 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 make fluctuate. And when redeemed, maybe worth more or less than originally invested.