Episode 10 – It’s Time to Explore the Quantitative and Qualitative Risks of Your Fall Season
Imagine transitioning into your fall season of life—in other words, your retirement phase. What type of risk might you experience?
In today’s episode, Danielle Howard explores that very question as she discusses the areas of risk that tend to come with life’s fall season.
Covering everything from market risk to longevity risk, Danielle explores the qualitative and quantitative sides of retirement risk, while highlighting the importance of rewiring or refiring as you enter your retirement years.
Join Danielle and learn about the conversations you should be having with yourself and your loved ones to ensure you’re prepared for the uncertainties that come with the retirement journey.[00:00:02] Welcome to the Wealth Done Differently Retirement podcast. Danielle Howard, a certified financial planner, shares insight into the financial tools, techniques and temperaments needed to make the most of your retirement dollars and relationships. [00:00:20] Danielle bridges the gap between Wall Street and Main Street, bringing complex financial topics down to earth. Danielle will educate and inspire you as you define and refine your version of prosperity. [00:00:35] Hello and welcome to Wealth Done Differently Retirement with Danielle Howard, a certified financial planner. Today, Danielle and I are going to be talking about risk in retirement and what that looks like. Hi, Danielle how are you? [00:00:47] I’m well Aric, thank you so much. [00:00:49] Good. So what’s on the agenda for today? [00:00:51] Well, I like to people, to have people think a little bit about what is going to change as they look into their fall season of life, especially when they’re taking on different types of risk. So let’s start out. If you were to think towards your fall season and making a transition in a variety of ways, what type of risk do you think is entailed in that, you know, looking into that new season of life? [00:01:22] Well for me personally, as a grandfather and a husband I want to take a lot less risk than I did maybe 20 years ago. I don’t ride a motorcycle without a helmet, I don’t jump cars off of ramps and I don’t want to risk the the nest egg I’ve got for retirement nearly as much as I did when I was younger and more aggressive. So I guess at this point, I don’t want to take on a ton of risk, but I still want a little bit because I still have quite a few years left. [00:01:50] So you’re talking about that qualitative component. So you’ve touched on that aspect of of market risk, and I would I would say that the majority of people, when they look at what’s going to change in my retirement season of life, that’s one of the first things they consider is that quantitative, oh my gosh what does my portfolio look like, what should it look like. And I think that’s a very important part. [00:02:17] And today, we’re going to be talking about the traditional quantitative aspects of risk. And I’d also like to deal, dig into and deal with some of the qualitative aspects of risk in this changing season of life. [00:02:34] Okay. Sounds good. So where are we starting at? [00:02:36] Well let’s start where you started, with market risk. And this is where you know, in the accumulation phase of your financial life, you’ve, we’ve been taught you want to look at your asset allocation you know what should you have, how should you have your investments weighted in the equities market versus the bond versus the alternatives. How do you hedge against you know market corrections. And there’s a variety of ways to do that in your accumulation season, when you’re putting money into the market. And as you transition towards the fall season of life, yes you’re probably going to be less comfortable with that roller coaster ride of the equity side going up and down. And you know traditionally people said, well I’ll probably shift my asset allocation more into a bond portfolio to where I’m not experiencing as much of that up and down of the market. And I think what we need to consider is that now we are dealing with market risk, we’re dealing with inflation risk, with interest, interest rate risk, and it has completely shifted, what we need to address and because of our current, what we call, an economic season. So for the first time in over 30 years, we have a rising interest rate environment and that puts a very different weighting on bond risk. So for people to understand what their true, not only risk tolerance is, you touched on I still need to have a little bit, I need to take on a little bit of risk. [00:04:23] Why do you need to take a little bit of risk? Because my thinking is is that the more risk the more possible gain. And that’s kind of what you want to go for if you still need some gain in that portfolio, which which I do. I’m not satisfied with where I’m at personally with what I can draw down during my retirement years so I need to build that still. Right. [00:04:45] So you’re wanting to build, this is an important piece, why do you want to grow your portfolio? And you’re wanting to grow your portfolio because you want to manage maybe some inflation risk knowing that the cost of living, what you buy a loaf of bread for what your a tank of gas costs, or what going to the movie costs you is going to probably be a little bit higher down the road. So you need to incorporate a cost of living inflationary factor into what you want to be pulling out for your lifestyle. I’d also encourage people to look at the different types of inflation risk. Their health care costs, we know that healthcare goes up you know at 6 percent right now. And so you’re needing to grow your portfolio because you’ve probably crunched some numbers, you know what your cost of living is now and down the road. And you know that healthcare costs are going to go up. [00:05:46] Yep, absolutely. And it’s, when I’m fully retired, I would like to stay fully retired because you know, I’m going to be drawing down on my retirement while like you said, inflation is going up, prices are going up so I need to just, I need to be able to plan for all of that. Right. [00:06:01] Okay. So most people are starting to do some type of planning in that regard. To go, these are the numbers that I need to have now and down the road and incorporating that inflation risk, that we need to overcome inflation. And in order for you to do that, unless you have a whole lot under your mattress, you need to take some element of market risk to overcome inflation. And you’re probably going to want to overcome some spending shocks that are going to happen down the road. You’re probably going to need to buy a new car, you’re going to maybe have a wedding or some educational component. You know, you’ve looked at what your goals are, and in order to accomplish those and have a probability of success, most people need to take a certain element of risk in their investment portfolios. And you need to ascertain what risk is warranted, what risk is needed, and the probability of success given given that. And I work with a lot of of my clients and as I’ve been doing this for over 23 years, it’s it’s really interesting because sometimes when people come in and we start talking about risk tolerance, that cannot be done in a vacuum. You cannot just run it quick, do a survey that a lot, you can go online and you can go, what is my risk tolerance? Well it’s a very emotional component. Well, how do you feel if the market makes a 10 percent correction? Well if it corrected, if it corrected 40 percent, how would you feel? And that you know throws out an asset allocation, will you be more comfortable with you know, 100 percent in bonds or sitting under the mattress? That may or may not work given your goals. There’s a lot of variables in looking at what kind of market risk you should take on. And I really encourage people to clarify what their financial goals are, understand the inflation components that they’re needing to incorporate into their planning, as well as that emotional piece. We find that people are more risk tolerant when the market is going up, that people are really comfortable with risk when the market is doing well and they’re making you know seven to 12 percent in their portfolio. That’s all wonderful until the market has a correction. And we know that people feel pain quite a bit more than you feel the pleasure. So the pain of your portfolio going down is much more pronounced than your portfolio, the joy you feel when your portfolio goes up. So that’s just one aspect of that quality, you know that quantitative aspect of of risk. And I think something else you mentioned was you want to know that when you turn on that spigot, or spigots, because I really encourage people to have many different buckets from which they are able to tap into based on market conditions market conditions, economic environments, what is going on in their personal lives, that you need to you know take a look at what’s going to be the best bucket to pull out of. Traditionally, we a lot of the advisory world has adhered to what we called the 4 percent rule. And that’s where we were told way back in 1994 that if you systematically withdraw about 4 percent of your retirement bucket, because at that point well it’s all coming from a large 401(k) or from an IRA, that if you only withdrew 4 percent that given any market condition and you had a balanced portfolio of 60 percent equities 40 percent bonds, that you were you know, the probability of success was pretty well set. And now there’s a lot of discussion in the advisory community that that may not be the best route to go because it took a lot of, it said that your portfolio was going to be static and that it was your asset allocation was going to just rebalance, it was going to stay that 60 percent equities, 40 percent bonds or vica, you know 60 percent bonds, 40 percent equities. It also assumed a decreasing interest rate environment, which we’re no longer in. So there are a lot of things that was done in 1994 to come up with this 4 percent rule that William Bengen put together that I don’t think are valid anymore. And I really caution people to look beyond you know, can we just withdraw 4 percent cent out of our portfolio or do we need to look at more of a liquid, fluid, you know, continuously evolving plan for withdrawals. [00:11:14] And I think there’s there’s something to be said for the unknown. I mean, that’s a huge factor. If I’m retiring at let’s say 65, and I could possibly live another 30 years, there’s so many things in there that we don’t know and we’re just thinking about this 4 percent, it can lead us down the wrong path. For instance, if you’re in a home and you are keeping your home, during that 30 years you’re going to need a roof. That’s going to be 15 to 20 thousand dollars. That doesn’t usually, isn’t accounted for in that 4 percent that you’re pulling out, that’s not what you’re pulling out. Exactly. That really changes the game. The roof is just one thing. Medical costs going up like you said, there’s so many different factors. So how do you, how do you plan specifically for those unknowns? [00:11:55] I think it’s really important that people first address that there’s no any one perfect way to do this and that it is much more of a fluid. They need to stay connected to their portfolios, portfolios. You don’t just turn on turn on the spigot. Whether you do it in your bathroom faucet or with your money and leave it running. You need to be able to look at what different buckets you are able to turn off and on your retirement income streams and best utilize them based on a variety of factors. I think it’s really, really important that people look at having a cash bucket that they can minimize the impact of that sequence risk. Which, let’s talk about sequence risk. Yeah, absolutely. When you’re in the accumulation phase of your financial life, sequence risk isn’t going to have an impact on you. A lot of people haven’t heard of it, but when you start looking at pulling money out of your portfolios and drawing down from different investment buckets, sequence risk can have a huge impact on the sustainability of your, of your portfolio. And so the sequence risk involves the order in which your investment returns occur. So for example, for the retirees that started pulling money out of their portfolios in 2008, and they had a balanced portfolio that went down you know anywhere between 20 and 30 percent and they were pulling off that 4 percent systematic withdrawal, their account didn’t have time to recover from that. Absolutely. Versus, if they would have had a bucket of cash or cash, you know money markets or liquid alternatives, even inside their IRA, that they could have tapped into when the bulk of their portfolio had just drawn down and pulled back by 20 percent, they would have been able to give it time to recover. So looking at how you want to manage that sequence risk, because if you have several years of a down market early in your withdrawal strategy, early in your retirement years, it will have a huge impact on the longevity of your portfolio. So those are just a few of the quantitative, you know market risk, inflation risk, interest rate risk, and the sequence risk, that you really want to embrace and know that you’ve got to contend with now. I, looking at what was different from your grandparents’ retirement to your retirement, one of the things that I’ve heard over the years is, well I heard my grandparents saying, you know I’ve never touched the principle don’t tap into principle. And I don’t know if that’s possible for a lot of people. And you can’t just clip bonds anymore, or live off of the dividends unless you have a pretty good chunk set aside or if you have incredibly low spending needs. [00:15:19] Yeah I don’t know anybody that can just live off the principle. Or not touch the principle, I should say. [00:15:25] Yeah so I think it’s important that people look at the mindsets that they might have heard from relatives or other people about you know, you should never do this. I’ve I’ve heard people who say well, my folks told me you know you should never have a mortgage. Well maybe in the economic season long, long ago, that was doable. And I encourage my retirees to get a mortgage paid off. But is that in actuality possible for everybody? [00:15:57] Yeah it’s good in theory, is kind of what that is. [00:15:59] It’s one of those things, that’s good in theory but most of us do carry that mortgage for a while. You know so looking at how much house is enough and looking at the risk you’re taking by having too much home after a certain point in your life. But that idea that we heard things from family members or that were firmly intent, entrenched in our mindsets, to take a look at the risk of hanging onto outdated ideas or antiquated mindsets. Whether it’s around that 4 percent rule or maybe some thoughts that people had about retirement, what retirement was supposed to look like. I think that starts getting us into the qualitative aspects of this fall season of life and some of the risks that we need to take a look at and wrestle with. On of the first one I think is the traditional mindset around retirement, I think people are taking a huge risk when we’re just saying, alright I’m just going to draw the line and at 65 I’m supposed to step over that line into a life of, fill in the blank. Yup. And we take a risk of not leaving you know, not leading a fulfilled, meaningful, purposeful life unless we really start looking at what it means to refire or rewire and to do our dollars differently in retirement. I think another one of the risks that we need to look at is longevity risk. We’re living quite a bit longer than we used to. And you know, how do we deal with longevity risk? [00:17:53] That’s I mean that’s a huge issue right now because of the fact that the population overall is getting older. And now the, I’ve heard it called the sandwich generation, the ones in the middle that have parents and they have kids or maybe even they have some grandkids, they’re having to deal with this. And how do I make sure that mom and dad are taken care of, because back in the day like you said, it’s hard to shake those old mindsets. My grandparents said you work for a company, you work for for your lifetime and they’ll take care of you. And we just know that that’s not true anymore. And so it’s the same thing with healthcare, it changes all the time. Prices go up, insurance rates go up, it’s a completely different ballgame. So the longer we live, we know we have to hedge against that. [00:18:37] Right. I think whether it’s healthcare, whether it’s tax implications, we can we can take the risk and just assuming that tax law is never going to change. Well, we know it does. Or you assume that anything is not going to change, where change is definitely one of the certain things in life. So how does that impact not only your lifestyle needs, but you know your portfolios and how you want to take money out of different portfolios. And so I think that that risk of falling into mindsets of, well I’m not even going to look at it, or the risk that you decide I’m just going to take Social Security early because it may not be there for us. And you just jump into these assumptions without really doing your homework. I think it’s really important that people, you know, take a deep breath, go what is the best way to take Social Security? What is the best way to turn on different spigots from different buckets of income streams? What concerns, what risks do I need to be addressing? And best utilize the resources I have. [00:19:48] Absolutely, and the the media, the news media plays a big part in this also because for years we’ve been hearing, healthcare needs to change, healthcare needs to change. Oh, we’re going to have free healthcare and that’s something that people want to move to, and if you bank on that, that can be a huge mistake because it hasn’t happened yet. [00:20:07] Right. Right. I think there’s also a, the big qualitative risk about how your personal relationships change when you move into that fall season of life from, oh my gosh we’re together all the time. Yeah, I could see that. As well as you know, how do you deal with the loss of a spouse or partner? And you know with looking at the best ways to take Social Security, that a lot of times people don’t incorporate the risk that they, one spouse may outlive the other and what the impact of taking Social Security early or not looking at how that distribution is going to impact a surviving spouse, whether it’s taking Social Security or taking pensions. And that plays into that longevity risk. You know, what if one of us is around until we’re 97 or longer. How do we want to maintain that liquidity, and you know the flow of financial resources to address those healthcare needs down the down the road. And I think that relationship issues are a qualitative risk that a lot of people don’t, you know they haven’t addressed or they haven’t pondered and they haven’t talked about. I encourage clients to have these conversations about what’s going to change when one of us isn’t working or how does this how does this impact our relationship, and there’s a lot of resources out there that are really helping people to, again redefine this new season of life. [00:21:53] Absolutely. I would encourage folks that are listening to to have these conversations with their parents as well. My father served in the military and retired from the military. But if he passes before my mom, she doesn’t continue to get that. And so that’s a conversation that we had to have, to see what they have in place and how we can help plan if if dad does go first. He is quite a bit older than mom, so we need to make sure that that was happening and she would be taken care of. So, I mean it’s not just amongst you know a couple, I think it’s a good family conversation to have. [00:22:25] It’s a huge family, on both to your parents or for parents to come to their adult children. Yes. You know and it’s it’s just being that open and honest and and being ok with talking about the aging process, as well as the financial implications of that aging process. Because you don’t want to set either a family member up or an adult child or a spouse to take an unwarranted risk for their financial sustainability. I think there’s also a risk in looking at you know, what identity are you creating in this next season of life. So many people are tied, you know their identity is tied to their careers and we’re starting to see a lot of research and a lot of numbers out there that look at you know what happens in retirement when people are so tied to their identities in their careers, there’s a higher incidence of alcoholism and drug abuse. There’s more incidents of divorce and suicide and an early death because they haven’t incorporated that that risk of [00:23:36] who am I going to be? How do I want to rewire, refire, recreate myself, re-identify with something that’s going to bring meaning and purpose to my life? And that to me is almost a bigger risk than looking at your asset allocation because if you don’t have the the why behind this time of life, then the numbers really don’t matter nearly as much. [00:24:02] Absolutely. I mean you’re in Colorado and somebody who’s retiring and saying oh, I’m going to be fine, I’m going to play golf. I’m pretty sure you can’t play golf year round in Colorado. It’s really hard to see a white ball under snow. So yeah, that’s a huge danger because there’s there’s that six month gap of now what are you doing and who are you. So that’s that’s huge. [00:24:24] And here again is what we have been fed by I believe our media, our culture and especially the financial services industry, to say what retirement should look like. Exactly. You’re supposed to draw this line in the sand and step over it into a life of ease. We look at the Del Webb, I mean they put together all these retirement communities that were solely based on you know, just a lifestyle of enjoyment. [00:24:53] And what we are finding, and the research is you know just providing us some firm foundation on, is that isn’t enough for people and that they need to stay engaged. They need to have a life of meaning. And I’m not saying there is purpose and there’s all sorts of ways that you can find meaning and purpose and I do not judge anybody. But I do encourage them to look at, if if you are fulfilled every day by by golfing or fly fishing, and that brings meaning to your life, then I’m going to do everything I can to give you a firm foundation financially to support you in that. But I think what’s important is asking yourselves the questions. Is, how does this make me feel when I put my head down on the pillow at the end of the day, do I feel like it was a day well spent? Very good. [00:25:47] I agree. So what else do we have as far as qualitative risks? [00:25:52] I think there’s a couple, just inherent in the aging process. I think there is the potential for again, we’re seeing just growing incidence of elder abuse and fraud. And whether that you know there’s a lot of work out there that shows that a lot of that happens within families. But I think for people again to surround themselves with trusted advisers and trusted family members and be having conversations, and to avoid that isolation danger of just removing yourself once you retire. You know there’s the go go years, the slow go years, and then the nogo years. And we see a lot of that isolation happening in the nogo years where people just lose those connections and that leaves them exposed and you know, creates that environment that you know, somebody can take advantage of them. So again, whether you’re having conversations with your your parents or your parents are having conversations with you about how they want to be protected and how they want to make sure that they’re addressing these potential concerns, I think will really help to mitigate the exposure in those areas. [00:27:16] And we’ve got to remember that you know, especially those of us that have parents that are in these years, there’s a running joke with comedians comedians for a very long time that the older folks, retired folks are constantly reading the obituary. But kind of the fact of the matter is, is that that’s kind of when the time that they are losing those friends and we have to be aware of that so we can come alongside and make sure they don’t get into that isolation phase and kind of just quiet, I’m going to stay at my home and we can help them find that fulfilling time. [00:27:46] Right. You know, I had an aunt who we watched her and this is where I saw the shift in meaning and purpose in her life went from being a very, very active volunteer to there was a point where you know her purpose during the day would be to you know hold the hand of another aging person and just be there for them. [00:28:13] And just watching that processes is beautiful, but it also just brought about the idea that it’s going to be different for everybody. [00:28:23] And how do we work together to protect our families, to protect you know, friends, and if if if a person, they may not have family, so if you are engaged with your community earlier on, you will build relationships, you will build trusted and relationships and you will build, it might not be a biological, blood family but you will build a trusted network of people that are going to you know be looking out for you and protecting you. And I see several of my clients who don’t have that that blood family, but they’ve created a very strong and communicative environment with people that they have built relationships over over time and that is serving them very well. [00:29:11] That’s a beautiful thing. Go ahead. [00:29:14] So let’s wrap this up and one of the final pieces that we want to address is just that the cognitive aging process, and this I think can be a risk and we don’t even know it’s a risk. If you’ve always been good with money, there is just the aging process kind of, it changes. And there is you know, you may be really good at your money skills, but it is the decision making capacity that starts to change over time. And I just encourage people to, the sooner the better, that as you understand how the aging process works and as you have the conversations, you may be very, very competent early on. And and you may know how to do your own investments and you may be trading on your own platforms and you may be doing this all on your own. But as you get older, things change and it changes at different levels at different times and just that awareness that that your brain changes and we need to, we need to recognize it and put safety measures in place that as we address you know lifestyle needs, you need money to sustain your lifestyle, you want to create income streams to keep you in that lifestyle for as long as you live and addresses longevity pieces and look at the legacy piece, you know how you want to set your families up not only financially but training them around what has been meaningful in your life. That as you talk about this with family, as you look at what risks that you need to embrace as you enter into your your Fall season of your life, your rewirement years, your refirement years, and just be willing to talk about it with your trusted advisers, with trusted family members that you’re going to go a long ways in addressing these these risk factors. [00:31:29] I think that’s the key takeaway. Open communication. Trusted adviser or family members that you are bringing into your situation. Just keep that, keep the lines of communication open. Danielle, do you have any other closing thoughts for us before we wrap up today? [00:31:43] Well I appreciate your time today, Aric. I encourage people that if they they want some additional monetary encouragement, they can download my manifesto at our website, daniellehoward4u.com. [00:32:00] You can learn about an eight week retirement course that is a self-study, self-timed, but very, very rich and deep and broad that we are we are putting out. And if you feel you need some personal connection, a robust look at your financial life, you can visit us wealthbydesign4u.com. [00:32:28] That’s fantastic and I encourage everybody to reach out to them because it’s it’s all about communication. Just like we spoke about today. Hey, thank you for listening to today’s podcast with Danielle Howard. If you have not subscribed to the podcast yet, please click subscribe now button below. This way when Danielle comes out with a new podcast it will show up directly on your listening device. It also makes it so much easier to share these podcasts with your friends and family. Thank you so much for listening today. For everyone at Wealth by Design, this is Aric Johnson reminding you to live your best day, every day. [00:32:57] Thank you for listening to the Wealth Done Differently Retirement podcast. Click the subscribe button below to be notified when new episodes become available. The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Wealth by Design, LLC. The content has been made available for informational and educational purposes only. The content is not intended to be a substitute for professional investing advice. Always seek the advice of your financial adviser or other qualified service provider with any questions you may have regarding your investment planning. Danielle Howard, certified financial planner, [00:33:39] is an investment adviser representative of Cambridge Investment Research Advisors, a registered investment adviser. [00:33:46] Securities offered through Cambridge Investment Research, INC., a broker dealer, member FINRA SIPC, Cambridge and Wealth by Design, LLC are not affiliated.