How to Create Retirement Confidence - Replay

My name is Brian Scribonia and on this episode of the Common Sense Financial podcast, I have unfortunately witnessed people put their financial future at risk by making emotional decisions that support their biases rather than what may be best suited for their situation. Uncertainty is a common denominator when it comes to retirement plan. I mean, no one knows what the future holds. But being skittish or practicing decision avoidance or fearing the idea of making a bad decision are all confidence killers. And is the ultimate irony when this behavior is actually preventing the solution from being implemented. Granted, there are times when a decision should be delayed, but a need to delay is not the same as a propensity to procrastinate.

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There's a difference between what's real and what's true. You're listening to the Common Sense Financial Podcast. I'm your host Brian Scribonian. Thanks for tuning in and let's get into today's topic. There are many circumstances and events in life that can grip us emotionally and either build confidence or extinguish confidence. And when it comes to retirement, your quality of life in these golden years is often predicated on the level of confidence you have regarding your situation. The reason for this is that a poorly designed retirement plan can often cause emotional confusion, which leaves you feeling insecure and lacking confidence. When events or circumstances occur that are outside of your control, like a stock market correction, for instance, it can trigger a sense of fear, especially in situations when your retirement plan is wholly dependent on the stock market. In my experience, confidence is at its peak when a plan is optimized and is designed around meeting the needs of the client and not relying entirely on market performance. For instance, consistent income and retirement is an essential part of the plan, as well as having the ability to access cash when it's needed, along with having some level of principal protection strategies in place to at least help weather difficult market conditions. In other words, retirement confidence is in direct correlation with how well your plan is designed to manage your exposure to risk and its ability to fulfill cash flow requirements. When a retirement plan is reliant solely on hope and optimism, the result can be a very emotional retirement when things don't work out the way you had hoped. This is why when many client conversations happen relating to retirement, they often center around insecurities they are working through. And no, it's not like a therapy session to root out internal emotional issues. But it's issues relating to financial insecurities people have about retirement. Things like the fear of running out of money before running out of life, the fear of market losses that they don't have time to recover, the fear of having a health crisis that derails the retirement plan, the fear of missing out, the FOMO wanting to make sure that every opportunity is seized on, and the fear of making a mistake. And we often see two extremes of emotion here. Those who have very little confidence and those who appear to be overconfident. On one hand, you have those who fear making a bad decision, which can lead to avoidance behavior. And it leaves them vulnerable to many of the fears they have about the future. On the other hand, there are those who are driven more by FOMO than they are adhering to a plan. And they often have a propensity to underestimate their vulnerabilities. In these cases, emotion is seen as the overriding factor, especially in times of uncertainty. And I have unfortunately witnessed people put their financial future at risk by making emotional decisions that support their biases rather than what may be best suited for their situation. Uncertainty is a common denominator when it comes to retirement plan. I mean, no one knows what the future holds. But being skittish or practicing decision avoidance or fearing the idea of making a bad decision are all confidence killers. And is the ultimate irony when this behavior is actually preventing the solution from being implemented. Granted, there are times when a decision should be delayed, But a need to delay is not the same as a propensity to procrastinate. Even for those who appear to be overconfident, their blind spots can leave them overexposed to risk and may even find that their optimism drives more and more risky behavior. Granted, there are risks in most everything we do, but that doesn't mean we shouldn't try to help Mitigate those risks. When I think of having confidence, I personally think of trusting in the ability for someone or something to deliver on whatever is being relied upon for them to do. The question really boils down to whether confidence can be anchored to the stock market. It is my experience that many people think of a retirement plan as having a portfolio of public market investments that are adjusted for their risk tolerance, with the ability to sell off a small amount of the asset each month to provide income for them to live on. Then adding in Social Security or pension benefits, and you have what many people envision as their plan. Really, I see this as more of a default setting than an actual plan. And a default is not often the best setting, especially when your future is dependent on your decisions. Much of this paradigm, I find, is rooted in watching our parents or grandparents work for decades in the same job and then retiring with their pensions and Social Security benefits. They didn't really rely on their savings as much as people do today. But the problem with this idea of retirement is that things are not the same. I mean, in my experience, people change jobs as often as they change the oil in the car. And unless you have a government employee, pensions are dinosaurs. So with these societal shifts, we also see market influences shifting. For instance, baby boomers and how that ties into the stock market. Now, if you've been working in this country anywhere from, like, 1970 until today, you've seen a complete sea change. It started with the ERISA act of 1974, when personal retirement accounts for the first time became available to everybody in the United States. Now, there have been a number of things that have changed in the internal Revenues Revenue code since then. But in 1978, when the section 401k was added, that's the first time that a lot of companies started offering a retirement plan for their employees to participate. This is significant because by 1980, you started to see companies, you know, big companies like Procter and Gamble, Anheuser Busch, Boeing, those types of companies, they all started rolling out their first retirement plans. And like I said, it was around the early 80s. When we look at what happened from then until today, pensions declined. They are almost gone entirely, like I've already mentioned, unless you're part of the government. During this time, the baby Booner generation, which is, of course the largest generation, started putting money into retirement plans for the first time. And so from 1980 to 1999, people began having access to retirement plans, and baby boomers were hitting their primary earning years around 1990 until about 2000. Now, understanding the Basics of supply and demand. You have this large group of people putting money automatically into 401s or other types of retirement plans. For the first time, and with more buyers than sellers, we experienced a growing stock market. Now we see a shift, right? Baby boomers are retiring. 2016 was the first year the baby boomers began facing RMD's required minimum distributions. Whether you're taking them already or you're not quite there just means that for the first time, the same people who put in all this money into the retirement plans were beginning to be forced to take withdrawals. Now there's trillions of dollars in retirement plans and the largest chunk is owned by baby boomers. And when people are forced to take money out, you must sell your investments. The dynamics are different today than a decade or two ago. Many of the things that maybe worked for people in the 80s and 90s, we don't see that they're working as well anymore because the landscape we know is different. So we're seeing two massive shifts occurring. Those who ran the markets up are now the same group that is putting selling pressure on the markets. And there's other influences in the market as well. The bottom line is the stock market is driven by supply and demand. And there are contributing factors to what drives markets up and down. Recently we've seen a wide range of government decisions that impact the stock market. You have the pandemic, you have this government spending, you have Fed policy, we have esg. All these are examples of how government decisions can influence market performance. People and computers drive trading. And when people don't feel confident in what they're hearing, they tend to seek safety. And that often means exiting the market. This triggers a sell off which can exaperate when you have computer algorithms trading on the vibrations of what is happening. Couple that with a 247 news cycle and social media. People's reaction to headlines and the impact of the market can be happening almost in real time. And we see this when the Fed speaks. And depending on the message, you can watch the market literally move as they speak. Then you have interest rates and the inflation dynamic. So investors are rethinking portfolios in a time when interest rates are reminiscent of the 1990s. But what's different today than in the 90s is the inflation component. To find a time when inflation was close to where it is in 2023, we go back to 1985. In 1985, to generate income, you could invest in a CD and it was paying like 10%. Inflation in 1985 was running at 3.7%. And so if you take that 10% and you back out the inflation, you have a net gain of 6.3%. Now if you fast forward to 2013, inflation is running at that same 3.7% as it was in 1985, but CD rates resemble the 1990s of around 5%, which means the net gain is only 1.3%. The point being is that when you are looking at interest rates, you must factor in inflation rates because the separate rates are not as important as the net of both of them combined. The central point to what I'm trying to say is that no one has control over markets, inflation, government decisions, economy, least of all an aging population. I mean these risks are real. And what you choose to do to address these risks is what will determine the level of confidence confidence you have in your retirement. There are never one size fits all solutions to anything. But solutions do exist that can help with these problems, and you just must decide whether you want to ignore them, just using optimism as your guide, or begin to rethink your approach. If you have a portfolio of stocks and bonds, ETFs, mutual funds, they're all representing different asset classes. The concern is that while you may be diversified within the public markets, the they are public markets. They're just investments. And public market investments are all susceptible to similar risks and market influences that we've been discussing. In my July 2023 article with Kiplinger, five common retirement mistakes and how to Avoid Them, I share some insights into how to formulate the right retirement mindset. I'll provide a link for that in the show. Notes There are two fundamental things that can have a profile profound impact on your retirement confidence. First is solving for income using income products. If your Social Security or pension benefits are not enough to meet your income needs, you have an income gap. And it would seem that the solution to fill this gap would be to create passive income from assets. It seems obvious, but here's the problem. Passive income is not the same as selling shares of an investment to spend a dividend is not the same as an increase in share price passive income, just as the name suggests, it is income from an asset. Second, passive income from a public market investment does not behave the same as passive income from a private market investment or a fixed asset such as an annuity or life insurance. The foundation of a retirement plan is to generate consistent income. And unfortunately, consistency is not synonymous with the stock market. We find that diversifying assets into either income assets or long term growth assets or of course, a combination of both is foundational when formulating a retirement plan. In our experience, confidence is at its lowest when assets are not separated, which is why we look to public markets for long term growth and we look to private markets and fixed assets for income. At my farm, we work with families and entrepreneurs with assets greater than a million dollars, and what I have found is that regardless of the client's net worth, everyone seems to desire to feel confident about their plan. The more precise you can get your planning, the more we have seen confidence build. To learn how prepared you are for retirement, you can access a retirement checklist by visiting my website@Brian Scribonia.com that concludes today's show. I'm Brian Scribonia. Thank you for listening to the Common Sense Financial Podcast. Thanks for listening to today's show. If you liked what you heard, be sure to subscribe on YouTube and Spotify so that you can receive notifications when we release new episodes. I'm Brian Scribonia and this is the Common Sense Financial Podcast.

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