While international relations and foreign policy tactics undertaken by presidents may seem complicated, distant and removed from everyday life, macroeconomic issues do affect retirees. Because if fear hits the market, it can cause stock markets to tank, like we saw Monday, June 25, 2018 when the Dow Jones Industrial Average dropped 328 points due to trade war anxiety.
At Decker Retirement Planning, the way we handle retirement risk like this is by using a specific, math-based methodology to build and execute the retirement portfolio distribution plan, with the goal of taking advantage of both bull and bear markets. The strategy is that, even if markets go down due to trade wars or for other reasons, you have downside protection.
Trade wars and tariffs can make inflation worse, as it is doing to the lumber industry because of tariffs against Canada. The U.S. gets roughly a third of its lumber and 100% of its cedar shingles from our northern neighbor, now with a 20.8% duty attached.
Inflation should also be taken into account for any proper retirement plan, whether a trade war does or does not happen. If your plan looks like a pie chart and you’re drawing 4% from it, you are probably not prepared for inflation. (The 4% Rule was discredited by its creator in 2009.) And that’s a huge risk, because if the cost of services and goods goes up, the buying power of your retirement nest egg goes down.
Dollars today can become pennies tomorrow, and this is why retirees need to hedge against inflation risk by having a COLA, a cost of living adjustment, right in their retirement plan. Retirees need to be able to spend more money each and every year for the rest of their retirement to help ensure that they can pay for the rising cost of food, clothing, energy prices—essentially everything.
Retirement distribution plans designed by Decker Retirement Planning include a yearly factor for inflation. That, plus other preventive retirement risk measures we have consistently taken saw almost all of our retired clients sail through the Great Recession of 2008 unaffected. That is our goal.
Stock Market Risk
We’ve already discussed how the threat of tariffs and trade wars impact the stock market when investors become fearful. Nevertheless, the reasoning behind buying and holding stocks because they “trend higher over time” is still true in general—for the accumulation phase of life when you’re young.
But markets historically go through 18-year market cycles. Depending on when you retire, what part of a market cycle we’re in can determine whether your retirement lasts, or whether you will be forced to go back to work, especially if all your money is held in assets subject to market risk like stocks and bond funds.
Using the Dow as an example, for well over 100 years, this 18-year cycle holds true. From 1946 to 1964 we had a bull market, from 1964 to 1982 we had a flat and choppy period leading up to the ’80s for 18 years. From 1982 to 2000, as expected we saw a bull market, in fact the biggest bull market that we’ve ever seen. The year 2000 started off in a flat and choppy market cycle as expected. More recently, we’ve started to deviate from that pure 18-year cycle where from about mid-2016 most people didn’t make much money, but after 2018, we started to see a big uptrend.
There’s good evidence to support the thinking that our current bull market has been artificially elongated by quantitative easing implemented in response to the crisis that we encountered in 2008/09, including TARP as well as QE1 and QE2. (Quantitative easing is when a central bank prints more money and puts more cash into circulation than they do normally, with this acting as a nice spur to an economy. When there’s more cash available, the whole economy can really heat up.) It’s a tool that central banks can use to get markets back up, especially in times where you’re in crisis mode. But it definitely catches up with you—it’s a temporary fix. Inflation will start to come back in line with the total monetary supply, and you’ll see interest rates start to come up as the Federal Reserve attempts to cool the market a bit to maintain inflation around the 2% target rate.
Decker Retirement Planning believes, like many experts, that we are overdue for a market correction. Markets are always the strongest just before they correct, and they tend to run up at their fastest pace just before we get into a correction. Last year, 2017, might be an example of that—everyone was making money, and there were definite warning signs of a potentially overheating market. We’re starting to see things like housing prices reaching pre-2008 levels, and the affordability index getting very high. On top of that, global debt is mounting. We’re seeing the biggest economies in the world taking on more and more debt, including the United States. We’ve never seen this level of debt before, at least among the world’s more powerful nations. This is new territory.
Interest Rate Risk
Interest rates have been going up slowly, and they are expected to go up through 2019. Interest rate risk is the risk that as interest rates start to go up, there will be a resulting drastic, negative effect on bonds and bond funds, and particularly the principal that you have housed in those bonds or funds.
Many financial people tout “bond funds” as “safe money,” and encourage pre-retirees to move more money into them as they get older. Decker Retirement Planning does not. In 1994, for example, markets were caught off guard by a surprise tightening of interest rates by the Federal Reserve and yields on government bonds went up from 6% to about 8%. With that rise in yields, the average bond fund ended up falling by 20% that year, according to Morningstar. In 1999, interest rates on bonds jumped up from about 4% to 6% and during that particular year the average bond fund ended up falling by 17%.
As of late June 2018, the yield on a 10-year Treasury note was nearly 2.9%. When rates on 10-year notes eventually go back up to say, 4%, one could easily anticipate taking a 15 – 20% hit to principal. That is a huge loss that retirees shouldn’t have to take; that’s what interest rate risk is.
Many times we’ve seen liquidity issues sneak up on retirees. Liquidity risk is a very real type of risk—basically it’s the risk of not being able to pull out your money in case you need it for an emergency.
Some financial salespeople (not fiduciaries unless they are Series 65 licensed, not Series 7, independent and structured as an RIA, registered investment advisor) have a bad habit of locking up your assets such that you can’t withdraw them in the case of an emergency, and this can become a huge problem.
Some investments may seem good on paper, but they have bad liquidity, like real estate investment trusts (REITs), or some annuities, especially variable annuities.
At the same time, too much liquidity could actually hurt you, because if your assets are completely liquid, then they’re probably not growing very much. So it’s important to have balance where you want to be able to have a lot of your assets growing, but you still need to have access to some of your cash in the case of an emergency. Fiduciary retirement advisors like Decker Retirement Planning will try to find balance and minimize the amount of liquidity risk that you have in your plan.
Other Retirement Risks
Other retirement risks include the risk of divorce, or losing a spouse’s Social Security income. Many people don’t understand that when one spouse passes away, the surviving spouse will only receive one Social Security check, albeit the largest one. Additionally, a pension they have been relying on may have zero survivorship benefits. An even greater risk may be the possibility that one spouse will become incapacitated due to health or medical issues, which could bankrupt the healthy spouse if they’re not adequately prepared.
Litigation risk is another one we’ve seen. It’s fairly easy for someone to sue someone else for an injury, and we have seen some of our high net worth clients be targeted. For instance, one of our clients was sued when he barely bumped someone’s car in a parking lot. We recommend that you add a layer of potential protection using an umbrella liability policy with a limit of at least $1 million.
Risk, generally speaking, is a mathematical term which places a value on benefit in relation to potential loss. In retirement, risk management is especially important. Brian Decker has been working for the last three decades to help people retire, and we have identified dozens of risks you may be facing, and ways to help mitigate them.
When you hire an independent retirement fiduciary like Decker Retirement Planning, you will get an independent, unaffiliated, objective opinion—free from any influence from commissions or sales quotas. Fiduciaries are required to put your best interests above all else.
We use a range of different risk management tools to help protect clients from retirement risks. As fiduciaries, we are math-based, objective and factual. We will tell you the truth even if it doesn’t benefit us at all. And we will focus on ways to help you benefit during market ups and downs, whether or not there is a trade war happening.
For a complimentary look at your retirement plan to see if it addresses the retirement risks you will face, or to get a second opinion (you may not need as much money as you’ve been told in order to retire now), or to get started on developing a personal retirement distribution plan showing you how to utilize your 401(k) or other retirement savings and convert it into income up to age 100—including accounting for taxes and inflation and dozens of other risks—call Decker Retirement Planning at 855-425-4566.