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On-Demand: Wealth Management Economic Impact Webinar Series | Market Volatility and Its Impact on Your Retirement

Feb 16, 2023

Join us to learn actionable strategies that can be especially helpful in volatile times.

Wealth Management Economic Impact Webinar Series


Marc Scudillo:Thank you, Astrid. I appreciate that. And today, we're going to be discussing not only the vitality of portfolios but the volatility that happens with portfolios. We actually look at a lot of things and we're going to cover a lot.

I have joining with me, Brian Thorkelson, Director here at EisnerAmper as well, a member of our investment committee at EisnerAmper Wealth Management, and we're going to discuss how the markets fair today and what that really means, and strategies you could utilize when you're heading into or into your retirement phase.

As we look to help our clients, it's key for us to really help our clients navigate through all of the risks and opportunities, and achieving what's most important to them for a fulfilling financial life. And we do this in a way through education. We're big proponents of educating our clients and educating the marketplace so that they can make smart decisions along the way, having that confidence in their direction that they're taking when it comes to their plan.

And that's what today is all about. And we have a series of educational sessions and seminars that we're going to be providing.

What I would like to do is just go over the agenda, so you understand that we're going to be covering not only the market update, Brian will be touching base on the market update, what it means to be planning for the right path of success, what could be taken into consideration to reduce the volatility with your portfolios, and then providing choices in retirement.

How do you take retirement income? What are the different types of retirement income that can be generated? And then, how do we pull it all together by really focusing on your goals as a priority?

So what I will do is turn that over to Brian, to start discussing a little bit more about our market update. Go ahead, Brian.

Brian Thorkelson:Thanks, Marc. Appreciate it. Good morning, or afternoon, to everyone, depending on what part of the country you're in. I'm here in Minneapolis, where the high today right now is running about 16 degrees, so keep that in mind if I get a little stuttery with my language.

Market update, from a standpoint of what's going on, and we're looking forward, but definitely starts with inflation. Inflation came out of the pandemic and really coming into last year, 2022, when inflation was really no longer considered transitory. The question was, okay, when will inflation peak? That's changed this year. Now, it's when will and where will inflation settle? It's really interesting to talk today about this.

This week's been a very important week from inflation reports. The PPI, the Producer Price Index, came up today much stronger than expected. The CPI came in not necessarily stronger than expected, but still elevated more than the Fed would like to see. And I think the issue becomes, where does inflation stop, at least pause, and is it anywhere close to the 2% that the Fed is looking for? As it will really going to affect how portfolios do, and valuations in general.

Talking about recession, the market expects that the economy will go into a recession, probably sometime in the second or third quarter. But it's expected to be shallow, probably down six-tenths in the second quarter, and down two-tenths in the third quarter. After then, starting to regain up nine-tenths in the fourth quarter. And one of the issues at least from calling a recession will be, as employment continues to run hot, it's hard to have a recession when everybody's fully-employed.

Central Bank policy continues to be very hawkish. Current rates moved up this January, or February, excuse me, to four and a half to four and three quarters percent. The Fed looks to tighten at least two more times, with a 25 basis point hike, two of those coming through and then holding really through the end of '23.

So most recently coming up here, the debt limit, we've been spending a lot of money in the last couple of years, in terms of fighting the pandemic and keeping people employed. And so, debt has become an issue again and we've reached our debt limit. It was reached on January 19th. Isn't an issue for this moment, looks to be somewhat of a June to July timeframe, where we'll be talking a lot more about it and then expect the Congress to get fairly interested in using that as a political lever. Really, the most tenuous time for the debt limit that we've seen since 2011.

Lastly, chatting about geopolitical uncertainty, Russia, Ukraine, China, Taiwan, and balloons floating over the US with increasing tensions with China. All will continue to keep investors on edge and continue to create volatility in the market.

Let's see here. Move forward.

Astrid Garcia:Polling Question #2.

Brian Thorkelson:Marc, I think what's interesting, as we're letting people respond to this, is the trend that we've been seeing with investors. There's an old adage, "Don't fight the Fed." Fed keeps raising rates and it's almost uncanny, a day before the announcement from Fed rate adjustment takes place, the market rallies hard thinking that it's not going to happen. And then, invariably the Fed had come out and really squashed hopes of inflation being, or at least Fed tightening, being over.

Very interesting, I will say, though last announcement, I thought the Fed was a little bit dovish and we've seen the markets rally. I think based on that, it'll be interesting now with CPI and PPI data, that has just came out this week, as well as retail sales coming in much better than expected. It's hard to see how this economy looks to be in a recession in a couple quarters here. So any thoughts on what you think, Marc?

Marc Scudillo:Yeah. And so, it goes to show that even though the market has a specific viewpoint with an assumption going into the Fed's conversation and interest rate hike, that there's no certainty. And that's the point of making sure that, when you're looking at things and looking at your retirement, that there will be inevitability of being faced with uncertainty as you're going through planning.

And that just proves the point, how do you strategize and structure your plan and retirement? And really, both of those scenarios, where it could have gone up if the rate hike didn't take place, and you saw the market go down because there was a rate hike, how do you present and how do you have success in either scenario?

Brian Thorkelson:Exactly. Exactly. We'll talk a little bit more about that as we go forward. Are we all done with the poll?

Brian Thorkelson:Okay.

Brian Thorkelson:Ah, interesting. So, neutral. I would've expected it to be a little bit more pessimistic, but I'm happy to see much more people neutral. Although, kind of fits with where the market is and feeling like there's a better outlook going forward.

We'll chat about stocks, bonds, and alternatives here just briefly, and touch on our thoughts on what's going on there. But we're in a classic bear market. It's much different than what happened in 2020. During the pandemic, market was down in five weeks and recovered very rapidly. This is a classic bear market, that we're seeing much longer down trends than rallies, and buying the dip doesn't work anymore. These rallies, these markets wear you out and they can be very, very frustrating.

Valuations have changed dramatically from the beginning of the year coming into, or I should say, from 2021 into '22, markets were trading at, the S&P was 21 times. As we got near the bottom of the market, that multiple had fallen to 15 times.

It really has been a reevaluation or a recalibration of asset values due to rising interest rates. We had rates close to zero in a market environment we hadn't seen before, and that's why we have seen returns in '21, '22 that have been fairly foreign, especially when both markets, stocks and bonds, are down.

Earnings growth looks to be flat 2023 kind of, and if we see a recession, more than likely we'll see 2023 earnings fall. But '24 is expected to pick up, looking at probably about 12% earnings growth, which should be a good sign for the market.

Couple of interesting things that are going on behind the scenes. Number one, US stocks which have dominated performance for a decade and a half, 15 years, it's starting to turn. We may see, part of that is the dollar. Part of that is the economic differences and you've got a war going on with Ukraine. If that war were to suddenly end for whatever reason, you could see those international stocks actually move fairly aggressively.

Now, the growth and value side, which has been growth stocks, why would you ever buy value that's changed and changed dramatically? Really, starting in '21, we've seen a move on the value side and then a recovery of growth. But now, value really has broken the trend that growth set for the last 15 years. And it's really not a performance, really not a surprise, is the word I was looking for. In that markets, low interest rates like that, it's when growth stocks outperformed and not a surprise.

Looking at the outlook for '23 into '24, I expect to see somewhat of a trading range, especially into the mid-summer when we see markets start to get a better handle on what's taking place. And maybe we see returns high, or I should say, mid to high single digits. But hopefully, we see markets on the positive.

One note to make is we haven't seen a recession, in terms of actual slow down in economic growth, and historically, stock markets don't bottom before recession. So, wouldn't be surprised to see the market backtrack here a bit after this rally, and some of the data that we've seen recently this week may put that on the table.

Moving to the bonds side, worst bond market, excuse me, for the Barclays Aggregate in its 50-year history. Never seen markets, as far as bond prices, that bad. But then again, we've never seen bond prices in markets and interest rates, excuse me, at less than 50 basis points. And really, what we're going through I believe is more normalization of interest rates in general.

If you look historically back, and you take out the '70s and '80s of very high interest rate periods, the average yield for the 10-year treasury really has run about four and a half to 5%. And that's kind of where we're heading. We pushed through 4% earlier last year, and I believe we may see those yields again. Don't expect to see a dramatic reduction of interest rates going forward.

So, one of the things to keep in mind, this puts us in a great spot to be able to generate income, that we haven't been able to do for clients in a very long time. Locking in 5%, 6%, plus corporate bond portfolios for seven to 10 years, really takes care of a lot of income problems that our clients face.

One note to make, short-term rates are higher right now. They look very appealing. But one thing to keep in mind is when that short-term rate is over, and it's a 18 to 24 month maturity, we don't know what rates are going to be at that time. So, one suggestion might be to somewhat barbell short term and longer term rates. But I think investors should start to dip their toe into intermediate term bonds, especially higher quality investment-grade.

And I say that because as the economy starts to teeters around, whereas the economy starts to potentially move towards recession, credit-based strategies like high yield bank loans and so on will come under pressure. That's been a safe haven and an area of yield for investors. So, something that we've been looking at pulling back on and something that you should also think about as well.

So, let me go forward here. I wanted to bring up a slide. What I'm showing you here, and I think it's very interesting and very important is, the thesis of this slide is the blue line is the Barclays Aggregate bond current yield, current yield close to 5%.

Number one, we haven't seen that type of rate since 2008. Number two, the fact that it's there gives the potential, and a very strong potential, 97% correlation, that rates from bonds should generate 5% annualized returns for the next five years. That again, is more and more credibility to the bond side of our portfolios.

So, outlook for bonds continue to, I think, rates stay high until the Fed pauses and we get a better handle. And the market will keep coming after the Fed and they want the rates to drop, but I think the Fed's going to stay strong.

Lastly, if the yield curve probably starts to normalize if we truly do go through a recession, where we see that shorten the curve come down, and that would obviously be caused somewhat by the Fed as well, but that's kind of where I think bonds will do this year.

The last side is Alternatives. Adding Alternatives to the portfolio in 2022 was, and it being in '21, really helped portfolio returns. Where, number one, commodities were positive, and I think, the first half of the year were up 30 some percent. Anything up last year was a huge positive.

Commodities may struggle a bit going forward, given again recession potential. But there's still a lot of deficits that are out there for our commodity stockpiles. Real estate, last year, public real estate was hit very hard. Private real estate, because they value their properties differently, stayed pretty consistent.

This year, we may see REITs bring back some of those returns. And some of the private areas of the market start to get some valuation corrections that take place, because the appraisals are starting to happen. Couple of last places here, Market Hedge, these are all areas, market neutral, event-driven strategies in the alternative space.

In a market where we don't think stocks are going to do a huge performance number, it makes sense to possibly go into some of these other areas that have the ability to generate returns, whether the market's up or down.

Marc Scudillo:So Brian, as you're bringing that up, and thinking about the underlying investments and some of the volatility that's associated with the stock market, and then we're seeing bonds projected to pay us more income now, which they are, how does that really lay into the concept of how we're going to generate a successful retirement?

And so, that means different things to different people. And there's certain assumptions that take place along the way there. And we are often asked, what is a safe assumption that we should be utilizing? Whether it be the various different types of asset mixes that we should have, and asset allocations, what's the years? If you look at these numbers, what I'm going to actually do is I'm going to explain a little bit of what we've heard and what we've seen throughout the years, as we're going through this next polling question. So Astrid, if you want to take over from here.

Astrid Garcia:Polling Question #3.                

Marc Scudillo:Great. So as you're thinking about that and answering that question, which I'm curious how that translates to everyone out there, through the years we often heard of things, a 4% is a safe rate of distribution that you could take from your portfolio. And we should be planning for the next 20, 25, 30 years maybe. We should be becoming more conservative when we hit age 65 automatically.

These assumptions have been stressed through the years, especially with such a low interest rate environment, some of the market volatility that we've experienced through the years. Is 4% the right rate of distribution? Is 25 years the right assumed length of a financial plan success, that you should be accounting on?

Actually, the Financial Planning Association and many periodicals are saying that we should start planning till age 100. And actually, you see that most when you look at insurances and insurance companies. They have their insurance products now going out to age 120 plus.

So, there's lots of things that need to be considered as part of the financial plan, and what does it mean to have a successful retirement. Using rule of thumb does not necessarily mean that that translate properly to any one particular individual.

Marc Scudillo:Right. So interesting. So, thank you. So building a solid long-term financial strategy was overwhelmingly the most important facet for the viewers here. So, ties in right with what you're seeing as this next... What the financial priorities are for individuals. So, thank you for answering that because having certain amounts of planning in place, whether it be having a guaranteed income stream in place, a certain amount of savings for a particular goal, having a long-term financial strategy, protecting the family along the way and keeping up with your monthly expenses, you can see that. For the point in time today, that solid long-term strategy, for many of us, will help answer those other questions, those other goals and priorities that people have.

What is reality is that, for many of us, we look at our finances as segments. We need to look at it and create a organization around our financial plan. Clean out our financial junk drawer of all of our stuff. We receive our statements and we put our statements into a drawer, and we keep them there. And how do they coordinate with one another? What do those statements mean? What do the holdings mean? How does that translate into our actual wealth plan?

It's important to keep in mind that there's only certain things that we could actually control when developing your financial plan. And when you're creating your wealth, you have the ability to control your spending, right? That is in our control. We also have the control of how much money we're going to save for a particular goal, or the timing of that goal along the way, and the risks that we're willing to take for achieving that goal and how much legacy we wish to leave behind. These are elements that are actually in our control. Everything else, we could influence but we can't control. I wish we could control the market, but we can't.

And so with that said, then how do you design a plan knowing that we have certain elements that are our control and certain elements for retirement that are not in our control? So, we often go to different tools that are out there in the marketplace. And it's important to understand that when you're using different tools and different assumptions along the way, how does that play into a financial plan's output?

There's a difference between creating a linear financial plan versus a dynamic financial plan. And I thought it would be important to understand the differences between those two.

So if we look at a linear assumption of a rate of return, an example of this would be, well, if we had an individual that was heading into retirement that had a nice balance that they're starting out with, and they're taking out a distribution, and the portfolio is averaging a 6% average rate of return. Well, through age 89, they have a successful plan, there's still a balance at the end of age 89. Well, that's based upon an average rate of return, for example, of 6%. Simplifying the linear concept there.

But is that the right assumption to make, 6%? How often does your portfolio actually do 6%? The reality is that, in a more dynamic approach, you're taking into consideration the volatilities that actually occur along the way. We may average a 6% rate of return in a more balanced conservative type portfolio strategy, but you'll either do higher than 6% or less than 6%, till you get to an average of 6%. And that could have a significant impact to your success.

And so by measuring, what this is illustrating to you on the screen here is, what are the chances that if we had market outcomes that do not participate right away in the way that we had anticipated, there might be a 25% chance, in this example here, that we could run out of money. We think that that's important information that our clients should be aware of.

What could you do to help plan and actually promote a higher score along the way, so your probability of success can be higher? What that is based off of is something called the Sequence of Returns.

And what the Sequence of Returns say is that, depending upon where you are in your financial life, having an average rate of return could mean different things. So for example, if we had client A and Client B, in what you're seeing out here, both starting out with a million dollars and both taking out the same distribution amount each year. And you can see at the bottom of the market returns, they both averaged a 10% rate of return.

The only difference between the two is that Client A started with a positive 25% rate of return and finished with a negative 14% rate of return. Client B's experience of the markets was reversed, started with a negative 14% rate of return and finished with a positive 25%.

The output from that sequence of returns is dramatic. Client B started with a million dollars, taking out the same distribution amount, averaging 10%. However, the portfolio is a little over $400,000. Where Client A started with a million dollars, finished with $1.3 million, a little over $1.3 million.

If rate of return was a measurement of their success, they both should be equally happy. We know Client B is not happy because they might have to go back to work. Client A, I would even submit, is not happy either because the portfolio had grown from a million dollars to $2 million. There was an opportunity to make some adjustments before the markets turned. But how do you know when?

And that's part of the success of utilizing, putting more science to the financial plan, than using a rule of thumb of saying, I should be becoming more conservative at age 65, as an example. Because it becomes very critical, the Sequence of Returns.

When you get into that retirement red zone, that's when the market risk is actually the greatest, of what happens to the market's volatility and how it impacts the success of your retirement plan. And so it's a few years before retirement, and then a few years thereafter retirement, where that market risk is greatest, in how it affects your retirement.

How can we reduce volatility along the way to minimize some of those changes, to get closer to an average? Brian's going to discuss a little bit more about that.

Brian Thorkelson:Thanks, Marc.

Reducing portfolio volatility is really a big deal when it comes to investment management. And we look at it from a top-down perspective, starting out with a portfolio strategic allocation. That means, how much do we put in stocks, how much in bonds? Kind of the 60-40, the 80-20, the 40-60, all depending on different types of risk tolerance. And that guides the portfolio, really, for the long term.

But there are things we can do within the portfolio that help the portfolio withstand different market conditions. For instance, coming into 2021, and starting to see inflation rise, rates starting to go up, you could look and say, "Hey, there might be something going on here." At that time we thought things were transitory, at least that's what people were saying. But the reality was, they weren't.

And so, by reducing your fixed income duration, the maturity length of your portfolio, you could significantly change the return that those bonds were going to have, in terms of negative, because interest rates were going up. You could add things into the portfolio, commodities and so on.

And those are things we did do with portfolios, to help withstand some of the downside even in a market where both bonds and stocks were down. On the stock side were income-based type of investments, perform better, more value-based type investments and so on. And US stocks continue to do a bit better as well.

So, those are tactical adjustments that you can say, "Hey, we're going to take some money from here and move it here." It's not going to change the overall risk posture the portfolio, but it could, and does at times, help in terms of reducing volatility.

Another way to reduce volatility is to look at how you're allocating to managers. Typically, in downturns, active managers are going to do a better job of protecting returns. They're doing similar things in terms of portfolio management and have the ability to raise cash. And sometimes, index-based passive strategies like ETFs can get caught with an index that's geared to go down more in market environments where it's down.

And lastly, tax loss harvesting/rebalancing, things like that, make portfolios less volatile. Also, it isn't really, especially on the tax loss harvesting, it's not something that is immediately known. But tax loss harvesting allows us to change portfolios after a long period, or I should say, the last three years coming into 2022 that were so strong, we had a lot of gains. If there's losses in the portfolio, we are able to harvest, not harvest the losses, but we're able to reduce those portfolio exposures to those more momentum-based strategies, and using the tax loss harvesting.

Wanted to introduced to some of you, and talk a little bit about a strategy we've been using with client portfolios for a period of time now. And it's an actively managed S&P 500 portfolio. And what you see here, and really the issue we're talking about is, the returns that the index generates without any gains, so on, is a lot higher than what would happen if we actually have to turn and change the portfolio.

What we're doing, and what this strategy does is, along the way is continue to generate losses. For instance, a good example and an easy example is Home Depot, Lowe's. One is at a loss, you would swap into the other one. So you're always keeping portfolio in line with the S&P return, but you're generating losses on the way.

What happens, and what has happened in the past, and what we see here are, 2020, perfect time to talk about, portfolio was able to generate eight to 9% excess returns just from the tax loss harvesting advantage, that we didn't have to report taxes. And so, strategy that we're using with clients that have gains that are going to be problems long term, in terms of limited partnerships, things that are going to generate gains that we can continue to offset those with losses, strategy that is really S&P-based, and frankly, keeps up with the S&P, that the deviation from the S&P return is quite small.

Lastly, I want to finish and talk about the 60-40 portfolio. And really, some of the issues that kind of gets us going forward. It's been a great strategy, since interest rates started to climb back in the '80s. But more recently, it's struggled and some of that is due to the fact that there wasn't any interest to garner really from the portfolios with bonds.

So obviously, the benefits, more diversification. And frankly, higher income generation. But what's changing is correlation between the assets classes is becoming higher, and that's somewhat due to higher inflation and more volatile markets, with less accommodating the Fed going forward.

Talking about how the tactical changes take place, some of what we've been doing and we will continue to do, is add Alternatives into the portfolio. Income-based Alternatives to replace some of the fixed income areas that might be at risk. More market-neutral strategies, if stocks potentially are at risk. And lastly, hard assets, an area that we don't necessarily invest in all the time, because hard assets don't generate long-term returns like stocks, and they don't generate income. But they do well when inflation picks up, and starts to go higher.

So, that's what we're doing with the 60-40 portfolio. Still makes sense, still diversifies, but some changes can be employed to make it work better.

Lastly, interesting, this year, we may see stocks could be the weak link in that 60-40, with subpar returns. Only time will tell. So Marc, back to you after...

Marc Scudillo:Thank you.

Brian Thorkelson:Yeah.

Marc Scudillo:Thank, you Brian. And with that 60-40 allocation, or whatever the allocation that matches up to the individual client's strategy and risk comfort level along the way, the benefit of having a game plan in place is that there's going to be points in time that any one segment will might be lagging versus another.

And that becomes opportunity. Opportunity to rebalance, opportunity to make adjustments to the portfolio, opportunity when there's challenges, when people feel strongest that the market is struggling the most. Historically, that's been an opportunity for actually buying into the market, when you look at it in hindsight.

So, using that as an example, sticking to a game plan has been most important. And when you look at it from a retirement perspective, well, there's different ways to create a game plan for income distribution. Different theories, different concepts. And we're going to exemplify some samples along the way here, because we have different sources that we could take funds from.

This is from one of our balance sheet sources, but don't forget, you'll have social security, you might have pensions, that are income received by investors along the way there. But besides that, what can they take from their balance sheet, whether they have, starting out with what many people have are just your 401k plans, looking at the bottom. Traditional IRAs, that's become a large amount for individuals. How do we take out distribution, so we understand the taxation along the way?

And you have the tax accounts. These are our traditional accounts that have you take distributions from, whether it be qualified dividends that might be treated as capital gain treatments, or getting favorable treatment associated with that. The municipal income, coming off of municipal bonds, are starting to see that they're generating more interest along the way. Then what do we have as far as capital gains? Both long-term and short term.

Might have Roth accounts, or Roth IRA. How does that tie into a distribution methodology, so you're maximizing the net amount of money going into your pocket? And then you have your health savings accounts, which we feel is something that's under-utilized, when people look at the long term savings that could be put into a health savings account on a tax-free basis, that could be used in your retirement years as well, for healthcare expenses.

So all of these are sources of funds, but how do you create an income strategy? So, there's something called a Flooring Strategy. This is one way of creating a distribution methodology. So we've heard from some clients that say, "I have this certain amount of expenses that I just need to make sure that I'm meeting on an annual basis. It'll allow me to sleep better at night, assuming that I have these expenses covered."

So, we call this, by having a successful flooring strategy, all right, well, there might be ways that you could create some sense of certainty that those fixed expenses, those expenses of necessity that you have, is being met by either your pension, your social security, certain risk-free income distributions that are available to you, all of which is the designed to help cover those essential expenses. Some of those risk-free income type of investments, again, nothing's really risk-free in its entirety, but you have certain types of insurances, certain types of annuities, they provide guaranteed income. You have dividends and interest that's being derived off the portfolio.

You might have reinvestment and interest rate risk. If interest rates start going back down again, and we were hoping that we were going to be getting a four, five, 6% bond interest rate, well, that was something that many people weren't anticipating in their Flooring Strategy through the years.

Well, how do we offset that? But it's taking all of that into consideration, so you have a prudent strategy to create an income that's going to generate all of your essential expenses, and cover those expenses, while you have your wants and wishes being generated off of what we call all the assets that are above the floor, that can accept a little bit increased amount of volatility along the way.

For this to work, it's important to understand, well, what are those two essential expenses? Understanding what the income is, that's coming from the various sources, and then seeing as if there's a gap between the two. And then how do you make up that gap? So for some people, during this market volatility that's transpired over the last couple of years, knowing that they had a guaranteed income stream in place, through the various sources that they had, allowed them to sleep much better at night.

However, some people want to have greater opportunity for growth along the way. Because once you have it in something that's going to provide a guarantee, you might not have some of the same growth opportunities. So those that are looking for, while I'm not necessarily needing a guarantee or income certainty, but what I would like to do is make sure that I'm meeting certain strategies and goals along the way, and increasing my probability of success for each of those.

So what you do is then you create a goal-based concept, where you have short term cashflow needs that's going to be there for you to meet upcoming expenses in the short term, in the next two to three years. Then you have a longer term strategy. A longer term strategy would be more in the midterm, where you could have greater exposure to stocks and bonds.

And then, you have your long-term goals. And those long-term goals could be whether it's retirement years from now, or income years from now, or legacy planning, you could take on more risk associated with that.

And the longer that you have a timeframe and you could see various buckets of success, you can see that if you have a long time horizon, you do have a positive success rate. So if you look at even just having a stock portfolio, over a rolling 20-year period of time, in the best of years, it's average 17%. In the down years, it's average a positive 6%. But you need time. And that's what this means here, is that we want to make sure that you have time.

And as we're getting those periods of time, that we have success from our stocks and bonds, you basically create almost a waterfall approach where you start having those long-term gains, and your long-term buckets start transitioning into your midterm bucket. And as that midterm bucket fills up and has success, you're going to transition some of those funds and those gains into your short term bucket. So you're always staying ahead, so you're always meeting your short term goals along the way, and allowing those short-term goals and the cash-like investments to give you the comfort and the sense that you could ride out some of the market volatility in the short term. But you're accepting a little bit more risk along the way for that potential growth.

But then, you can have a Dynamic Spending Strategy. And a Dynamic Spending Strategy, what that means is that you're basically tightening the belt when need be, or loosening the belt when things are going in a positive direction. It's really important to understand that you're working under a concept of trade-offs, knowing what we need versus what we want.

And for some people, a lot of their wants, when we're having conversations with them, it's important to drill down deep. Is that really that want or that need accurate? A lot of people might translate, "I need, need, need this," which is fine. But if we need to tighten ourselves, are you willing to transition and treat some of those items as a want?

And then, you have the aspect of timing of those needs versus wants, the short term versus the long term. Understanding that is important, because when you have the freedom and the flexibility to be more dynamic with your spending on a year by year basis, you could see the impact that that could have.

Whereas, if we took a distribution, this assumption is that we have two individuals both experiencing a 5.2% withdrawal rate. But when there's points in time and the markets are doing well, one individual is actually tightening the belt by 10%, or loosening the belt by 10%, around that 5.2% initial withdrawal rate. And the other one is taking an even 5.2% plus inflation over time. And you could see that they could potentially run out of money, if the sequence of returns did not cooperate with them. So, it could be a dynamic and very powerful concept to put into place.

It translates back again into, well, what's the Sequence of Returns, though? And are you comfortable with that, as far as tightening the belt? For some conversations with individuals, it's hard to say, "Well, listen. The market hasn't performed well as of last year. It's now time for us to cut back 10%." That's a tough conversation.

So I say, it sounds good. The reality is that maybe a combination of all of the strategies and others might be more favorable. But it's important for us, along the way, to make sure that we're focusing on your goals. Because that should be the driver, saying, "Well, how do I ensure that I'm going to do the things that matter most to me along the way?"

And before we jump into that conversation, we're going to head into our next polling question.

Astrid Garcia:Polling Question #4.

Marc Scudillo:Great. And as we're listening to the silence here, I thought I would just add, we had a question coming in, as far as distribution rates and how do you determine what's the appropriate distribution rate, and should that distribution rate take into consideration fees, whether it be the mutual fund expense fees or management fees or what have you?

And we look at it and say, a distribution rate is the amount that we're taking off of the portfolio that's going to help support someone's lifestyle. And what we look to do is saying, the impact of the fees is an impact to the rates of returns. So, when you're looking at that on a linear assumption rate, you should be making sure that if you're going to use that approach, and have an average rate of return, make sure you're building into that, what the underlying expense ratios are, and should that be netted out of your average rate of return.

In a dynamic approach, you could actually build that in. And you could say there's a certain expense ratio that's built in, that's going to be subtracted from whatever the Sequence of Returns that we're going to project out through the years, and net that out of the rates of returns of the underlying investments. The distribution rate will still remain consistent. For that particular example.

Great. So, it looks like that people are moderately confident for the majority of your finances, which is great. That's what you want to see. And actually, start pushing that into, really, we want you to have high confidence and high control over your wealth.

And what helps in increasing your confidence is having a clear vision, right? When we say that we want to retire, what does that really mean? What does that really look like? By not having a clear understanding of what really matters to you, that makes it harder to achieve that goal. And so, defining that means a lot.

For some people, it's spending time with the people they care about, and they want to take trips along the way and take family trips. For others, it is making sure that their family is taken care of should something happen to them. And when they mean taken care of, you drill down a little bit deeper, and say that whether it's a financially being taken care of, making sure that there's a certain amount of money that's going to be left behind. Well, that could be built in. And once you have an understanding what that dollar amount is, you could gain clarity and more confidence to be able to achieve that.

Often, we hear of not being a burden to our family is a goal. Well, that can mean a lot of things. Not being a burden financially, not being a burden physically, support-wise? Maintaining that independence and dignity at the end of the day is what we all are looking for. But how do you accomplish that in all market scenarios?

So understanding that, having a clear understanding of what that really means, helps in the design of the plan. But it also enables you to avoid some of the emotional aspects that money brings. Because people, when they're following the markets and they're seeing it's in front of us all the time now, right? Whether it's on our phones, whether it's on our computers, when we log in, you're getting statements on a consistent basis, and you're looking at all the news, I call it noise, but all the news that's out there, how does that translate back to you in all of those different inputs that you're receiving?

It generates an emotion. And we want to make sure that we're helping our clients differentiate between what's emotion and a prudent financial decision, because sometimes they get mixed. And so, when there's points in time that the markets are at their highest, that's when people are elated about their portfolios, and then they're most comfortable saying, "I want to buy more into this."

Many people were buying into the Facebook, the Amazon and Netflix and so on. In 2020, 2019 and so on, it already gone up. And then the markets go down and they regret that decision. What you want to do is try to strategize and create a game plan.

Again, focusing on that, you need to have clarity as to what's most important to you. Understanding the choices that you have, so you can be confident in moving in the direction that you feel most confident in. Because at the end of the day, you need to control, this is your money, you need to have control over that. So by doing this, and having a design plan along the way, it makes it a lot easier to develop and strategize an investment plan that you could feel that will meet your needs, in good markets and bad.

Brian brought that up, that we have different market potential outcomes, right? No one's really certain about that. But how do you have success regardless of the directions of the markets? So, separating the struggle of the emotions from their investment decisions is important.

So, we're going to head into our last polling question here.

Astrid Garcia:Polling Question #5.

Brian Thorkelson:Marc, we have a couple questions we could just address here. I know that last one was-

Marc Scudillo:Sure.

Brian Thorkelson:Question comes in. Doesn't volatility also create opportunity? And the answer to that is absolutely.

When you're making portfolio shifts, like I discussed, and you're moving, for instance, let's say to a shorter duration from a longer duration, when bonds have essentially peaked in terms of rates, again, this is all perfect foresight, which is not what we're talking about here. But you can then move that back, where the volatility has created the opportunity on both sides.

So, there's no question that volatility is both a good thing and a bad thing. And it really comes down to two things. Number one, being prepared for it with the plan, to understand that the plan that you've put in place can withstand it from that perspective. And then additionally, from the perspective of a portfolio, is we're not making massive moves. We're making moves around the edges to help portfolio returns and risk control.

Marc Scudillo:Great point.

Okay. So Brian, if you don't mind moving forward on the presentation. For some reason, I just was-

Brian Thorkelson:You lost it?

Marc Scudillo:... kicked off the internet here.

Brian Thorkelson:Okay. Technology.

Marc Scudillo:The beauty of live presentations, that's fine.

Brian Thorkelson:Yes. Do you see it there?

Marc Scudillo:If you could describe it, then I will be able to go over it.

Brian Thorkelson:Oh, you can't even... So, it's the Cost of Missing the Best Days.

Marc Scudillo:Oh, yes. So again, the concept around the emotions. When we're looking at that volatility of what happens in the market, and we make decisions on a knee-jerk reaction, you could see the cost of what happens if we miss the best trading days, which happen to happen right during a period of time, that's always after some of the worst days in the markets.

So, we want to make sure that we're avoiding that volatility along the way, making sure that we're not making the decisions on an emotional basis.

Go ahead, Brian.

Brian Thorkelson:Moving forward here to Understanding All the Risks in Retirement, from longevity to investment.

Marc Scudillo:Yeah.

Brian Thorkelson:Sequence of Returns, inflation/deflation, and withdrawal.

Marc Scudillo:All of those different areas of risks need to be taken into consideration. Now, when we're thinking about different concepts, as far as dynamic, fixed income type planning strategies, flooring, all of those, you need to consider, well, what's the length of time that I need to plan for, that I'm confident, or I'd like to plan for? That's the longevity risk.

What's the reinvestment risk? We've discussed a little bit about investment risk. All of those different areas have an important impact to the success of your plan. And not only that, but Brian, you also brought up taxes. And taxes have an integral part of the planning process so that we could be efficient to make sure that you're maximizing the dollars that, not only that you've accumulated, that you're actually able to utilize for the benefit of yourself and for your heirs.

Brian Thorkelson:Marc, I was looking at this slide. It looks like risk is, and it looks a little scary. The truth is, and really the important part is, when you have a plan, these risks all come to light. And the solutions are put in place so you're prepared for the risk. And that's the whole goal of the planning process.

Marc Scudillo:That's exactly right. And you'll see, in that final slide there, that it's really pulling that all together, understanding the different dynamics that we have to take into consideration and that you should be thinking about when you're not only heading into retirement, but really planning throughout all your various life stages, to make sure that you're maximizing that which is most important to you, and your ability to achieve those goals along the way there.

Brian Thorkelson:So that brings us to the Q&A period here, in terms of, we have three minutes or so left. I'm going to jump down here to the questions.

There was one talking about, we talked about this. There's a question from a gentleman, asking, should the equity bond allocation shift as one gets older? And interesting, that's always been the case. What is it, the age is how much you have in bonds, things like that. And that, Marc, you brought up a great point about living longer. And what we're finding is that portfolios need to actually have a decent amount of equity allocation to grow even in retirement, because they're living 80, 90 years, and that's a long time in retirement. If it's just suddenly an all fixed income portfolio gets depleted fairly rapidly, or it can be, I should say.

Marc Scudillo:And there's ways actually to stress test that concept to see, well, what's going to help increase your success rate in the various market returns that we could be experiencing in the future, to see when it would be the right time to make the adjustments to the portfolio.

Brian Thorkelson:Let's see here. Quick question here on the economy. It seems like the economy is stronger than anticipated, labor market, consumer spending, et cetera. Given that, do you still think we'll experience recession 2023, maybe late '23?

It's great question. Frankly, a lot of discussion in the last week has come up. The two scenarios have been soft landing, hard landing in terms of recessions, and now there's one out there called the no landing. As we are seeing data come in a little bit stronger, especially on the retail sales side, which expectations have not been for retail sales to do as well as we thought. And what's going on in the service side of the economy, and that's getting much more vibrant and robust, and a much bigger part of the economy.

It's not a done deal. And the question really hits on a great point. This is probably the most widely-forecasted recession I've ever seen. Which typically means, guess what, a lot of people have already prepared for it and it may not happen.

So I think it's a great question. We're kind of at base case thinking, a soft landing, a very mild recession at best, and if the no landing happens, I think we're still positioned okay.

Marc Scudillo:Great.

Brian Thorkelson:That probably puts us at time.

Marc Scudillo:That wraps it up. So, thank you everyone for participating. Thank you Astrid and Maggie, your support and putting this together. And everyone, thank you for being part of this presentation. And we will have more information out. Coming to our March 16th, we have our next educational series. Keep a lookout for that.

Transcribed by

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Marc L. Scudillo

Marc Scudillo provides financial planning, investment and wealth preservation protection services to both individuals and corporations.

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