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Coasting in Retirement Ep 4: The Top 7 Financial Intentions Retirees & Pre-Retirees Should Have For 2023 Part 1 Thumbnail

Coasting in Retirement Ep 4: The Top 7 Financial Intentions Retirees & Pre-Retirees Should Have For 2023 Part 1


Josh and cohost Michelle discuss why New Year's Financial Intentions are better than resolutions:

  • Sequence of return risk can create compound growth by having a plan &other assets classes to dip into
  • Benefits get higher every year you delay taking Social Security until age 70
  • A higher interest rate environment can help with income production in retirement
  • Owning equities can help combat inflation

Transcript:

Good afternoon everyone and welcome to Coasting in Retirement! I am your host, Josh Null, and I’m joined by my co-host, Michelle Lee Melton. Happy New Year, Michelle, how are you doing? We’ve got a great show for you all to kick off 2023! First, for those new to the show, I am the owner of Gulf Coast Financial Advisors, an independent financial planning firm based out of downtown Fairhope, Alabama that serves clients up and down the Gulf Coast. You can learn more about us on our website at Gulfcoastfa.com. Michelle and I are here today to discuss financial topics relevant to those in or near retirement living their best life along our part of the coast. 

So, Michelle, you and I started off our new year with what you call “intentions”. Can you describe what that means? Is this different than new years resolutions? “Intentions are courses of action vs resolutions that are more of a determination. Resolutions = outcome. Intentions = process.” So that got me to thinking – a show based on financial resolutions would be too easy right? Save more. Spend less. Buy generic. You get the idea. We must try harder Michelle! We are going to dig just a little deeper by making intentions not only the main topic of today’s episode, but give it space to breath with a 2 episode mini-series. Epic. Plus to be honest my list got too long for just one episode. This week and the next we are going to discuss what parts of the financial planning process that those in or near retirement should focus on as we enter 2023. What should be the financial intentions of pre-retirees and retirees in 2023 you ask? We shall answer. And because I’m a huge nerd that has to number everything and keeps a never-ending to-do list always by my side, we going to title our mini-series the “Top 7 Financial Intentions that every retiree and pre-retiree should have for 2023”. We will cover the first 4 today. Ready? 

Here are the 2023 financial intentions we are covering today, in no particular order: 

  1. Reorganize your financial plan to help deal with sequence of return risk
  2. Take a hard look at your social security, and if possible, delay turning on your benefits
  3. Investigate how a high interest rate environment can actually be your ally when it comes to income production in retirement
  4. Take real action to accommodate inflation in your retirement plan, including an honest assessment of how much inflation is affecting your daily living vs your investment accounts 

Even breaking the list in 2 parts, that’s still a lot to digest, so let’s break them down one at time, plus we will be revisiting these intentions with the other segments in our show.  

First, sequence of return risk. What is it? Here’s the simple version: Many folks will be in retirement for 20, 30, maybe 40 plus years. At some during that amount of time, there will be at least one bear market. Probably more. Your finances will be much worse off if the slump occurs at the outset of your retirement rather than in the middle or at the end. Think of it as a mirror reflection of why you’re better off if you start saving for retirement as early as possible. When you start investing early, your cash has more time to benefit from compounding returns—and when you start taking money out of retirement investments in a bear market, it decimates your principal and permanently reduces the basis for enjoying the benefits of compound growth. 

Imagine two retirees who start with $1 million in their retirement portfolio. Each of them withdraws $50,000 per year for expenses. Investor A is hit by a 15% market decline in the first year of retirement, and as a result, runs out of cash by year 18 of retirement. Investor B is hit by a 15% market decline at year 10 of retirement, but they still have $400,000 left at year 18 of retirement. 

How do you mitigate sequence of return risks? It takes a plan. It takes having other investment buckets and asset classes that you can dip into instead of selling positions at a low point.  At the end of the day you are trying to minimize principal withdrawals during a market downturn early in retirement. One of my primary functions as a fiduciary financial advisor is to make sure you don’t outlive your money. One of the ways I do this is to pay close attention to sequence of return risk in your portfolio. 

Next up: Social Security. Anyone that has looked at their social security projection statement knows that the benefit gets higher every year they delay taking social security. What most folks don’t know is that once you reach full retirement age, typically between age 65 to 67, you’ll get an extra 2/3 of 1% for each month you delay after your birthday month, adding up to 8% for each full year you wait until age 70. In my opinion, this is the only, and I mean the only, investment you can kinda squint at and say it gives you a guaranteed 8% return. Now, it’s not that simple, and nothing in investing is guaranteed, but when you add in the fact that social security has to also accommodate cost of living adjustments, there is typically a tipping point to where the additional benefits from waiting mathematically outweigh the payments received from starting social security early. There are also ways to use insurance to help offset the loss of early benefits, but that a larger one on one discussion you can have with our office. One way or the other, if you are someone that is eligible for social security this year, please either give us or another qualified financial professional a call to discuss your options. You can set an appointment with us at 251-333-5151.  

Third is our list of financial intentions for 2023 involves how a higher interest rate environment can actually help with your production of income in retirement. Most investors have already seen the effect rising interest rates have had on their fixed investments, such as CD’s – banks are offering higher rates of return than they they have in years. More specifically, many investors utilize annuities to produce income in retirement. I won’t go into all of the different kinds of annuities again – you can find that discussion by finding our Coasting in Retirment podcast and listening to Episode 3 – but let’s briefly talk about income annuities here. Insurance companies do not directly base their annuity income payouts on the Fed Funds rate – that’s a short term rate, they look longer term. But broadly speaking, bonds are significant part of insurance company’s annuity portfolios – what they use to determine the payout on their products. When interest rates rise, insurers get a higher yield on new bonds — which generally gets passed along to consumers in the form of a larger monthly check. So all that is to say that rising interest rates can actually help those in retirement generate higher payments. 

Lastly, we often talk about taking action to accommodate inflation in your retirement plan. What does this mean? Often a pre-retiree or retiree will be tired of the ups and downs that is inherit with have equities in their portfolio, that is, either individual stocks, or maybe mutual funds or ETF’s, that tend to go noticeably go up and down with stock market volatility. And for good reason – they’ve worked hard for many years for that bucket of money, and more often than not they want to protect it. Maybe bury in the back yard or under the mattress, so to speak. The problem with doing that is that your money – specifically your cash – is always, constantly losing value in the form of inflation, and especially during times of high inflation, it’s losing it’s purchasing power quickly. Over the modern history of our economy, one of the only proven ways to combat inflation is by owning equities, or pieces of ownership in a publicly traded company. How do we accommodate both sides of these desires in a financial plan – to preserve capital but not totally lose the inflation battle? It often involved holding equities, but holding them in a methodical and planned out manner, as part of a comprehensive financial plan.  

What does this comprehensive financial plan look like? There’s too many details and options to fully discuss on this episode, but let me give you our basic process at Gulf Coast Financial Advisors: 

  • First we figure out how much you’ll need for the retirement you’ve been dreaming about
  • Next we uncover the main risks posing a threat to your retirement, including inflation, stock market volatility, potential tax increases, skyrocketing health care costs, etc
  • Then we discuss options for generating income in retirement and putting your investment portfolio to work doing specific jobs, such as battling inflation
  • Finally we discuss how to keep your current standard of living in retirement, even as costs keep rising.

The strategies we use are designed in part to help you with inflation and longevity risks. Not only are we trying to match your risk tolerance with your investment holdings, we want to help make sure you don’t end up outliving your retirement savings. If you’re interested in having that conversation, give us a call at 251-333-5151, or find us at gulfcoastfa.com. That’s gulfcoastfa.com.

Alright, coming up next - There’s always a lot going on in the world! Particularly the world of finance. It seems like there’s major headlines every week affecting investors, especially those in or near retirement. Join us after the break to hear Michelle and I discuss this week’s relevant headlines in our “Michelle with the News of the Week” segment. Stay tuned!

Segment 2 - Michelle with the News of the Week:

Josh: “Welcome back to Coasting in Retirement, your host Josh Null here! As we discussed before the break, it seems like there’s major headlines every week affecting investors, especially those in or near retirement. Coasting in Retirement’s co-host Michelle and I are going to help you all understand and decipher the deeper meaning of those headlines, particularly the ones that relate to our show topic and have an impact on those in or near retirement. So with out further adieu, here’s “Michelle with the news of the week”!:

1. Michelle: Alright Josh, let’s start with Smart Asset has an article titled “10 Strategies to Maximize Social Security Benefits”. I learned a couple of things from this article. One is that social security is based on your highest 35 income earning years. That seems like a lot of years! Does that mean I have to work 35 years to get social security? 

Josh: No, it just means that if you didn’t have reportable income for a full 35 years, there will be a “0” for the years you fall short and the amount of your social security will be reduced. Sometimes working for a couple of more years past your desired retirement date makes a significant impact on your future social security. Now for a lot of people, when they retire from their main career, they’re done, they have no desire to work anymore. But if you have the ability to maybe pick up a 2nd job or a side hustle while delaying your social security, you can at least avoid some of the zero’s on your statement. Either way it’s definitely part of the conversation we’re going to have at Gulf Coast Financial Advisors with those folks entering the retirement red zone.  

(https://smartasset.com/retirement/social-security-strategies#:~:text=Consider%20Working%20in%20Retirement&text=Specifically%2C%20the%20SSA%20deducts%20%241,%243%20you%20earn%20over%20%2451%2C960) 

2. Michelle: Back to a site you know well Josh, and something you talked about in the opening: Charles Schwab has an article titled “Timing Matters: Understanding Sequence of Returns Risk”. I know this issue comes back to math but it is really that big of deal for people entering retirement?  

Josh: Absolutely. So let’s re-hash what we said in the opening segment, starting with defining sequence of return risk again. Many folks will be in retirement for 20, 30, maybe 40 plus years. At some during that amount of time, there will be at least one bear market. Probably more. Your finances will be much worse off if the slump occurs at the outset of your retirement rather than in the middle or at the end. Think of it as a mirror reflection of why you’re better off if you start saving for retirement as early as possible. When you start investing early, your cash has more time to benefit from compounding returns—and when you start taking money out of retirement investments in a bear market, it decimates your principal and permanently reduces the basis for enjoying the benefits of compound growth. 

Imagine two retirees who start with $1 million in their retirement portfolio. Each of them withdraws $50,000 per year for expenses. Investor A is hit by a 15% market decline in the first year of retirement, and as a result, runs out of cash by year 18 of retirement. Investor B is hit by a 15% market decline at year 10 of retirement, but they still have $400,000 left at year 18 of retirement.

How do you mitigate sequence of return risks? It takes a plan. It takes having other investment buckets and asset classes that you can dip into instead of selling positions at a low point.  At the end of the day you are trying to minimize principal withdrawals during a market downturn early in retirement. These are part of the conversations we have with our clients at Gulf Coast Financial Advisors.

(https://www.schwab.com/learn/story/timing-matters-understanding-sequence-returns-risk)

3. Michelle: So in the first segment of the show, you discussed how rising interest rates might actually help with retirees trying to produce income in retirement. Our last Coasting in Retirement episode discussed the use of annuities to produce income in retirement, so I think this article ties all of that together: From CNBC: ”Climbing interest rates mean good news for annuity buyers”. Josh – please explain how this works?

Josh: CNBC either does a great job with their financial articles or a great job with their google search SEO, because you and I certainly find usable material on their site. So let’s talk about the effect of rising interest rates on investor’s common savings options. Most investors have already seen the effect rising interest rates have had on their fixed investments, such as CD’s – banks are offering higher rates of return than they they have in years. More specifically, many investors utilize annuities to produce income in retirement. I won’t go into all of the different kinds of annuities again – you can find that discussion by finding our Coasting in Retirment podcast and listening to Episode 3 – but let’s briefly talk about income annuities here. Insurance companies do not directly base their annuity income payouts on the Fed Funds rate – that’s a short term rate, they look longer term. But broadly speaking, bonds are significant part of insurance company’s annuity portfolios – what they use to determine the payout on their products. When interest rates rise, insurers get a higher yield on new bonds — which generally gets passed along to consumers in the form of a larger monthly check. So all that is to say that rising interest rates can actually help those in retirement generate higher payments.

(https://www.cnbc.com/2022/05/19/climbing-interest-rates-means-good-news-for-annuity-buyers.html)

4. Michelle:  So here’s a site that you and I both struggle to pronounce – Kiplinger! Josh, you talked about investors taking “real” action to fight inflation in their portfolios, and I think Kiplinger expands on this with their recent article titled “5 Ways to Fight Inflation’s Impact on Your Retirement Plan”. Do you agree with Kiplinger? Why I am saying Kiplinger so much? 

Josh: Actually, this is one of the few articles on Kiplinger that I don’t necessarily agree with. Let me explain. The first thing Kiplinger says is do a in-depth budget analysis. Ok, fine, nothing wrong with that. And while there’s no doubt inflation impacts retirees, the reality is that more often than not retirees are spending less on groceries, gas, etc than they did when they were running in twenty different directions, so I don’t know much an impact trimming a line item is going to help. Less eating out I suppose, but that sucks, and as we’ve discussed on this show, people tend to live a certain life style consistently. It also says to draw on cash to fight inflation – NO – you’re letting that cash go when it has the least buying power. Let’s keep that cash to work. It also says to downsize and relocate. OK, fine with downsizing, may retirees do – but re-locating? I guess if you’re moving from an expensive area to a cheaper area fine, but moving, and adjusting to a new area is expensive, and should not be done just to fight inflation. There has to be other reasons. 

(https://www.kiplinger.com/retirement/fight-inflations-impact-on-your-retirement-plan#:~:text=Focus%20on%20a%20balanced%20portfolio,and%20protection%20against%20inflation%20risk.)

5. Michelle: So, let me say again, Happy New Year’s everyone! So I’ve made my opinion public about how my opinion about resolutions versus intentions, I think we should take a look at the success rate of resolutions. I don’t think it’s great, and I think many people would agree. I know the New York Post agrees, because they just put out an article titled “Why most New Years resolutions fail – and a new approach to consider”. For example, most people have the resolution to lose weight, but they don’t put the intention, or the process, in place to do so. What’s your experience with New Year’s resolutions, Josh?

Josh: Dismal. Expand. I tend to be over optimistic in the short run. Greatest strength / greatest weakness. I usually hit my goals in the long run. But I like focusing more on the process than the outcome. 

(https://nypost.com/2022/12/31/why-most-new-years-resolutions-fail-and-a-new-approach-to-consider/)

6. Michelle: Alright, so we’ve established that people should make New Year’s intentions versus resolutions. But just to prove it’s not my opinion, and there is a deeper meaning behind the methodology, my final article is from Psychology Today, and can of course be found under the “Motivation” section:  The article is titled “Better Than a Resolution? Try a New Year's Intention” and I totally agree. Do you? 

Josh: I saw this in action for the first time in 2021. It worked. The intentions I made this year in 2022 appear to be already on the right track. Expand. 

(https://www.psychologytoday.com/us/blog/a-different-lens/202212/better-than-a-resolution-try-a-new-years-intention#:~:text=Intentions%20are%20a%20healthier%2C%20more,principle%20to%20instill%20new%20habits.)

Josh: Michelle, great job with the headlines, these are all important pieces of information that impacts those in or near retirement. And for our listeners that are impacted by this news of the week, or interested in learning more, we invite you to take action and start a conversation about your financial plan. You can reach us at 251-333-5151 or find us at gulfcoastfa.com. 

Alright folks, coming up after the break, regular listeners are used to co-host Michelle and I getting to poke a little fun at me, sometimes even getting picked on a little by Michelle in our regular segment titled, “Where Josh nailed it, where Josh was a little off”. Normally I get to share some opinions that I’ve made public that proved fairly accurate, and for balance, a few where I didn’t quite stick the landing, but with New Years upon us, we’re going to throw in a little twist for this episode. Let me ask you, the listener, this: ever made a New Year’s resolution that you didn’t keep? Maybe it didn’t even make it a few weeks? Well, I sure have. Maybe even super-planner Michelle whiffed on a few. So tune in after the break to hear me, and maybe Michelle (?) discuss times where our best intentions proved accurate, and well…maybe where we were human after all. See you after that break! 

Segment 3 - Where Josh nailed it, where Josh was a little off: 

Welcome back! For regular listeners of the show, this is the segment where we typically get to discuss some of the opinions and thoughts I’ve expressed publicly, we call it “Where Josh nailed it, and where Josh was a little off”. With the New Year upon us, and to go along with the theme of this show, we’re going to mix it up a little for this episode. Michelle and I are going to share past New Year’s resolutions, or intentions if you will, that we made that both in the past, and those that proved pretty accurate, and to be fair, the times we may have swung and missed. This will require us to be open and honest with you listeners, and in my case, probably a little raw at times. So since this involved Michelle’s statements as well as mine, I’ll start with one that I nailed last year:

1. Josh: Alright Michelle. I promised myself last January 2021 that I would do everything I could to help me and the kids overcome a ridiculous personal situation by finding and buying a nice home in a great neighborhood that allowed them to meet new friends and have new experiences. Now remember listeners, it was a red-hot housing market, especially here on the Gulf Coast, so this was not as easy as it sounds now, especially with 3 kids. So, self gloss here - I nailed it. Josh – expand on how well Jubilee Farms, and your house, worked not only to give the kids a great landing spot, but also allowed you to build a home that Michelle and all of your friends and family could enjoy….

Michelle, you’re next. What is something you expressed either via an resolution or an intention in past New Years that either worked out or…was a little off?

2. Michelle:  

3. Josh: Alright Michelle. So I mentioned that I may get a little raw in this segment. So, here it is. For too many years I have had the resolution that I would help my Mom and Dad get their dream house designed and built on some family land they own back in Wappapello, MO. It’s called “Punch Lake” – Josh – describe. And for the past handful of years, I have been a little off, and it bothers me greatly. Let me explain. I come from a big, close, emotional, country, intertwined family, and where some generations of families kind of do their own thing relative to the next generation, my family tends to think in legacy terms. So when I say that I want to help my Mom and Dad build their dream house, it’s not in a condescending way, or that they even need my help, it’s based on the fact that I wouldn’t even have a financial planning practice here along the Gulf Coast without their support, and that when we do things to help each other, we do it for the family. So, once again in 2023, one my intentions is to help my Mom and Dad along their path of building their dream home. Describe how this year is different. For one, I am not held back by an anchor but instead set free by a kite. Figure out how to say that in an appropriate way.

 4. Josh: Talk about growing your practice here. About your intentions with your clients and your business. The radio show, the seminars, the client events, etc. While we grew in 2022, we actually grew faster in 2020 and 2021. Why? Because I got personally distracted and took my foot off the gas, quit being as visible publicly as I typically was. 

Great stuff, great job Michelle. Alright, coming up next: we reach into our listener mailbag for our question of the week! Stay tuned!