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Posted on June 14, 2019

Sequence of Returns Risk and How it Could Impact Your Nest Egg

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Wealth from Wisdom is a weekly radio show from Carson Wealth.

Paul West: If you retired anytime in the last 10 years, your timing was impeccable and you didn’t even know it. The wind was in your sales for your sequence of returns, and the Dow more than quadrupled since 2009 here. That’s four times, Erin, if you wanted to know what quadrupled means.

Hey, I’m Paul West. Welcome to Wealth from Wisdom. Fortunate enough here to have our Head of Financial Planning. Erin Wood welcome back to the show.

Erin Wood: Fantastic to be here again.

Paul: Yeah, glad you’ve already passed the math test for the day. That’s a simple one.

Erin: Yeah. Wow. You’ll have some zingers for me soon.

Paul: At some point. We’ll see what happens when we talk about this. I mean seriously like we don’t want, you hit the lottery, but they hit the lottery of retirement because they had the best 10 years they possibly could – at least historically in many ways. But what if you’re going to retire in the next five years or the five years after that, are you going to be as lucky?

Erin: Yeah, that’s an unknown. I always look at this. Do you remember that show that used to have the Whammies on it?

Paul: Whammies – Press Your Luck. It was on earlier this week on TV.

Erin: Okay, so perfect. That is every time I think about this and we start talking about is someone going to hit the jackpot of retiring and a good market or a bad market? That’s always what goes through my head. The No Whammy.

Paul: No Whammy – just pressure. It was fun to watch it with our family the other day. It was on national TV prime too – like eight o’clock or nine o’clock at night. No, like I don’t know if it was like the, well first of all, this whole generation of TV really since 2000s – remember that TV show called Survivor?

Erin: Yes.

Paul: What was his name? Jeff Probst was the host and they’d put all these people on an island.

Erin: They starved themselves.

Paul: They could only eat a ration of rice and all these things. Well that really started this whole transformational change.

If you think about, go look at the 80s and 90s, they were all about the sitcom Seinfeld and all these great shows, Friends and all these things. And you go back and then you go back to the seventies and you take like Dynasty and you take Love Boat.

You take all of those shows and now everything is what? American Idol, America’s Got Talent. Everything is about “look at me.” I’m a superstar and put me on TV and I blame, I don’t blame, that’s a bad word. I associate that trend with social media because people now glorify other people based on their presence.

Erin: We were just in Vegas that not too long ago, my husband and I, and he was talking about these Instagram models and I wasn’t paying attention to it, but we are sitting at the pool and there was someone down there, someone else had the camera. And completely posing randomly all over the pool and I was like, well, what is going on!

Really? Yeah. How strange is that to think about that? You’re just going to throw yourself out there on Instagram. It’s weird.

Paul: Track followers and then eventually do you get marketers and or did you get paid off of this? I don’t know. Maybe you do. Our producer, Meg, right now is saying, yes you do, she’s nodding at us. I’ll have to learn more about that at our segment break here.

But one of the things we’re going to talk with you about today is not just your retirement. If you are in the next five years or 15 years or 20 years or you’re in there now. What we want to teach people is how you make decisions related to retirement is so critically important and not important just on when, but how and what you do. On today’s show, we’re going to talk about what we call “sequence of returns risk” or how you time things out.

I’ll give you an example. Those of us who drive. Is it not the best feeling when you’re driving down the road? Oh, that light was green. Great – that next light was green. Awesome – that next light was green. Yes. How do you feel? Perfectly. I love when stop lights are timed perfectly.

What about the other side of the coin? That’s turns from red to green. It goes and you’re going, you’re speeding along. All of a sudden, boom. The next one hits red. Yeah, and you’re like, Gosh, 10 more seconds.

Erin: Yeah, like I probably only made a few feet.

Paul: Luckily downtown Omaha does a pretty good job of this, but that’s frustrating. You keep hitting roadblocks. Well, imagine that’s your retirement. You’re at a red light. Your account’s gone down. Okay. It turns green. It goes back up again and boom, it goes down again. You hit another red light.

All right. Green one block apart. Nope, down. It was down to red again. But now if you’re sitting at the red light a long period of time, all right, now you’re in a construction zone. All right? Now you have a funeral procession go by. All right? Now you have an ambulance go by and now you have all of these challenges and you’re just trying to get somewhere.

What if I told you this could be avoided? There’s a street running parallel right down the road but doesn’t have this light issue. It doesn’t have these barricades for construction. It doesn’t have funeral processions coming down in the street. What it’s got is a much more seamless way to do that.

That’s all we mean by a sequence of returns. We want to help people go down that seamless road versus that one is riddled with barricades.

So let’s talk about that a little bit today. One is timing. Like when you choose to go down the road because that road’s got to be open for you. Two, it’s got to be done in a way where you take every factor into account: your tires, how fast you’re going, how are those things?

And so one of the things we want people to look at is when they retire, but importantly, how aggressive or not are they when they retired? Erin, you help people all day long. All across the country. What do you think people should do? Why is it so dangerous on not figuring out how to actually sequence their returns?

Erin: Well, so I was making the joke about the Whammy before, but the truth is when you retire in a down market and you’re having to take the money out of the account, it’s a double whammy is what it is. So even if you’re taking a safe withdrawal rate and you’re just taking the 4 percent, well, if the market goes down 10, you don’t just have to come back 10, but the 10 plus the four plus whatever.

And so you start looking at how fast that compounds and off of $500,000, even if you’re taking a 4 percent withdrawal rate and the market’s down 10 percent over two years, it’s about 20 percent you got to come back.

So it’s double that effect when you’re in a down market. And so that’s a double whammy. When you can look at ways to have secure sources of income, you can look at ways that having some more cash reserve available and bucketing. Those are all things that we can discuss on how to make sure you’re putting yourself on that road that doesn’t have all those obstacles.

Paul: Yeah. So let’s just give you an example. I said those of you hit the lottery and you retired in the last 10 years in this upmarket. Congrats. Pat Yourself on the back. Brilliant decision. And you can take full credit for it, I’m sure.

Let’s just do something. So this is interesting. So AIG retirement CEO, Janna Greer, told CNBC that if you put two people side by side – all right, let’s do this. And they both retire. They both take money out of their account because they need to pay themselves their paycheck and their retirement.

But one retired when it was a market downturn in one did when it was an upturn. The impact is huge as she would say. I’m not Donald Trump language of huge, but different – this language of huge is. But there would be a two-thirds difference. Yeah, if you’ve got $1 million, right, you have $1 million versus $333,000. All based on when you retire.

Erin: And that’s a hard conversation, right? When you have someone who we’re talking to this year and their account’s been doing good and they say, okay, I’m going to retire at the end of this year or I’m going to retire next year. And then we find out that the market went down 10 percent.

I’ve had to have those conversations that you really should hold off. If you can hold off six months, then let’s do it. Giving yourself that time, if you have that choice, is a huge thing just because of those numbers.

Paul: Well, I mean at the end of the day, Erin, we’re going back. We’re in a 10 year bull market. The clock’s ticking somewhere. At some point, we will have a downturn. We all thought it was maybe here in the fourth quarter of 2018 – didn’t turn out to be the case.

May of 2019. Here it was a bad month. June, you know at this point in time popped back up for us, but at some point, it’s going to stay down for more than a market. And when that happens are you prepared for it? It’s interesting is because of what we’re sharing with you. I’m going to give you a trivia question here. Erin, you ready for these?

Erin: No, I’m not.

Paul: Well, I’m going to cheat. Sure. Whatever you want to go search, Google, whatever you want to do to answer it as a, well I would, I would take your answers usually faster than Jim Caldwell, so I’ll just give you that much of it here.

But so imagine this. All right, so what should you do? You’re going to retire, let’s call it June of 2020. Okay. Is it better off right now? So we’re in June of 2019 should you be in a 70 percent stock portfolio or a 30 percent stock portfolio?

Erin: Oh, see this is a trick question.

Paul: You can’t say it depends either.

Erin: I can’t say it depends?

Paul: Figure out another word.

Erin: There are lots of variables here. You have no idea how old the person is. Don’t know what their withdrawal rate’s going to be. No clue what their taxes are going to be. And we haven’t talked about what kind of account that is.

Paul: You answered that like a financial planner. I’m going to answer it like someone else here who, if I was going to give people generic advice and generic advice doesn’t always work.

But here’s the problem, Erin. Everybody listens to generic advice. They take bits and pieces. They hear from us on the radio or anything else.

Erin: Okay, so you’re going to go with the conservative way

Paul: For sure. Why?

Erin: Because then that sequence of return risk goes down.

Paul: You got it.

So I would rather opt to, you know what? I’m okay if I’m going to retire in 2020 and I have $1 million right now, I’m okay if that $1 million is $1.1 million in June of 2020. All right. But it could be.

It could be at $1.2 million if I would have been fully invested, but I am not.

Okay if a year from now we have a 25 percent decline in the market and I lost $250,000.

Erin: It goes back to that double whammy I just said a few minutes ago. Instead of being down 10 percent you got to come back 20 percent.

Paul: So it’s funny, it’s like everybody, most of you listening today, I know this is happening to a lot of you: You’re actually turning the dial the other direction. You are saying, Hey, I need to make just a little bit more so I can even have a little bit more in retirement. And all you’re doing is flying without a parachute.

Then you’re being, super dangerous for no reason. Is it really going to change your lifetime? And I know we’ve talked on this show that money doesn’t buy you happiness. And we’ve talked about the empirical evidence that if you made is like right around $93,000 or more.

Each incremental dollar doesn’t make you incrementally happy. So I bring up this 70/30 or 30/70 example because when is the last time many of you have actually rebalanced your investments or looked at it, especially as you get closer?

This could be the single most important thing you can do right now. If you want help looking at that, what we have is some advisers standing by, we can help you. (888) 419-8513. Learn how you could potentially take some risk off the table.

You’re listening to the radio right now, or our podcast. I want you to imagine this. Here we are, it’s June 2019, things are going pretty darn well. But imagine if there’s trouble with the economy. All of a sudden. Trade wars don’t turn out the way we want. The stock market finally goes south and you get older.

What happens is you can’t retire when you want to or you’re in retirement and now you’re starting to take money out of a declining account. So really what you’ve done is you just locked in a loss. By the way, there are many of you that own stocks and pick stocks on your own. What do you do? You hate selling them for loss because means you locked it in, it’s gone.

You’re never going to get this money back again. Hey, I’m Paul West here, you’re listening to Wealth from Wisdom. Erin Wood is joining me today, we’re talking about this devastating and lasting impact and sequence of what happens. Many of you out there, I’m guessing have never talked to your advisor about this.

By the way, there’s some interesting information out if you’re actually able to use the term adviser or not anymore. So let’s talk about that for a moment. I know I’ve said it before on the show and I’m going to say it again until I won’t go 100 percent. Let’s get to 99 percent of people understand.

I want them to truly understand what the difference is between a fiduciary and a broker. And about a week ago, Erin, I’m just going to tell you I was disappointed. The SEC had a great opportunity. SEC as in the Securities and Exchange Commission that is not the Southeastern Conference for all of you College World Series fans in town.

By the way, we’re here in Omaha. I have to say College World Series is one of my favorite, favorite events. I just thank all of the great people of this city for rolling out the red carpet for all these guests. And I love to go to it because I love college athletics. It’s so fun to watch the raw emotion, how much people care, how they give it their all every single day.

There’s a lot of SEC – Southeastern Conference – teams that make it. But if I go back to the SEC, the Securities and Exchange Commission, they had a chance to really turn it up a notch to do what’s better for the consumer. And they just didn’t do it. They chose not to. Erin, it’s frustrating to us.

Erin: This was something that, for part of it, you know, they’re pushing it back to the DOL to make a decision. But yeah, they kind of fluffed it the way they went about saying whether or not someone can call themselves an advisor. It’s fascinating to me that if they are truly not a fiduciary, they came back and said, well, it’s against your disclosure rules. I’m not even sure what that means. So I’m not sure how they’re going to work with that.

Paul: Yeah. I mean, if you’re a listener today, all I can tell you this is – is your person you work with, are they a broker or a fiduciary? And if you don’t know, ask them. Ask them in writing.

Actually one of our colleagues, Jamie Hopkins, when this rule came out actually, was put on a lead article on Forbes about, commented about it. So if you want more, you can Google it. The Forbes article, Carson wealth, Jamie Hopkins, and then we go into detail talking about this.

It’s interesting. People say to me, like, Paul, why do you care? Why does your firm care? I would say, if we don’t care, we have a serious problem. Why do we care? Because at the end of the day, we’re in the financial planning business. Actually had a call with the family from New York earlier this week. They said, so you’re an investment manager, right?

I said, no. I said, I’m a wealth planner. Oh, what does that mean? Investment management is just one element. It’s just one tiny element, but yet everyone thinks that their advisor does everything when the reality is most advisers, and I don’t even like the term adviser, it should be agent, broker, agent – they don’t, they don’t do anything else. Or if they say they do, they don’t really do it.

Case in point this family made a comment to me that, hey, what you’re covering on your comprehensive services, our person never offered to us. Know what actually they probably did five years ago, but we declined it, but they’ve never re-offered it since.

Erin: Oh, that’s really sad.

Paul: It is sad because I mean, could you imagine that? Let’s look at like your cable TV subscription or your phone bill subscription. How frequently do you get asked to upgrade or change?

Erin: All the time. But I’m even thinking about it on the cars. I mean, we talk about cars a lot and you go in and it’s like you need an oil change and you need a new air filter and we need to rotate the tires. And you’re like, Eh, I don’t need to do all those things today.

Like what do I really need to do? But the next time you come in, you need an oil change, you need an air filter and we’re going to rotate the tires. Like, even the car industry keeps bringing it up. Now they might bring up a few things you don’t need, but the fact in five years they offered once to look at something other than investments and never did again. That’s a big loss.

Paul: Yeah. Well, and then I think if you work with a broker versus a fiduciary, oh, you really need to buy life insurance. Oh, next time. Oh, you really need to buy life insurance.

So if they’re a broker, they don’t all have to do is determine can you buy this? Not should you can versus should. Where I would tell you, and by the way, they may try to coerce you to say you should buy it, but if you worked with the fiduciary, they have to tell you that it is in your best interest and not in the fiduciary’s best interest.

Erin: Not just at the point of purchase. Let’s add on to the complexity of these new laws rolling out. So now we have brokers and we have the new “best interest” rules that are being looked at right now. And then a fiduciary. The best interest rules now are saying they have to look at what’s in your best interest but only during that transaction.

Paul: Yeah. And what does that mean? That now also basically means just you have to read the prospectus to truly understand all the fine print. How many people do that? I mean, like right now if you’re going to go download an app, whatever app it is – I like golf. So guess what’s happening this weekend?

The US Open. So if there’s US Open app, so when you download the app or do you have to do I agree to the Terms and Conditions, right?

Erin: Have you ever read him?

Paul: No! Does anybody read them? Anytime you upgrade your Apple device, do you read what those things say now? Nobody does, but that’s all you’re held accountable to if you work with a broker is that you read those – you’re never going to read them.

That’s complete and utter – I’m not saying anything else because I don’t want to be fined. Enough of my soapbox there, but that’s our job here in Wealth from Wisdom is to help educate our listeners.

What that means is all you’d need to do, send an email to your advisor/broker/fiduciary, whatever they are, and just ask them the following question. Are you a fiduciary? If they are not, by the way, they could be talented, they could be good, but at the end of the day, they have a conflict of interest.

Just telling you at some point that’s going to happen. They may deny it and they may have a good explanation, but it’s pretty simple. And we were talking about this earlier, so I’m going to talk about Edward Jones here for a second because this is really interesting to me. Edward Jones has come out very recently this week about how many of their advisors have the CFP.

Erin: Oh, that’s gotta be a small number.

Paul: It’s a pretty small number. It’s enough though. And if I remember right, it’s several thousand people. But Edward Jones is, is potentially considering not allowing their CFP people to use the CFP designation anymore.

Erin: Well, I can see that because now you’re looking at two different standards. If Edward Jones is following the best interest standard or a broker standard. And then you have CFP – who are required to follow a fiduciary standard. According to the CFP board, they don’t care who you work for, what kind of employer. You have to always follow that fiduciary standard.

So it puts Edward Jones in a position where they either have to let the CFPs operate in a different way than they as a company are agreeing to. Or they have to tell him not to use the designation. It’s a tough place for the company, but it shouldn’t be.

Paul: Yeah, it’s a tough place for the company, but all that tells me about the company is what’s more important. So here these, it’s almost 2000 is what the articles quoting here on www.financialplanning.com. So you’ve got all those 2000 people who have spent their time and you and I both know we’ve both taken the exam and it’s not like passing the simple Series Seven exam.

Erin: Honest question. If you worked there and they told you that you couldn’t use your CFP, would you leave?

Paul: For sure I would.

Erin: Absolutely. I worked way too much time and effort into that.

Paul: Why did I do it? I did it because I wanted to be better for the clients. So I’d spent my own time. By the way, you can ask my family how much time did I spend at night, in the morning, on weekends, studying to get better for the benefit of my clients and but the benefit of my own personal career, but it was done for the benefit of our clients.

Now suddenly I can’t use it because the standard is higher than what my company has. That’s a huge, huge red flag. And you know what? You may not like me saying that, but it’s the truth.

That’s our job here on Wealth from Wisdom – you need to be educated on these things. Like if your employer says what your people have done is better than what the standard they want to hold you to, shouldn’t you be saying, holy cow, that is so cool that our employees are deciding to get better for our clients. Maybe we need to raise our entire game for our organization.

Yeah, versus the opposite.

Erin: I absolutely agree with that.

Paul: I mean, think about your employer wherever you’re working right now. What if you came up with a really cool idea that benefited your clients and it was truly in the best interest of them, but your company said, no, we don’t want to do that because we don’t want to get better.

We don’t want our clients to get better. Right. I mean, that’s all I hear when I read this article is you’re sacrificing corporate decisions and probably corporate profits as a huge part of it there versus doing what’s best for clients. I guess this is all about evolving, right?

No one knew they needed an iPhone many years ago. No one knew they needed Netflix. How many of us 10 years ago knew we needed Amazon Prime?

Erin: Oh, I can’t even imagine my life without it.

Paul: Yeah. Well, I just saw again, you know, look at it across the country, how many distribution centers in cities? I saw, we just got one here in Omaha. Yeah, right by your house actually, Erin. It’s creating jobs. It’s creating opportunities and people don’t take the time to look at that.

I’ll give you an example. A fiduciary is also going to remind you when is the last time you got a will updated or your trust and got those things figured out. If you’re not sure what questions to ask and you want, shoot us an email and we’ll send you what questions.

We actually have 10 questions to ask your advisor. If you’d like that from us, you can email info@carsonwealth.com or if you’d like you can call (888) 419-8513.

Hey, show me someone who got crushed in the 2008 financial crisis and I’ll show you someone who didn’t have a properly set up diversified portfolio. What do you really mean by that, right?

Hey, we’re on Wealth from Wisdom, I’m Paul West. Erin Wood is my co-host today. Erin, we’re talking about mistakes people make before going into retirement. Once you’re in retirement. I’m telling you, these are devastating. These are long-term lasting impacts.

I think about this. Most people work, let’s just call it 40 plus years of their life. What do you do? You clock in, you clock out, you work hard, you run hard. And You look forward to Friday night. Then You can have that cold beer, the glass of wine, the time with your family, yard work in the garden, all those things. Whatever you enjoy. Was sharing all the things you enjoy, there Erin.

Erin: Sure that works.

Paul: Minus the yard work.

Erin: I like yard work.

Paul: Okay. But you work so darn hard yet people don’t take the time to get to that culmination point to make sure the decision they made to retire, why?

There are two numbers to focus on: the age you retire and the total amount of assets you have when you retire. And people get so fixated. I’m gonna retire at age 65. Oh yes, I’m gonna retire at age 62, 67 for me, 63 for me, 66. I mean like everybody has picked a number. But if that is your age, which is an important variable.

When I asked you in the earlier segment and of course you went down the segment of when I said, hey is a 70/30 allocation better than 30/70. And you did what most financial planners do you then ask me 10 questions! Which is good, but that’s why you’re good, Erin.

That’s what most people need to figure out: How do I protect myself? Here’s an example I give you. I’m driving from Omaha to Denver and what does that take on average eight hours?

Erin: Sounds about right.

Paul: All right. So I’m driving and I get bored. I start driving faster and I keep going more than 75 and I’m up to 80, then I’m up to 85. Hopefully, I’m not going above 90. All right. But all of a sudden I’m scheduled to get there in seven hours and 35 minutes.

Okay. But I didn’t need to be there until eight hours. There’s nothing I can even do. I can’t check into my hotel room. I’m going to sit idle. So that’s what happens with retirement is like, but I’m going that fast and I’m 20 minutes away.

And what happens? I get pulled over because I was going 85. And now I get a ticket. So that cost me money. And by the way, it took forever. So now I’m late. So if I advanced quickly and I knew I was going to make it there in eight hours, why didn’t I slow down? I could have, but I didn’t.

Why? Because many of us have this insatiable appetite to make as much as we can or to get somewhere as fast as we darn can. But often there’s no darn reason why.

The same applies to your retirement. You want to get there. You’ve worked so hard and now you’ve sped, you’ve been driving 85 in a 75, you’re 401(k) has done awesome. It’s just killed it the last 10 years. You’re doing great. You better slow down for a second. You better re-look at what you’re doing and how you approach it.

So let’s talk about this. One of the things that we see, one of the biggest errors people make is they don’t have the proper asset allocation in place. And so if you don’t, we use the word risk and I often think risk could be a four letter bad word. I know it’s a four letter word.

By the way. I did watch that Scripp Spelling Bee about a month ago. It was eight children that all tied because they ran out of words. I didn’t know the dictionary ran out of words, but it does.

But what we see is, and I really can see this right now, is risk-taking by people is more than they think. And I know you’re listening to me and you’re like, oh sure, Paul, that’s not me. I’m going to challenge you to this.

So we run something called a digital allocation tool. And what this does is this takes emotion and opinion out of the equation. It plugs in your holdings, your positions, and tells you how much upside risk you’re taking and downside risk. I say this to people all the time here on the radio I do in person, when I do speaking engagements, when I’m out in the community. Until you actually go through it, is when you have that Aha moment.

Erin: Oh, I completely agree with that.

Paul: Yeah.

Erin: You just don’t see it the same way until you look at it and go, oh, that’s what all of these individual holdings or mutual funds or ETFs or stocks or whatever, that’s what they’re doing collectively together.

You don’t see it that way. It’s very clean. It’s one of the nicest things about it is the pictures are there. And you’ve heard me say I much prefer pitchers. And so the pictures there and it says, here’s your top side, here’s your downside.

What if we go through that negative 20 percent market? What does it do to you? It’s fantastic to be able to see it in such a clear and clean way.

Paul: Yeah. And so, I mean, here’s the example, most people were like, oh my blood pressure’s fine. Right. So what are you gonna do? You’re gonna go to, by the way, I don’t even know this or not.

I remember it as a kid growing up into like if you went to Walgreens or CVS, do they still have those little places? They still have a sitting area where you actually put your arm in there and it’ll take your blood pressure on the spot.

Erin: I know that some of them still have them because when I was pregnant with my daughter, I had high blood pressure and occasionally I would have to go do that.

Paul: Because you wanted her to check it just for yourself?

Erin: No, they had me checking it frequently. Of course, my husband’s a paramedic so he would check it at home. But during the day I would have to go check it frequently.

Paul: Ah, I feel like every time I have, if I did see it, it was always the little kids in there because they thought it was fun.

How often do you actually check the risk? So you’re checking your risk with blood pressure is, is it pumping too fast? Right. Well, too slow and you pass out, that’s a problem as well. Okay. So you’re checking to see if it’s off is what you’re checking. Why does no one check to see if the risk is off?

So I don’t know. It’s an interesting observation and I will tell you, and you and I talk about this all the time, we’re big behavioral finance investment believers. That people follow. One of the things is the herd bias – they listen to what other people do.

Another thing they do is I call it the blinders bias. If they don’t want to know something and they just put their blinders on and so they just, they avoid it completely. You probably have a better term for that.

Erin: No avoidance I would agree with. I also think there’s one more piece to this though. It’s the fear of not wanting to look stupid. It’s that I don’t really understand and so I’m not going to ask. And that to me is one of the worst ones because everyone has all these holdings and they’re not really sure what they are.

So the fear of looking like you don’t know is something that causes a lot of people to not even bring it up. When you look at the risk – I think it’s really important for people understand figuring out risk and figuring out what you’re actually going to hold are two different things.

They’re very different, and people put them together. First, you figure out the risk and then inside of there, it’s our job to help you figure out what actually all those holdings are.

Paul: Yeah. End of the day is hey, from an ego comparison, if you made 7 percent versus 7.5 percent, yes, everybody wants to make the most they can, but for taking along the right amount of risk. I bring this up all the time because risk accounts for what you need for income for how long you’re living your life, your financial goals

But you as an investor you need to take enough risk so that way you can achieve those but you can’t take too much risk. Again, my analogy is: sure it’s fun to get your car up to 120 miles per hour, but there’s only so long you can drive like that before you’re going to crash or you’re going to get pulled over or lose your license, lose your car. All of those things that go with it.

Erin: Have you ever been to a horse track?

Paul: I have, yes.

Erin: I always like to think of this as the workhorse versus racehorse. Like it’s fun to go to the racehorse said and put a couple dollars down and for two minutes it’s exciting and it’s fun. But you really need the majority with that workhorse. You need the person who’s out there plowing the fields and doing the actual work.

And that’s much simpler in my mind at least to visualize that it’s not necessarily just risk, it’s how do you divide up that risk into what’s real terms.

Paul: Yeah, and I think for a lot of people it’s like how do, how do you divvy that up and how do you make the most sense of it? So, close Your eyes right now.

Unless you’re driving while listening to us – please do not close your eyes. I did not instruct you to do that. When was the last time you actually updated or rebalanced, your investments to look to reassess your risk? You know, like, Oh Paul, I don’t need to do that. Well, fine then I’m going to tell you the people that do are further ahead.

Why? Because they get a safety check. Right? Why do you take your car and get an oil change? Like you said earlier, you want to get a safety check and I’m going to tell you all day long, what does it hurt you? What does it hurt you to do? A safety check. At a minimum, it confirms you’re in the right place and maximum you fix a problem you and avoid.

If you want one of those safety checks from us. Looking at your digital location, (888) 419-8513 We’d happy to give it to you. It’s complimentary. It’s a way to have a safety check on your portfolio.

Hey, welcome back to Wealth from Wisdom. Paul West joined by Erin Wood here today. Hey, Erin is people are listening to us. I’m going to tell him the three most important words you can know in retirement. You ready?

Erin: Yes.

Paul: All right. Income.

Erin: Got It.

Paul: Income! Income!

Erin: Location, location, location!

Paul: You got it. Thanks for listening. Right? If you don’t have a strategy to generate your income, then what you’re doing is you’re running risk that you’re going to go through your entire life savings too soon.

What I want to talk to you about today is many people don’t think about income in a way that makes sense because here’s how they think about it. Oh, well, I’m going to keep scraping a little bit out of my accounts and I’m going to do that and I’m going to make as much money as I can in my accounts to pay for income.

Or as I said, I’m going to go get some really cool dividend stocks and I’m going to go buy some real estate income and then that’s going to pay for everything.

Erin: Or can I do the third one? That really is always bothered me.

Paul: Sure.

Erin: The, “I’m going to keep everything in cash because it’s so safe.” That, that one is always kind of stuck me in the chest a little bit.

Paul: By the way, if you’re not getting over 2 percent for your cash right now, call us because you’re losing out, right? I’m just going to be with here sitting at a financial institution and you’re getting less than that.

By the way, if you work at a financial institution, I’m sorry, but money market rates have come up and investors need to know that. So I’m just sharing that with you: Firms like ours and plenty of others can help investors all day long make more money on their cash.

But we’ve been talking about having the right strategy in place. And one of the areas that we’re going to help you with is, you know, next is diversified income. So you can’t have all your eggs in one basket, but you have to be smart about how you think about it.

According to the Motley Fool, 42 percent of Americans are at risk of going broke in retirement. Why? Because they put all their eggs in one basket. They have one income plan. And that’s it. I think you see this all the time on, you know, people not diversifying and making huge mistakes.

Erin: Oh, absolutely. There are multiple facets of this too. It’s the person who comes in and they worked for the same company for many years and they have all of their stock in company stock or a very large portion. All in one company.

We see the people who do exactly what I said, come in and they have been cash-frozen for years and missed out on all of the last 10 years. We see the individuals who are too heavy in stock or they don’t have a dividend focus or the ones of course, who, I’m just going to take my social security today and not look at the big picture.

That social security one, we say it all time, that’s an 8 percent guaranteed return for delaying. And so if you can develop the portfolio to create the income stream and still get that 8 percentm that that’s a no-brainer.

Paul: Yeah. By the way. So we had a caller on the show a couple of weeks ago. I’m going to share, always the good and the bad, right? So the caller on the show had some questions about social security. We get them all the time.

Give us a call again, if you want the number (888) 419-8513. So, the caller’s question – and again, I’m going to give you the generic answer. You as the lead financial planner can then get to the detailed answer, Erin.

But to help our listeners, because the show is only a certain amount of time.

Erin: Oh, you mean I can’t just talk for hours?

Paul: Not in that level of detail because we want to retain our listeners! But the caller said: Okay, Paul, I want to do the following.

I’m going to take social security at age 62 and I’m going to invest it. Yeah. Okay. I said all right, great. What are you going to invest it in? I don’t know. I’m going to pick a bunch of stocks and stuff. Ah, yeah. Okay.

So are you sure? And I use the word assured because I hate the word guaranteed. Are you assured? Are you assured that you’re going to make 8 percent or more a year? What do you think the answer was?

No, I don’t know. I hope so. It should. Okay. What are you gonna invest in? Stocks? I said, all right, well did you know the following that stocks as the history have actually earned just slightly under 8 percent per year. So it meaning you’ve got to have good years and bad years.

By the way, I’ve shared this before, but it’s approximately two out of three years are positive years and one year is a down year. Okay. So, yeah, you got more than a 50/50 chance of having a good year. But that doesn’t mean it’s an 8 percent year. No. So if you have assuredness that you can get 8 percent until your full retirement age, or FRA is the acronym the Social Security Administration uses, why in the world would you do that?

Erin: You know, we get this a lot and this is one of those where I think it’s shortsightedness. So many of the people we talk to are of the mindset “I’m going to get my money because I want my money.”

And yes, there’s been a lot of media press that, you know, there are issues with social security. But all those can be overcome and that I’m going to get my money is really, they’re betting on they’re going to die early.

And that to me is a fascinating thing is nobody, if I said to Paul, when are you going to die? Everyone you know is, Oh, I’m gonna live a long, healthy and happy life until it comes to social security. And then they bet on taking their money early.

Paul: Yeah, a crazy, huh? I mean, just amazing. Hey Erin, we’re lucky, we got the College World Series in town here in Omaha this week. Actually, today is the game if you’re listening to us live today. But we’ll be here for the next 10 days.

I think about baseball is that they have to make decisions all day long. Do I take a pitch or not? Should I swing? Steal a base or do I not? Okay. The ball is hit. Do I run or do I not? But aren’t they really doing the same thing? Taking a calculated odds in their head.

Think of that movie called Moneyball, right? Really. I think Billy Bean was the name of the gentleman, for the Oakland A’s.

Erin: It’s all the RBI.

Paul: Well, on-base percentage I think was the big thing.

Erin: Okay. Did I mess that up?

Paul: You might’ve made – it’s about getting a person on the base. Yes. On-base percentage. OBP.

Erin: Yeah, I’m not a sports person.

Paul: All right, I’ll keep those analogies to a minimum for you. But here they are. I mean, it’s transformed so it’s no different than your retirement. You’ve got to make the right calculated decisions on risk and how to figure that out.

I mean, there are eight teams that are here. They’re from across the country, they had to win a regional. So there were four teams at the regional. They had to be the best team for those games for the regional, and then they had to be the best team on the best two-out-of-three games series in a super regional and now there’s eight of them.

And there’s only one survivor. So a lot of game. Yeah, you want to win, right? And you want to win to get there, but you’ve got to make calculated decisions. Okay, I’m losing 10 to nothing and I’m in the eighth inning of the game. Do I put my best pitcher on the mound? How do I approach that? What do I do?

And there’s a lot of the decisions that come up. By the way, you’re critiqued afterward on what happens. But when you make the right decisions, you’re lauded. And what happens, the best managers continue on or they have the best winning records.

I know the Florida State manager here, you know, has had an amazing career. Well, why do you think people like Carson and other successful fiduciary financial planning firms are nationally ranked on Barron’s and Forbes and those other places? Because we make those right decisions for our families and over and over again.

It’s not a guessing game. It’s not what people think. I’ll share his one last quick item with our listeners today. If your broker says, hey, let’s dollar-cost average everything in. Paul, I’m going to move my money to you, let’s dollar-cost average in. You know what my answer to them is? Runaway.

Why? That to me means they don’t have conviction and confidence in their actual process for you. If they’ve really set up the right answer, right financial plan and allocated you correctly, then they should want to move forward with it, day one. Not trying to say, oh, well let’s hope this works over the next six months.

So if somebody made that decision for you, give me a call. (888) 419-8513, we’ll help you think through what’s the right decision.

Hey Erin, it’s been fun talking with you today. I’ll avoid baseball analogies in the future. For those of you in Omaha, we hope you have a wonderful College World Series. For those of you as a podcast, we thank you very much and we’ll talk to you soon on Wealth from Wisdom.

Announcer: Okay. And here’s the legal Mumbo jumbo. The opinions voiced and wealth from wisdom with Rod Carson or for general information only, and are not intended to provide specific advice or recommendations for any individual to determine what is appropriate for you. Consult a qualified professional. All indices are unmanaged and may not be invested into directly. Investing involves risk, including possible loss of principle. No strategy assures success or protects from loss. Past performance is no guarantee of future results. Advisory services offered through CWM, LLC, an SEC registered investment advisor.

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