November 19, 2024 • 27 mins
In today’s episode of Ready for Retirement episode James covers when to adjust your portfolio as retirement nears—a crucial step for balancing growth and security. If adjustments happen too late, market downturns could delay your plans; if too early, you might miss out on potential growth.
The focus is on reallocating stocks to more stable investments like bonds as you approach the time you’ll need to start drawing from your portfolio. Historical data shows that while the stock market grows over the long term, short-term volatility can be risky close to retirement. Timing this transition, often starting about 10 years before needing funds, provides a smoother adjustment and reduces risk.
Besides financial factors, psychological comfort with market swings also matters. Striking the right balance helps ensure your retirement funds last while maintaining your peace of mind.
Questions answered:
1. When should I start adjusting my investment portfolio as I approach retirement?
2. How can I balance growth potential with stability in my retirement portfolio to minimize risks and ensure financial security?
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Timestamps:
0:00 - Protect against stock market decline
2:22 - Investment fundamentals and market trends
6:12 - When will you need the funds?
8:06 - Risk capacity
10:55 - Consider dividends and interest from bonds
14:20 - Use bonds for a specific purpose
17:07 - Risk tolerance
20:59 - 5-10 years before retirement
24:36 - Goal: minimize risk and regret
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Transcript
Episode Transcript
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Speaker 1 (00:00):
On today's episode of Ready for Retirement, we're
going to discuss how soon,before retiring, you should
begin to adjust your portfolioNow.
This is one of the mostimportant things you can know
about retirement planning,because if you don't do this
soon enough, or in other words,if you do it too late, your
desired retirement date could bewiped out, even if just
temporarily, by a major marketdownturn.
On the other hand, if you beginto adjust your portfolio too
(00:20):
soon, you could miss out onsubstantial growth in your
portfolio, which will thenimpact your ability to maximize
retirement income and live outyour ideal retirement.
This is why, to state theobvious, it is crucial that you
understand when you should beginmaking adjustments to your
portfolio and to take an evenbigger step back.
What do I mean by adjustmentsto your portfolio?
I mean when should you start toallocate the amount of growth
(00:41):
investments to stableinvestments, or growth
investments to conservativeinvestments, typically thought
of as your mix of stocks tobonds?
So that's exactly what we'regoing to be discussing on
today's episode.
This is another episode of Readyfor Retirement.
I'm your host, james Canole,and I'm here to teach you how to
get the most out of life withyour money.
And now on to the episode.
(01:02):
Here's really what this comesdown to.
Really, what this comes down toisn't how soon should I begin
adjusting my portfolio, it's howdo I protect myself against a
stock market decline?
Now, that might seem obvious,but when we state it this way,
it's a little bit easier toquantify what that adjustment
should look like.
And the reason for that isbecause, with the stock market,
(01:23):
we have no idea what's going tohappen going forward.
But we at least have severaldecades, 100 years of experience
to help us understand how themarket works and what typical
recovery timeframes look like.
So, as you're listening to this, just to really paint the
picture, if you're in your 30s,you're probably not too worried
about decline for your long-terminvestments.
If your 401k balance goes down,if your Roth IRA balance goes
down, you maybe don't like it,you almost certainly don't like
(01:46):
it but you're not too worriedabout your ability to retire.
Now contrast that to if you're60 years old and let's say that
all of your money is in thestock market.
Now you are very worried aboutthe ability to retire, assuming
your retirement is coming up inthe not too distant future.
So you can start to see how, atone point, you shouldn't be at
all concerned.
In fact, if you're in your 30s,you should invite a market
(02:06):
downturn, because that means youget to continue buying great
companies at a lower price.
But if you're in retirement ornear retirement, you can start
to see how, of course, that'snot going to be as appetizing,
because that's money that you'regoing to need, sooner rather
than later, to live on inretirement.
So what we're going to do iswe're going to look at
statistics just to give you someperspective on how markets
typically work, and then we'regoing to take a look at a
practical way of working aroundthis, a practical way that you
(02:29):
can implement in your portfolioto help protect yourself against
a market decline in retirement.
So let's start with thefundamentals.
We invest in stocks becausewe're investing in real
companies with real earnings.
You're not just sticking yourmoney into something, seeing
numbers go up and down on ascreen and hoping for the best
long term.
What you are actually doingliterally doing is you're buying
ownership in a company.
(02:49):
Now that company has earnings,it has profits, it has revenues,
and those are things that youthen participate in as a
shareholder.
You don't just buy one stock orone company.
Ideally, you're purchasinghundreds or even thousands of
companies, because if youdiversify well and if you own a
lot of great companies, you canbuild a lot of wealth over time.
In doing that, the downsidestocks don't always go up.
(03:15):
Historically, the S&P 500, someasure the 500 biggest
companies in America it'saveraged about 10% per year over
time.
Now, to state the obvious, ifwe knew that every single year
we were going to get exactly 10%, we probably wouldn't own
anything other than that.
Sure, maybe some other assetclasses actually have a better
long-term return.
But if you could guarantee 10%per year, most of you are going
to be all over that.
Who wouldn't want that?
The downside, again to statethe obvious, is stocks don't
(03:36):
always go up.
If they only went up, wewouldn't own other things like
bonds or cash or otherconservative investments.
We would only own stocks.
But because stocks on averageone out of every four years have
a down year, have a bear market, that's why we start to own
other things.
So let's look at that frequencyas a starting point.
How frequently do stocks go downand how frequently do stocks go
(03:58):
up?
Well, if we're looking at theS&P 500, and we're looking at
the frequency of positivereturns over the last 90 years
and we're looking at thefrequency of positive returns
over the last 90 years.
It's really easy to get dataaround this.
On a daily basis, about 53% ofthe time the S&P 500 goes up,
meaning tomorrow assumingtomorrow is a market trading day
.
If you want to bet what themarket's going to do tomorrow,
it's basically a coin flip, aslightly more likely to be up
(04:20):
than down.
But 53% of the time the marketis positive on a daily basis and
47% of the time it's negative.
So not much better than a coinflip.
If you're staking yourretirement on a coin flip,
that's a bad deal.
So the stock market is veryrisky in the short term.
You're equally as likely tolose money on a daily basis as
you are to gain money.
Now, what if we extend that?
What if we don't look at dailyreturns but we look at monthly
(04:41):
returns?
Well, on a monthly basis, 63%of the time the S&P 500 has been
positive over the last 90 plusyears, which means the remaining
37% of the time it's beennegative.
So it's almost a two thirds onethirds ratio.
At that point, what aboutannually?
On an annual basis, 73% of thetime the S&P 500 has a positive
outcome.
(05:02):
The other 27% of the time ithas a negative outcome.
So that was my statisticearlier One out of every four
years.
The market goes down on acalendar year basis, but as we
begin to extend that evenfurther over five-year rolling
time periods, 88% of the timethe S&P 500 has a positive
outcome.
Overall 10-year rolling timeperiods the S&P 500 is positive
94% of the time.
(05:23):
In over 20 20 year rolling timeperiods, there's never been an
instance in the last 90 plusyears that the S&P 500 has not
had a positive outcome.
And to add on to that, not onlyhas there not been a negative
outcome over those 20 yearrolling time periods, it's not
like an equal negative to equalpositive.
There's only been substantialpositive gains over those time
periods.
So as an investor, that's whywe invest we are trading
(05:45):
short-term uncertainty for ahigh degree of probability of
success over the long term, andnot just a small degree of
success.
But when you take your money andyou compound it at 8%, 9%, 10%
over five years, 10 years, 20years, you can really begin to
build substantial wealth.
Now those numbers were justlooking at the S&P 500, just big
US companies.
If you diversify further, youlook at small companies,
(06:08):
international companies,emerging markets, real estate,
so on and so forth the frequencyof those returns actually
increases.
So that is an important thingto note as a fundamental
starting point.
And this may sound obvious, butthis is just designed to
quantify some of this, to givesome framework for some of this,
because here's what we want todo next In practice.
We want to take but it doesn'tjust stop there, it's not just
(06:32):
looking at okay, are youretiring in 10 years?
Well, there's 94% probabilitythat your money is going to be
increasing in value over that10-year time period.
That's a good starting point,but really what we want to know
isn't when are you retiring,it's when will you need these
funds and how much of them willyou need?
For example, let's assume thatyou are 55 years old today and
(06:52):
you want to retire at 65.
You, for example, let's assumethat you are 55 years old today
and you want to retire at 65.
You might look at those numbersand say, ok, we're still 10
years out.
There's still a highprobability of success over that
10 year time period 94% forlooking at the S&P 500, just
based on historical numbers.
Probably even higher dependingupon the mix of different stocks
in your portfolio, or stocksand bonds in your portfolio.
So you might look at that andsay, ok, 10 years out seems okay
, but I'm going to startgradually getting closer and
(07:14):
closer to my desired stock tobond allocation by the time that
I actually retire.
Well, let's also assume thatyou're retiring at 65, but you
have a pension, you have socialsecurity and you have a spouse
that's going to continue workingfor the first five years of
your retirement.
And between those three incomesources social security, pension
and spouse's earnings youactually don't need to touch
(07:39):
your portfolio.
Well, in that case, you're 10years away from your retirement,
but you're actually 15 yearsaway from needing funds in your
portfolio.
So that's a key distinction.
It's not just when are youretiring and that's going to
drive the decision of whenshould you start making some
strategic shifts from stocks tobonds or stocks to other assets.
It's not just that, it isactually when do you begin to
need these funds from yourportfolio?
So, in this example, you'reretiring in 10 years, but you
need funds in 15 years.
(08:00):
It's that 15 year mark that Iwould be more focused on when it
comes to what should thestrategic shift, the strategic
realignment, look like for yourspecific portfolio.
So that's one thing you look atis not just when you retire,
but when do you actually needfunds from your portfolio.
Now, oftentimes those twothings coincide with one another
, but not always.
The second part of this isn'tjust when do you need funds from
(08:21):
your portfolio, but how much doyou need from your portfolio.
So, for example, let's assumethat you retire and you know
that you're going to needexactly $40,000 per year from
your portfolio to supplementyour other income sources.
So let's assume that with that,you want to make sure that you
have 10 years worth of cash andbonds in your portfolio in case
the stock market drops a lot.
I'm not saying that's myrecommendation.
Oftentimes, actually, I startwith less than that.
(08:42):
But just for sake of example,let's assume you say I want 10
years worth of cash and bonds inmy portfolio.
That's not subject to stockmarket ups and downs.
So if we go through a 10-yeartime period of really rough
returns in the stock market, Istill have other assets that I
can live on in that case.
Well, that comes out to a totalof $400,000.
(09:03):
If you have a $1 millionportfolio going into retirement
and you want 10 years worth ofliving expenses in cash or bonds
.
That's the $400,000.
So in this instance, you wouldend up with a portfolio that's
60% stocks and 40% bonds the60-40 portfolio.
So keep that in mind.
In order to meet that objective, you would need a 60-40
portfolio if you started with amillion dollars.
(09:24):
Now let's assume that you'renot starting with a million
dollars.
Let's assume that you'restarting with $4 million, but
you still have that same need.
You still have that $400,000need for cash, bonds, other
stable assets.
Well, in this instance, that$400,000 has stayed fixed, but
the portfolio value is now $4million.
So $400,000 in this example nowonly represents 10% of your
(09:48):
overall portfolio, which meansyou could be more like a 90-10
in this example and still havethe same protections the cash
and bonds offer In bothinstances, because your need
from your portfolio was the same.
The 90-10 portfolio and the60-40 portfolio provide the same
level of protections.
The difference was in both thedollar amount and the percentage
(10:09):
amount that you had in moregrowth-oriented assets.
So you can start to see thedifference here.
And, by the way, this is justlooking at the financial side of
things.
Another layer that you need toadd onto this, which we're gonna
talk about in just a second isyour comfortability with this
type of a portfolio allocationin retirement?
I have a lot of clients thathave 90% or more of their
portfolio in stocks and they'reretired and they're fully
comfortable with it.
I have a lot of other clientsthat would never be comfortable
(10:31):
with that type of an allocation,even if they knew they were
secure enough with their overallportfolio to weather the
downturn.
In that example, just the upsand downs in retirement would
not be something that they couldsleep with at night, at least
not peacefully.
So there's the what does yourportfolio need side of this.
We call this what's your riskcapacity in terms of how much
could you possibly have instocks?
(10:52):
And then there's more of theemotional side, or the
psychological side of even ifyou could afford to have more in
stocks doesn't necessarily meanthat's the best portfolio for
you.
If that's going to cause a lotof discomfort, that's going to
cause a lot of anxiety inretirement due to the ups and
downs of the market's going tocreate.
So more on that in one second.
But I actually want to go backto my example that I just used.
We just used an example to showhow, if your needs from your
(11:13):
portfolio are the same in bothinstances a million dollar
portfolio versus a four milliondollar portfolio you would have
different stock to bond ratiosin those to accomplish the same
goal.
Let's actually go back to thatfour million dollar portfolio
example and, by the way, whetheryour portfolio is four million,
four hundred thousand fortymillion, the principles here are
what I want you to focus on.
Don't focus too much on thedollar values.
(11:34):
I'm just using these as anexample.
Focus on the principles.
And the principle there is.
If you actually look at that $4million portfolio, and we know
that our goal is to generate$40,000 per year and we want 10
years of living expenses andcash and bonds in case the stock
market drops.
Well, here's another thing thatI want you to consider A $4
million portfolio and this, ofcourse, depends upon how you're
(11:59):
invested, but let's assume thatportfolio is generating a 2%
dividend yield.
That $4 million portfolio isgenerating $80,000 of cash
dividends.
Now why do we have cash andbonds?
Go back to the very beginning,where I said we don't own those
because they're going to grow awhole lot.
That's what the stock marketdoes.
We own those because theyprovide some stability.
They provide another asset,another resource.
Think of it as like theemergency fund for your
portfolio, so that when thestock market is down, you don't
(12:21):
have to sell your greatinvestments, you can simply pull
from your emergency fund, oryou can simply pull from your
cash and bonds, giving time forstocks to recover.
Well, if you have a $4 millionportfolio generating a 2%
dividend yield, that's $80,000of cash income that that
portfolio is creating for you.
If you only need $40,000, youare already creating 200% of
(12:41):
your desired income needs on anannual basis.
Just some cash dividends fromyour portfolio.
Now you may say, well, james,sure, but what happens when the
stock market drops?
What happens when the stockmarket drops 30%, 40%, 50%?
That can and will happen.
However, when it does, historyactually shows us that dividends
remain pretty resilient.
If you look at 2000, 2002, forexample, the stock market lost
(13:03):
about half of its value.
The US stock market that is,dividends only dropped by about
1% to 2%, meaning the companythat was paying $1 per share in
dividends at the end of thatperiod was paying closer to 98
to 99 cents per share individends.
So that's incredibly resilient.
In 2022, when the stock marketdropped 25 plus percent at its
(13:24):
peak, dividends that yearactually increased.
So when you're looking at this,keep in mind that dividends the
cash dividends companies paythey do not rise and fall with
the company's stock value.
The stock value is verysporadic.
It can be up and down.
It can swing wildly.
Traditionally, dividends do notmove as actively.
They remain pretty steady.
(13:45):
Now the flip side of this is2008 to 2009, when dividends did
actually go down by about aquarter, but still dividends
didn't get wiped out.
Dividends didn't drop as muchas the stock market did.
So keep that in mind when you'redesigning a portfolio, that you
can look at the cash dividendscoming either from the stock
portion of your portfolio or theinterest income from the bond
portion of your portfolio, andthat can help you to determine
(14:07):
what allocation to use as well.
So that's the first part of thedecision.
As you're asking yourself, howsoon before retiring do I start
to make this transition from amajority or even all stock
portfolio to the appropriateretirement portfolio, which in
many cases is still majoritystocks, but it's maybe not all
stocks or it's maybe not quiteas many stocks as you had in
your working years as you do inretirement Not a universal thing
(14:29):
, but just on average that tendsto be the case.
What's the second part of thisframework?
Well, the second part to tagalong to what I was talking
about is there are reasons forusing bonds.
There are reasons for usingcash.
There's a financial reason andthere's a psychological reason.
So that financial reason is notbecause they're going to grow a
whole heck of a lot over time.
We already established thatStocks, traditionally, are going
(14:50):
to grow a lot more than bondsare over time.
However, bonds provide somethingthat stocks don't, which is
stability in the short term.
Even with bonds, you need to bevery careful because in a year
like 2022, if you just owned anaggregate bond index, that
aggregate bond index was downdouble digits.
So if you're saying, well, whatthe heck, my safety money just
lost 10, 12 percent, well,realize that not all bonds are
(15:14):
created equal.
You have government bonds andcorporate bonds.
You have short-term bonds andlong-term bonds.
You have junk bonds, you havehigh quality bonds.
There's all these differentkinds of bonds and, unlike
stocks, where you might say, hey, for my stock market portfolio,
I just want to be broadlydiversified, I want to own the
entire US stock market.
That could be a great strategyfor a lot of people.
However, if your bond strategyis I just want to own the
(15:35):
entirety of the bond market,which, by the way, is enormous.
But if you just wanted to ownthe entirety of the bond market,
probably a horrible strategyfor most people.
What you really want to do isyou want to use bonds for a
specific purpose, whether it'sliability matching Okay, I need
to have a certain amount inbonds that mature at the right
time for me to be able to spendthat money in my portfolio.
Or whether it's for liabilitymatching, which means I need to
(15:55):
have a certain number of bonds,certain amount in bonds, and a
specific duration or a specificmaturity so those can mature and
I can spend that money bypulling that money out of my
portfolio.
Or it's to have somethingthat's non-correlated to the
stock market as much as possible.
Or for some other reason.
Maybe that's income, maybethat's something else, but you
need to first define what is thepurpose for the bond and then
what specific types of bondsshould you use.
(16:17):
But understand that the goal ofbonds, whatever that purpose is
, should not be growth.
Growth should be coming fromthe stock portion of your
portfolio or other asset portionof your portfolio, not from
bonds.
The financial reason that I liketo think of when it comes to
bonds is to protect againstthose downturns.
It's to be that emergency fund,so you need to have a stable
amount in conservativeinvestments so that you have
(16:39):
options of where to take incomefrom when the stock market is
down.
So if you have a year where thestock market is down and the
bond market is up, well you canstrategically say I'm not going
to touch my stock marketinvestments.
Those are great investments andthey will recover, but it might
be several months or even years.
In the meantime, I'm going totake money from my bond
portfolio, or vice versa.
Maybe the bond market is downand the stock market is up.
(17:00):
You're going to take money fromthe stock portion of your
portfolio and not touch the bondportion, or maybe they're both
up.
The thing, though, is you wantto have options.
You want to have non-correlatedassets.
You want to have things that goup and down on different
frequencies, so that you haveoptionality and flexibility when
it comes to where you shoulddraw your income from in
retirement.
So that's the financial reason.
Now the second reason, thepsychological reason, comes
(17:23):
under your personal risktolerance, you may be in a
position where you don't need tohave any money in the bond
market.
Let's use an extreme exampleyou have an incredible pension
and social security and thatcovers all of your needs and
then some.
Well, if you look at yourportfolio in retirement, you
technically don't need it tocreate income, because you don't
need it.
You could afford to be 100%stocks because if there is a 30,
(17:44):
40, 50% downturn you could justnot touch it.
You have time for that stockmarket to recover.
You have the same investmenthorizon as someone does in their
20s or 30s, which is a verylong time.
Now, just because you couldafford to do that doesn't mean
that's going to sit well withyou, doesn't mean that's not
going to cause your stomach totie up in knots when there's a
market downturn.
So that's where it's importantto know yourself.
(18:05):
That's where it's important tounderstand how have you felt in
previous downturns?
I don't want to go too far onthe spectrum because just
because you feel a certain way,you could take that too far.
You could be overlyconservative because it helps
you feel better, but then it'shorrible for your long-term
returns and it's horrible foryour ability to maintain a
comfortable retirement.
So it has to be this balancebetween almost logically,
(18:27):
mathematically, what's the bestallocation, and emotionally or
psychologically, how do you feelabout this?
There needs to be considerationfrom both sides and then you
need to be able to understandwhat's the right allocation for
you.
But going back to my previouspoint, if stock market
volatility is keeping you up atnight and all I mean by
volatility is both the ups andthe downs if that craziness and
(18:48):
the uncertainty of short-termreturns keeps you up at night,
well then, maybe you should havemore bonds in your portfolio.
Even if they don't fill afinancial need, they can still
fill a psychological need.
They can still help you feelbetter about your portfolio, if
that's going to help you stayinvested.
I will say this if you are goingto add more to cash or bonds or
stable investments like that,purely for psychological reasons
(19:09):
, there's nothing wrong with it.
However, before you do so, itis wise to understand what are
the long-term implications ofthat in terms of how much you
might be able to spend later onin life, in terms of how much
you might have left over as abuffer to pay for things like
long-term care needs or thingslike that.
How much might you have leftover for your inheritance, for
(19:29):
legacy that you want to leave tochildren, to family, to charity
.
Some of those things might notbe important to you.
That's perfectly fine.
All I'm saying is understand thetrade-offs of decisions that
you make today, because when youretire it may feel like you're
at the finish line.
It may feel like, okay, I'mhere Now I just need to protect.
You might still have 30 plusyears ahead of you and the
(19:50):
difference between, say, an allstock allocation and an all bond
allocation, to use the extremesif you compound that over 30
plus years, the differences areenormous.
So make sure you understand thetrade-offs because more than
likely you're not all one or allthe other, you're probably
somewhere in between.
But make sure you understandwhat that's going to do to the
long-term projections of yourportfolio.
(20:10):
To make sure you're comfortablewith that, because what you'd
hate to see is say, okay, youknow, I don't actually feel
comfortable with the ups anddowns, so you get way
conservative.
Then you wake up one day andrealize, oh, my goodness, I
don't have nearly as much as Ithought I would to continue
paying the bills or to leave alegacy for my family and all of
a sudden, that discomfort, thatpsychological pain, is far worse
(20:31):
than the psychological pain youwould have faced going through
some of the ups and downs.
So there's no perfect solutionhere, but make sure that you've
considered everything beforedetermining what the right
allocation is for you.
So let's start to wrap this upand just to summarize what we've
talked about.
We've talked about thefrequency of positive returns in
the stock market, and we usethat as a starting point to
frame when might we need to havesomething that's not in the
(20:52):
stock market as we get closer toretirement.
We talked about the fact thatit's not actually your
retirement date that you'relooking at.
It's the date that you're goingto start pulling money from
your portfolio that's going todetermine when you should start
making changes.
We then talked about thedifference for the financial
reason for assets like cash orbonds in your portfolio versus
the emotional or psychologicalreason for that.
To tie it all together, here'swhat I typically have done with
(21:15):
clients, typically about 10years out from retirement, and
by retirement, what I should besaying is the time that they'll
start taking money from theirportfolio.
That's where I introduce theconversation Of.
You know what I'm not saying.
We need to start making changestoday, but let's at least begin
the conversation.
Why do I start the conversation10 years out, even if I'm not
going to make changes?
I start it because someonemight be saying they're gonna
(21:37):
retire at 67 and they're 57today, but that 67 might not be
a definite goal and we mightlook at their projections and
say, oh, I thought it was 67,but because I'm doing so well,
I'd actually love to retire at62.
Well, because we started thatconversation 10 years out, we
were able to keep talking aboutit and when they said, you know,
I actually want to reallyaccelerate my retirement, we
(21:57):
weren't caught off guard.
We could say, okay, now let'sreally start to accelerate some
of this transition from stocksto bonds, depending on what
their allocation ultimately wasgoing to be, because we brought
it up.
So I start the conversation 10years out more or less, but
usually it's more like fiveyears.
They actually begin making somemore substantial changes, and
substantial changes as arelative term because, just to
(22:18):
use an example, if we're goingfrom a portfolio it's a hundred
percent stocks to zero percentbonds, and their retirement
portfolio, just to use anarbitrary example, is going to
be 90% stocks and 10% bonds.
It's not really radical changesthat need to be made.
It's a little bit here and alittle bit there over the course
of the next five years, that'sgoing to get them in a perfect
position to retire.
Now, if they're going from a100% stock portfolio to a 50%
(22:40):
stock portfolio, there are goingto be more substantial changes
along the way, but typicallyabout five years out from
retirement, from the date thatthey're going to start pulling
funds, that's when I startmaking some actual changes, or
recommend some actual changes tosay let's start getting you
from where you are to where youneed to be.
So, to use another exampleinstead of going from 100% stock
portfolio today, then youretire tomorrow and immediately
(23:04):
shift to a 60-40 portfolio.
If that is the right allocationfor you, well, that's probably
not the best thing to do.
It works out great if the stockmarket is going higher and
higher and higher, and then youhappen to retire when the stock
market's at peak, because youmaximize the upward capture of
performance and you immediatelyswitch to what was best for you.
But if you wanted to do that ina year like 2022, for example,
(23:26):
and the stock market lost 20,30% of its value, well, now, all
of a sudden, because youweren't getting conservative
along the way, because youweren't making shifts along the
way.
It doesn't mean you can'tretire, but it maybe pushed your
retirement date back by 12months, 18 months, 24 months,
depending on what type ofallocation that you had.
So that's typically what I'lldo.
10 years out, start having aconversation, start looking at
(23:47):
different things, start reallynarrowing in on is this actually
a retirement date and how muchwill we need from your portfolio
at that time?
Five years out, that'stypically where we're starting
to make some strategic shifts.
Those strategic shifts don'tneed to be sales and purchases.
You could simply say, okay,we're going to start taking
dividends and interest from ourportfolio and reinvest that into
(24:08):
the more conservative parts ofour portfolio so that we're
gradually getting to where weneed to be.
On the flip side, you could say, okay, all new 401k
contributions or all newinvestments are going to start
going to more of theconservative investments as we
build our way to where we wantto go.
Or you simply could say youknow what, if today we're 100%
stocks and we know that we wantto be, for example, 80% stocks,
20% bonds in five years?
(24:28):
Well, every year do you make a4% allocation shift to your
portfolio.
So up to the first year you go96% stocks, 4% bonds, then 92%,
8%, then 88%, 12%, and whatyou're doing is you're starting
to take chips off the table,little by little.
So by the time that youactually need funds from your
portfolio, you're in the rightallocation for you All.
(24:49):
That being said, there is noperfect scientific way to do
this.
The stock market is a biguncertainty.
What we're trying to do withthis approach is to minimize the
probability of unfavorableoutcomes.
We're trying to minimize therisks, minimize regret.
In the way that you approachthis.
This is one framework.
I hope that framework helps,but this is the way that I think
makes a lot of sense when we'retrying to look at things from
(25:10):
the standpoint of what is therole of stocks versus what is
the role of bonds and how do wethink of both, both from a
financial standpoint as well asa psychological standpoint, to
come up with the rightallocation for us and to begin
that shift in the mostappropriate timeframe.
So I hope that's helpful.
Thank you everyone for listening.
If you are watching this onYouTube, please make sure that
you subscribe to the channel sothat every time we release a new
(25:30):
video, you get notified.
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mind leaving a five-star reviewif you're enjoying this, that
would help me out a ton.
It would help people who arelooking for content out a ton.
Most of all, though, thank youfor listening and I'll see you
all next time.
Root Financial has not providedany compensation for, and has
(25:52):
not influenced the content of,any testimonials and
endorsements shown.
Any testimonials andendorsements shown have been
invited, have been shared witheach individual's permission and
are not necessarilyrepresentative of the experience
of other clients.
To our knowledge, no otherconflicts of interest exist
regarding these testimonials andendorsements.
Hey everyone, it's me again forthe disclaimer.
Please be smart about this.
Before doing anything, pleasebe sure to consult with your tax
(26:13):
planner or financial planner.
Nothing in this podcast shouldbe construed as investment, tax,
legal or other financial advice.
It is for informationalpurposes only.
Thank you for listening toanother episode of the Ready for
Retirement podcast.
If you want to see how RootFinancial can help you implement
the techniques I discussed inthis podcast, then go to
(26:33):
rootfinancialpartnerscom andclick start here, where you can
schedule a call with one of ouradvisors.
We work with clients all overthe country and we love the
opportunity to speak with youabout your goals and how we
might be able to help.
And please remember nothing wediscuss in this podcast is
intended to serve as advice.
You should always consult afinancial, legal or tax
professional who's familiar withyour unique circumstances
(26:54):
before making any financialdecisions.
On today's episode of Ready for Retirement, we're
going to discuss how soon,before retiring, you should
begin to adjust your portfolioNow.
This is one of the mostimportant things you can know
about retirement planning,because if you don't do this
soon enough, or in other words,if you do it too late, your
desired retirement date could bewiped out, even if just
temporarily, by a major marketdownturn.
On the other hand, if you beginto adjust your portfolio too
(00:20):
soon, you could miss out onsubstantial growth in your
portfolio, which will thenimpact your ability to maximize
retirement income and live outyour ideal retirement.
This is why, to state theobvious, it is crucial that you
understand when you should beginmaking adjustments to your
portfolio and to take an evenbigger step back.
What do I mean by adjustmentsto your portfolio?
I mean when should you start toallocate the amount of growth
(00:41):
investments to stableinvestments, or growth
investments to conservativeinvestments, typically thought
of as your mix of stocks tobonds?
So that's exactly what we'regoing to be discussing on
today's episode.
This is another episode of Readyfor Retirement.
I'm your host, james Canole,and I'm here to teach you how to
get the most out of life withyour money.
And now on to the episode.
(01:02):
Here's really what this comesdown to.
Really, what this comes down toisn't how soon should I begin
adjusting my portfolio, it's howdo I protect myself against a
stock market decline?
Now, that might seem obvious,but when we state it this way,
it's a little bit easier toquantify what that adjustment
should look like.
And the reason for that isbecause, with the stock market,
(01:23):
we have no idea what's going tohappen going forward.
But we at least have severaldecades, 100 years of experience
to help us understand how themarket works and what typical
recovery timeframes look like.
So, as you're listening to this, just to really paint the
picture, if you're in your 30s,you're probably not too worried
about decline for your long-terminvestments.
If your 401k balance goes down,if your Roth IRA balance goes
down, you maybe don't like it,you almost certainly don't like
(01:46):
it but you're not too worriedabout your ability to retire.
Now contrast that to if you're60 years old and let's say that
all of your money is in thestock market.
Now you are very worried aboutthe ability to retire, assuming
your retirement is coming up inthe not too distant future.
So you can start to see how, atone point, you shouldn't be at
all concerned.
In fact, if you're in your 30s,you should invite a market
(02:06):
downturn, because that means youget to continue buying great
companies at a lower price.
But if you're in retirement ornear retirement, you can start
to see how, of course, that'snot going to be as appetizing,
because that's money that you'regoing to need, sooner rather
than later, to live on inretirement.
So what we're going to do iswe're going to look at
statistics just to give you someperspective on how markets
typically work, and then we'regoing to take a look at a
practical way of working aroundthis, a practical way that you
(02:29):
can implement in your portfolioto help protect yourself against
a market decline in retirement.
So let's start with thefundamentals.
We invest in stocks becausewe're investing in real
companies with real earnings.
You're not just sticking yourmoney into something, seeing
numbers go up and down on ascreen and hoping for the best
long term.
What you are actually doingliterally doing is you're buying
ownership in a company.
(02:49):
Now that company has earnings,it has profits, it has revenues,
and those are things that youthen participate in as a
shareholder.
You don't just buy one stock orone company.
Ideally, you're purchasinghundreds or even thousands of
companies, because if youdiversify well and if you own a
lot of great companies, you canbuild a lot of wealth over time.
In doing that, the downsidestocks don't always go up.
(03:15):
Historically, the S&P 500, someasure the 500 biggest
companies in America it'saveraged about 10% per year over
time.
Now, to state the obvious, ifwe knew that every single year
we were going to get exactly 10%, we probably wouldn't own
anything other than that.
Sure, maybe some other assetclasses actually have a better
long-term return.
But if you could guarantee 10%per year, most of you are going
to be all over that.
Who wouldn't want that?
The downside, again to statethe obvious, is stocks don't
(03:36):
always go up.
If they only went up, wewouldn't own other things like
bonds or cash or otherconservative investments.
We would only own stocks.
But because stocks on averageone out of every four years have
a down year, have a bear market, that's why we start to own
other things.
So let's look at that frequencyas a starting point.
How frequently do stocks go downand how frequently do stocks go
(03:58):
up?
Well, if we're looking at theS&P 500, and we're looking at
the frequency of positivereturns over the last 90 years
and we're looking at thefrequency of positive returns
over the last 90 years.
It's really easy to get dataaround this.
On a daily basis, about 53% ofthe time the S&P 500 goes up,
meaning tomorrow assumingtomorrow is a market trading day
.
If you want to bet what themarket's going to do tomorrow,
it's basically a coin flip, aslightly more likely to be up
(04:20):
than down.
But 53% of the time the marketis positive on a daily basis and
47% of the time it's negative.
So not much better than a coinflip.
If you're staking yourretirement on a coin flip,
that's a bad deal.
So the stock market is veryrisky in the short term.
You're equally as likely tolose money on a daily basis as
you are to gain money.
Now, what if we extend that?
What if we don't look at dailyreturns but we look at monthly
(04:41):
returns?
Well, on a monthly basis, 63%of the time the S&P 500 has been
positive over the last 90 plusyears, which means the remaining
37% of the time it's beennegative.
So it's almost a two thirds onethirds ratio.
At that point, what aboutannually?
On an annual basis, 73% of thetime the S&P 500 has a positive
outcome.
(05:02):
The other 27% of the time ithas a negative outcome.
So that was my statisticearlier One out of every four
years.
The market goes down on acalendar year basis, but as we
begin to extend that evenfurther over five-year rolling
time periods, 88% of the timethe S&P 500 has a positive
outcome.
Overall 10-year rolling timeperiods the S&P 500 is positive
94% of the time.
(05:23):
In over 20 20 year rolling timeperiods, there's never been an
instance in the last 90 plusyears that the S&P 500 has not
had a positive outcome.
And to add on to that, not onlyhas there not been a negative
outcome over those 20 yearrolling time periods, it's not
like an equal negative to equalpositive.
There's only been substantialpositive gains over those time
periods.
So as an investor, that's whywe invest we are trading
(05:45):
short-term uncertainty for ahigh degree of probability of
success over the long term, andnot just a small degree of
success.
But when you take your money andyou compound it at 8%, 9%, 10%
over five years, 10 years, 20years, you can really begin to
build substantial wealth.
Now those numbers were justlooking at the S&P 500, just big
US companies.
If you diversify further, youlook at small companies,
(06:08):
international companies,emerging markets, real estate,
so on and so forth the frequencyof those returns actually
increases.
So that is an important thingto note as a fundamental
starting point.
And this may sound obvious, butthis is just designed to
quantify some of this, to givesome framework for some of this,
because here's what we want todo next In practice.
We want to take but it doesn'tjust stop there, it's not just
(06:32):
looking at okay, are youretiring in 10 years?
Well, there's 94% probabilitythat your money is going to be
increasing in value over that10-year time period.
That's a good starting point,but really what we want to know
isn't when are you retiring,it's when will you need these
funds and how much of them willyou need?
For example, let's assume thatyou are 55 years old today and
(06:52):
you want to retire at 65.
You, for example, let's assumethat you are 55 years old today
and you want to retire at 65.
You might look at those numbersand say, ok, we're still 10
years out.
There's still a highprobability of success over that
10 year time period 94% forlooking at the S&P 500, just
based on historical numbers.
Probably even higher dependingupon the mix of different stocks
in your portfolio, or stocksand bonds in your portfolio.
So you might look at that andsay, ok, 10 years out seems okay
, but I'm going to startgradually getting closer and
(07:14):
closer to my desired stock tobond allocation by the time that
I actually retire.
Well, let's also assume thatyou're retiring at 65, but you
have a pension, you have socialsecurity and you have a spouse
that's going to continue workingfor the first five years of
your retirement.
And between those three incomesources social security, pension
and spouse's earnings youactually don't need to touch
(07:39):
your portfolio.
Well, in that case, you're 10years away from your retirement,
but you're actually 15 yearsaway from needing funds in your
portfolio.
So that's a key distinction.
It's not just when are youretiring and that's going to
drive the decision of whenshould you start making some
strategic shifts from stocks tobonds or stocks to other assets.
It's not just that, it isactually when do you begin to
need these funds from yourportfolio?
So, in this example, you'reretiring in 10 years, but you
need funds in 15 years.
(08:00):
It's that 15 year mark that Iwould be more focused on when it
comes to what should thestrategic shift, the strategic
realignment, look like for yourspecific portfolio.
So that's one thing you look atis not just when you retire,
but when do you actually needfunds from your portfolio.
Now, oftentimes those twothings coincide with one another
, but not always.
The second part of this isn'tjust when do you need funds from
(08:21):
your portfolio, but how much doyou need from your portfolio.
So, for example, let's assumethat you retire and you know
that you're going to needexactly $40,000 per year from
your portfolio to supplementyour other income sources.
So let's assume that with that,you want to make sure that you
have 10 years worth of cash andbonds in your portfolio in case
the stock market drops a lot.
I'm not saying that's myrecommendation.
Oftentimes, actually, I startwith less than that.
(08:42):
But just for sake of example,let's assume you say I want 10
years worth of cash and bonds inmy portfolio.
That's not subject to stockmarket ups and downs.
So if we go through a 10-yeartime period of really rough
returns in the stock market, Istill have other assets that I
can live on in that case.
Well, that comes out to a totalof $400,000.
(09:03):
If you have a $1 millionportfolio going into retirement
and you want 10 years worth ofliving expenses in cash or bonds
.
That's the $400,000.
So in this instance, you wouldend up with a portfolio that's
60% stocks and 40% bonds the60-40 portfolio.
So keep that in mind.
In order to meet that objective, you would need a 60-40
portfolio if you started with amillion dollars.
(09:24):
Now let's assume that you'renot starting with a million
dollars.
Let's assume that you'restarting with $4 million, but
you still have that same need.
You still have that $400,000need for cash, bonds, other
stable assets.
Well, in this instance, that$400,000 has stayed fixed, but
the portfolio value is now $4million.
So $400,000 in this example nowonly represents 10% of your
(09:48):
overall portfolio, which meansyou could be more like a 90-10
in this example and still havethe same protections the cash
and bonds offer In bothinstances, because your need
from your portfolio was the same.
The 90-10 portfolio and the60-40 portfolio provide the same
level of protections.
The difference was in both thedollar amount and the percentage
(10:09):
amount that you had in moregrowth-oriented assets.
So you can start to see thedifference here.
And, by the way, this is justlooking at the financial side of
things.
Another layer that you need toadd onto this, which we're gonna
talk about in just a second isyour comfortability with this
type of a portfolio allocationin retirement?
I have a lot of clients thathave 90% or more of their
portfolio in stocks and they'reretired and they're fully
comfortable with it.
I have a lot of other clientsthat would never be comfortable
(10:31):
with that type of an allocation,even if they knew they were
secure enough with their overallportfolio to weather the
downturn.
In that example, just the upsand downs in retirement would
not be something that they couldsleep with at night, at least
not peacefully.
So there's the what does yourportfolio need side of this.
We call this what's your riskcapacity in terms of how much
could you possibly have instocks?
(10:52):
And then there's more of theemotional side, or the
psychological side of even ifyou could afford to have more in
stocks doesn't necessarily meanthat's the best portfolio for
you.
If that's going to cause a lotof discomfort, that's going to
cause a lot of anxiety inretirement due to the ups and
downs of the market's going tocreate.
So more on that in one second.
But I actually want to go backto my example that I just used.
We just used an example to showhow, if your needs from your
(11:13):
portfolio are the same in bothinstances a million dollar
portfolio versus a four milliondollar portfolio you would have
different stock to bond ratiosin those to accomplish the same
goal.
Let's actually go back to thatfour million dollar portfolio
example and, by the way, whetheryour portfolio is four million,
four hundred thousand fortymillion, the principles here are
what I want you to focus on.
Don't focus too much on thedollar values.
(11:34):
I'm just using these as anexample.
Focus on the principles.
And the principle there is.
If you actually look at that $4million portfolio, and we know
that our goal is to generate$40,000 per year and we want 10
years of living expenses andcash and bonds in case the stock
market drops.
Well, here's another thing thatI want you to consider A $4
million portfolio and this, ofcourse, depends upon how you're
(11:59):
invested, but let's assume thatportfolio is generating a 2%
dividend yield.
That $4 million portfolio isgenerating $80,000 of cash
dividends.
Now why do we have cash andbonds?
Go back to the very beginning,where I said we don't own those
because they're going to grow awhole lot.
That's what the stock marketdoes.
We own those because theyprovide some stability.
They provide another asset,another resource.
Think of it as like theemergency fund for your
portfolio, so that when thestock market is down, you don't
(12:21):
have to sell your greatinvestments, you can simply pull
from your emergency fund, oryou can simply pull from your
cash and bonds, giving time forstocks to recover.
Well, if you have a $4 millionportfolio generating a 2%
dividend yield, that's $80,000of cash income that that
portfolio is creating for you.
If you only need $40,000, youare already creating 200% of
(12:41):
your desired income needs on anannual basis.
Just some cash dividends fromyour portfolio.
Now you may say, well, james,sure, but what happens when the
stock market drops?
What happens when the stockmarket drops 30%, 40%, 50%?
That can and will happen.
However, when it does, historyactually shows us that dividends
remain pretty resilient.
If you look at 2000, 2002, forexample, the stock market lost
(13:03):
about half of its value.
The US stock market that is,dividends only dropped by about
1% to 2%, meaning the companythat was paying $1 per share in
dividends at the end of thatperiod was paying closer to 98
to 99 cents per share individends.
So that's incredibly resilient.
In 2022, when the stock marketdropped 25 plus percent at its
(13:24):
peak, dividends that yearactually increased.
So when you're looking at this,keep in mind that dividends the
cash dividends companies paythey do not rise and fall with
the company's stock value.
The stock value is verysporadic.
It can be up and down.
It can swing wildly.
Traditionally, dividends do notmove as actively.
They remain pretty steady.
(13:45):
Now the flip side of this is2008 to 2009, when dividends did
actually go down by about aquarter, but still dividends
didn't get wiped out.
Dividends didn't drop as muchas the stock market did.
So keep that in mind when you'redesigning a portfolio, that you
can look at the cash dividendscoming either from the stock
portion of your portfolio or theinterest income from the bond
portion of your portfolio, andthat can help you to determine
(14:07):
what allocation to use as well.
So that's the first part of thedecision.
As you're asking yourself, howsoon before retiring do I start
to make this transition from amajority or even all stock
portfolio to the appropriateretirement portfolio, which in
many cases is still majoritystocks, but it's maybe not all
stocks or it's maybe not quiteas many stocks as you had in
your working years as you do inretirement Not a universal thing
(14:29):
, but just on average that tendsto be the case.
What's the second part of thisframework?
Well, the second part to tagalong to what I was talking
about is there are reasons forusing bonds.
There are reasons for usingcash.
There's a financial reason andthere's a psychological reason.
So that financial reason is notbecause they're going to grow a
whole heck of a lot over time.
We already established thatStocks, traditionally, are going
(14:50):
to grow a lot more than bondsare over time.
However, bonds provide somethingthat stocks don't, which is
stability in the short term.
Even with bonds, you need to bevery careful because in a year
like 2022, if you just owned anaggregate bond index, that
aggregate bond index was downdouble digits.
So if you're saying, well, whatthe heck, my safety money just
lost 10, 12 percent, well,realize that not all bonds are
(15:14):
created equal.
You have government bonds andcorporate bonds.
You have short-term bonds andlong-term bonds.
You have junk bonds, you havehigh quality bonds.
There's all these differentkinds of bonds and, unlike
stocks, where you might say, hey, for my stock market portfolio,
I just want to be broadlydiversified, I want to own the
entire US stock market.
That could be a great strategyfor a lot of people.
However, if your bond strategyis I just want to own the
(15:35):
entirety of the bond market,which, by the way, is enormous.
But if you just wanted to ownthe entirety of the bond market,
probably a horrible strategyfor most people.
What you really want to do isyou want to use bonds for a
specific purpose, whether it'sliability matching Okay, I need
to have a certain amount inbonds that mature at the right
time for me to be able to spendthat money in my portfolio.
Or whether it's for liabilitymatching, which means I need to
(15:55):
have a certain number of bonds,certain amount in bonds, and a
specific duration or a specificmaturity so those can mature and
I can spend that money bypulling that money out of my
portfolio.
Or it's to have somethingthat's non-correlated to the
stock market as much as possible.
Or for some other reason.
Maybe that's income, maybethat's something else, but you
need to first define what is thepurpose for the bond and then
what specific types of bondsshould you use.
(16:17):
But understand that the goal ofbonds, whatever that purpose is
, should not be growth.
Growth should be coming fromthe stock portion of your
portfolio or other asset portionof your portfolio, not from
bonds.
The financial reason that I liketo think of when it comes to
bonds is to protect againstthose downturns.
It's to be that emergency fund,so you need to have a stable
amount in conservativeinvestments so that you have
(16:39):
options of where to take incomefrom when the stock market is
down.
So if you have a year where thestock market is down and the
bond market is up, well you canstrategically say I'm not going
to touch my stock marketinvestments.
Those are great investments andthey will recover, but it might
be several months or even years.
In the meantime, I'm going totake money from my bond
portfolio, or vice versa.
Maybe the bond market is downand the stock market is up.
(17:00):
You're going to take money fromthe stock portion of your
portfolio and not touch the bondportion, or maybe they're both
up.
The thing, though, is you wantto have options.
You want to have non-correlatedassets.
You want to have things that goup and down on different
frequencies, so that you haveoptionality and flexibility when
it comes to where you shoulddraw your income from in
retirement.
So that's the financial reason.
Now the second reason, thepsychological reason, comes
(17:23):
under your personal risktolerance, you may be in a
position where you don't need tohave any money in the bond
market.
Let's use an extreme exampleyou have an incredible pension
and social security and thatcovers all of your needs and
then some.
Well, if you look at yourportfolio in retirement, you
technically don't need it tocreate income, because you don't
need it.
You could afford to be 100%stocks because if there is a 30,
(17:44):
40, 50% downturn you could justnot touch it.
You have time for that stockmarket to recover.
You have the same investmenthorizon as someone does in their
20s or 30s, which is a verylong time.
Now, just because you couldafford to do that doesn't mean
that's going to sit well withyou, doesn't mean that's not
going to cause your stomach totie up in knots when there's a
market downturn.
So that's where it's importantto know yourself.
(18:05):
That's where it's important tounderstand how have you felt in
previous downturns?
I don't want to go too far onthe spectrum because just
because you feel a certain way,you could take that too far.
You could be overlyconservative because it helps
you feel better, but then it'shorrible for your long-term
returns and it's horrible foryour ability to maintain a
comfortable retirement.
So it has to be this balancebetween almost logically,
(18:27):
mathematically, what's the bestallocation, and emotionally or
psychologically, how do you feelabout this?
There needs to be considerationfrom both sides and then you
need to be able to understandwhat's the right allocation for
you.
But going back to my previouspoint, if stock market
volatility is keeping you up atnight and all I mean by
volatility is both the ups andthe downs if that craziness and
(18:48):
the uncertainty of short-termreturns keeps you up at night,
well then, maybe you should havemore bonds in your portfolio.
Even if they don't fill afinancial need, they can still
fill a psychological need.
They can still help you feelbetter about your portfolio, if
that's going to help you stayinvested.
I will say this if you are goingto add more to cash or bonds or
stable investments like that,purely for psychological reasons
(19:09):
, there's nothing wrong with it.
However, before you do so, itis wise to understand what are
the long-term implications ofthat in terms of how much you
might be able to spend later onin life, in terms of how much
you might have left over as abuffer to pay for things like
long-term care needs or thingslike that.
How much might you have leftover for your inheritance, for
(19:29):
legacy that you want to leave tochildren, to family, to charity
.
Some of those things might notbe important to you.
That's perfectly fine.
All I'm saying is understand thetrade-offs of decisions that
you make today, because when youretire it may feel like you're
at the finish line.
It may feel like, okay, I'mhere Now I just need to protect.
You might still have 30 plusyears ahead of you and the
(19:50):
difference between, say, an allstock allocation and an all bond
allocation, to use the extremesif you compound that over 30
plus years, the differences areenormous.
So make sure you understand thetrade-offs because more than
likely you're not all one or allthe other, you're probably
somewhere in between.
But make sure you understandwhat that's going to do to the
long-term projections of yourportfolio.
(20:10):
To make sure you're comfortablewith that, because what you'd
hate to see is say, okay, youknow, I don't actually feel
comfortable with the ups anddowns, so you get way
conservative.
Then you wake up one day andrealize, oh, my goodness, I
don't have nearly as much as Ithought I would to continue
paying the bills or to leave alegacy for my family and all of
a sudden, that discomfort, thatpsychological pain, is far worse
(20:31):
than the psychological pain youwould have faced going through
some of the ups and downs.
So there's no perfect solutionhere, but make sure that you've
considered everything beforedetermining what the right
allocation is for you.
So let's start to wrap this upand just to summarize what we've
talked about.
We've talked about thefrequency of positive returns in
the stock market, and we usethat as a starting point to
frame when might we need to havesomething that's not in the
(20:52):
stock market as we get closer toretirement.
We talked about the fact thatit's not actually your
retirement date that you'relooking at.
It's the date that you're goingto start pulling money from
your portfolio that's going todetermine when you should start
making changes.
We then talked about thedifference for the financial
reason for assets like cash orbonds in your portfolio versus
the emotional or psychologicalreason for that.
To tie it all together, here'swhat I typically have done with
(21:15):
clients, typically about 10years out from retirement, and
by retirement, what I should besaying is the time that they'll
start taking money from theirportfolio.
That's where I introduce theconversation Of.
You know what I'm not saying.
We need to start making changestoday, but let's at least begin
the conversation.
Why do I start the conversation10 years out, even if I'm not
going to make changes?
I start it because someonemight be saying they're gonna
(21:37):
retire at 67 and they're 57today, but that 67 might not be
a definite goal and we mightlook at their projections and
say, oh, I thought it was 67,but because I'm doing so well,
I'd actually love to retire at62.
Well, because we started thatconversation 10 years out, we
were able to keep talking aboutit and when they said, you know,
I actually want to reallyaccelerate my retirement, we
(21:57):
weren't caught off guard.
We could say, okay, now let'sreally start to accelerate some
of this transition from stocksto bonds, depending on what
their allocation ultimately wasgoing to be, because we brought
it up.
So I start the conversation 10years out more or less, but
usually it's more like fiveyears.
They actually begin making somemore substantial changes, and
substantial changes as arelative term because, just to
(22:18):
use an example, if we're goingfrom a portfolio it's a hundred
percent stocks to zero percentbonds, and their retirement
portfolio, just to use anarbitrary example, is going to
be 90% stocks and 10% bonds.
It's not really radical changesthat need to be made.
It's a little bit here and alittle bit there over the course
of the next five years, that'sgoing to get them in a perfect
position to retire.
Now, if they're going from a100% stock portfolio to a 50%
(22:40):
stock portfolio, there are goingto be more substantial changes
along the way, but typicallyabout five years out from
retirement, from the date thatthey're going to start pulling
funds, that's when I startmaking some actual changes, or
recommend some actual changes tosay let's start getting you
from where you are to where youneed to be.
So, to use another exampleinstead of going from 100% stock
portfolio today, then youretire tomorrow and immediately
(23:04):
shift to a 60-40 portfolio.
If that is the right allocationfor you, well, that's probably
not the best thing to do.
It works out great if the stockmarket is going higher and
higher and higher, and then youhappen to retire when the stock
market's at peak, because youmaximize the upward capture of
performance and you immediatelyswitch to what was best for you.
But if you wanted to do that ina year like 2022, for example,
(23:26):
and the stock market lost 20,30% of its value, well, now, all
of a sudden, because youweren't getting conservative
along the way, because youweren't making shifts along the
way.
It doesn't mean you can'tretire, but it maybe pushed your
retirement date back by 12months, 18 months, 24 months,
depending on what type ofallocation that you had.
So that's typically what I'lldo.
10 years out, start having aconversation, start looking at
(23:47):
different things, start reallynarrowing in on is this actually
a retirement date and how muchwill we need from your portfolio
at that time?
Five years out, that'stypically where we're starting
to make some strategic shifts.
Those strategic shifts don'tneed to be sales and purchases.
You could simply say, okay,we're going to start taking
dividends and interest from ourportfolio and reinvest that into
(24:08):
the more conservative parts ofour portfolio so that we're
gradually getting to where weneed to be.
On the flip side, you could say, okay, all new 401k
contributions or all newinvestments are going to start
going to more of theconservative investments as we
build our way to where we wantto go.
Or you simply could say youknow what, if today we're 100%
stocks and we know that we wantto be, for example, 80% stocks,
20% bonds in five years?
(24:28):
Well, every year do you make a4% allocation shift to your
portfolio.
So up to the first year you go96% stocks, 4% bonds, then 92%,
8%, then 88%, 12%, and whatyou're doing is you're starting
to take chips off the table,little by little.
So by the time that youactually need funds from your
portfolio, you're in the rightallocation for you All.
(24:49):
That being said, there is noperfect scientific way to do
this.
The stock market is a biguncertainty.
What we're trying to do withthis approach is to minimize the
probability of unfavorableoutcomes.
We're trying to minimize therisks, minimize regret.
In the way that you approachthis.
This is one framework.
I hope that framework helps,but this is the way that I think
makes a lot of sense when we'retrying to look at things from
(25:10):
the standpoint of what is therole of stocks versus what is
the role of bonds and how do wethink of both, both from a
financial standpoint as well asa psychological standpoint, to
come up with the rightallocation for us and to begin
that shift in the mostappropriate timeframe.
So I hope that's helpful.
Thank you everyone for listening.
If you are watching this onYouTube, please make sure that
you subscribe to the channel sothat every time we release a new
(25:30):
video, you get notified.
If you're listening on podcast,please make sure that you leave
a review.
Reviews really helps peoplefind the show, so if you don't
mind leaving a five-star reviewif you're enjoying this, that
would help me out a ton.
It would help people who arelooking for content out a ton.
Most of all, though, thank youfor listening and I'll see you
all next time.
Root Financial has not providedany compensation for, and has
(25:52):
not influenced the content of,any testimonials and
endorsements shown.
Any testimonials andendorsements shown have been
invited, have been shared witheach individual's permission and
are not necessarilyrepresentative of the experience
of other clients.
To our knowledge, no otherconflicts of interest exist
regarding these testimonials andendorsements.
Hey everyone, it's me again forthe disclaimer.
Please be smart about this.
Before doing anything, pleasebe sure to consult with your tax
(26:13):
planner or financial planner.
Nothing in this podcast shouldbe construed as investment, tax,
legal or other financial advice.
It is for informationalpurposes only.
Thank you for listening toanother episode of the Ready for
Retirement podcast.
If you want to see how RootFinancial can help you implement
the techniques I discussed inthis podcast, then go to
(26:33):
rootfinancialpartnerscom andclick start here, where you can
schedule a call with one of ouradvisors.
We work with clients all overthe country and we love the
opportunity to speak with youabout your goals and how we
might be able to help.
And please remember nothing wediscuss in this podcast is
intended to serve as advice.
You should always consult afinancial, legal or tax
professional who's familiar withyour unique circumstances
(26:54):
before making any financialdecisions.
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