The Simple Investment Formula to Avoid Pitfalls that Can Ruin Your Retirement

Hello everybody and welcome to the Common Sense Financial Podcast. My name is Brian Scribonia. I have been in the financial services business since 1993 and I've had actual face to face conversations with thousands of business owners, families and individuals helping them develop solutions for real life situations. And it's my goal with this podcast to bring these real life experiences to our audience and offer a way to think about these topics and how they apply to your situation. I am fortunate to have a perspective that most people do not have when it comes to money because I'm privileged to work one on one with people discussing their financial situation, which elevates my understanding for what it takes for people to build wealth. It is a front row seat to thousands of cases seeing what works and what doesn't work. And then I can in turn share my experiences and knowledge with you through these podcasts. One area I see more and more people struggling with is headwinds they face when it comes to retirement. There are serious issues that exist that are making it very difficult for people to be able to retire. These are things that after you hear what they are and how they are changing the landscape of our economy, you will understand why they are so important. These are things that are not earth shattering, but they are alarming because there is no good solution, at least none that have been made available to the average person. First of all, the retirement landscape, it's changed. If you've been working in this country anywhere from around 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 America. Now, there have been a number of things that have changed in the Internal Revenue Code since then, but in 1978 is when the Section 401 was added. And that's the first time that a lot of companies started offering a retirement plan for employees to participate in. This is significant because by 1980 you started to see companies, really big companies like Procter and Gamble, Anheuser Busch and Boeing all starting to come out with their first retirement plans in the early 80s. When we look at what happened from then until today, pensions have almost entirely gone away. They almost don't exist. Very rarely do we see them anymore unless you, of course, work for the government. During this time, the baby boomer generation, which is the largest generation, started to put money into retirement plans for the first time. Now when we look at the stock market, we see it goes through these different time periods where for the most part the returns were fairly minor. But there's one part that really spikes. It really stands out from 1980 to 1999. One of the things that happened during this time and why we saw such a huge run up is we had this huge amount of people in this country having access to retirement plans. And then on top of that, they hit their prime earning years right around 1990 until 2000. So there's no mystery why all of a sudden the stock market was up. The stock market is really as simple as supply and demand. If there is more people buying, prices go up, and if there's more people selling, prices go down. This is all more complicated. The stock market really is. Now if you have this huge group of people and then all of a sudden, for the first time, we're putting money automatically into these 401s or other types of retirement plans, for the first time, you're going to get this huge run up in the market because there's a lot more buyers than there are sellers. 2016 was the first year that baby boomers were turning 70 and a half. And if you know what 70 and a half means, it means that you have required minimum distributions. Required minimum distributions. Whether you're them already or if you're not quite there, just means that for the first time, the same people who put all this money into these retirement plans are going to start taking the money out. Now there's trillions of dollars in retirement plans and you have the largest chunk of that owned by baby boomers. And when people have to take money out, you actually have to sell your investments before you can take the money out. So with this, what's going to happen? Well, you're going to have all of these people that are selling. They used to be buyers for years and years, and now, whether they want it or not, they're going to be forced to sell those retirement plans. We are all seeing two massive things that we've never had to deal with in this country happening right now, and that is that all these people that contributed to this huge run up in the market are now going to be contributing factors to selling pressure on the market. You've got a number of dynamics that are really different today about the retirement landscape. This is entirely different retirement. All of the things that maybe work for people in the 80s and 90s, they don't work anymore because the dynamics have completely changed the landscape. As we know it is different. To give you some perspective on this, almost $1 of every $5 are in a retirement plan. If you don't Think that's going to make an impact? When all that money all of a sudden has to start being sold off, then we're making a really big mistake. On top of that, since pensions are largely gone, one of the things that we have to worry about is the need for retirement income. For income to be created, we probably would have to start selling something. People are invested differently today than they than they were 20 years ago, which is putting pressure on the stock market. And that has to do with interest rates. Now if it was, let's say 1985 and I wanted to make sure I'm generating 10,000 a year for my retirement savings, you could invest in government bonds that was 100% backed by the full faith and tax authority of the U.S. government and was paying in the neighborhood of 9%. It would have only required me to have about $110,000 to generate $10,000 guaranteed interest payment for 10 years principal, fully backed again by the U.S. government. Now today, if I want to generate that same $10,000 of retirement income with interest rates low at say 1.6%, I'm going to need somewhere closer to around 650,000 to 700,000 to generate the exact same amount of retirement income I could have gotten in the same vehicle in 1980. How long is it going to take or will it ever happen that we ever see interest rates up that high again? And if we do, one of the things that come in to this is double digit inflation. If you recall, it wasn't too long ago that money markets were paying 5% and now they're paying close to zero. If you want to generate income in retirement, it's a totally different ball game. And what's happening is you are seeing more and more people use stocks and stock type investments, growth investments, or they're taking on just more risk. A lot of times they're taking risk they don't even realize they're taking because they're seeking that higher yield. It is a reality that we live in today. With ultra ultra low rates, we could have interest rates that are very, very low for a long period of time. And the only real reason why we would raise rates is typically to fight off inflation. And if we don't have a massive inflation problem, we're going to have to have very low rates. Probably the only reason why I don't see rates going up significantly anytime soon is because at the end of the day, there's a huge debt problem in this country. This is the gross public federal national debt. And if we have that number say around $20 trillion. And if you're only paying 1% on 20 trillion, it's $200 billion a year in interest payments. That's the government's cost for borrowing that money. What if all of a sudden those interest rates were 5% and that payment goes to 1 trillion? Well, that would be almost a third of the entire national budget obligated to paying interest on the national debt. Further, we have to think about what direction the national debt is going. It's going up. Now, you may be thinking there's nothing you can do about any of this. After all, you don't have any control over markets, inflation, government decisions, the economy, and least of all an aging population. However, there are simple ways you can help navigate these headwinds and have a retirement plan that can withstand the pressures that accompany these things we're covering today. All you have to do is follow a simple formula for retirement that the wealthy use to navigate these headwinds. And when I say the wealthy, you may immediately think of Jeff Bezos, Warren Buffet, Bill Gates, and folks at this level. But you'll be surprised to learn that the world's greatest investors are actually not people at all. Some of the greatest investors who have the most wealth accumulated are actually university endowments such as mit, Columbia, Notre Dame, Duke and Yale. These are multi billion dollar endowments run by some of the smartest people in the world. And what's happening is they're generating substantially higher returns and doing it with substantially lower risk than the average invest. The way they manage money is entirely different than the way the typical person manages money. And I can assure you most of them are not going to a local broker to get their advice. They're not going online and using a computer to just answer 10 questions and have it produce a risk tolerance that they plug into an automated portfolio for a low fee. That's just not how they're managing money. They're doing it differently. What they do really well is they protect their money a lot better than the average investor, really successful investor. One of the first things they do is they focus on not having huge losses. I mean, there's an inherent amount of volatility and risk in everything that we do. But we have to make sure that our focus is on the right things. And if your focus is on nothing else, it should be on not having large losses. If you invested in the S&P 500 over the last 35 years or so, with all the ups and downs, the average return would have been 8.51%. If you missed the best days of the market, the average return would have been just under 4%. If you took out the worst days, the average shoots up to over 14%. So what we find is that missing the worst days is far more important than missing the best days. And again, your investment strategy, especially during retirement, should be largely focused on avoiding big losses. And that's got to be the number one rule. You see, the S&P 500 can be up 20% one year, maybe the next year it's down 5%, the next year it's up 10%, and then it goes down 20% and then up again. These endowments, they don't usually have that type of return. Instead, they have a fairly steady return. One of the reasons why they have a steady return is most of those endowments are focused on growing their portfolio through income generating assets. Since the endowment is actually used to cover the operating costs of the university, they have to have consistent returns. If you don't have consistent returns and you start taking distributions every time you have a bad year, you're actually compounding your losses by selling. After losing money, then it makes it even harder to keep up. If you lose 10%, it takes 11% to get back to. Even if you lose 30%, it takes 43% to get back to. Even if you lose half of your money, that means you have to double it to get back to where you started from. So a 50% loss requires 100% gain just to be made whole. Well, if you have a 50% loss and you took out distributions, you have to have more than 100% gain to make up for that loss and the distribution. If you haven't connected the dots yet, you're a lot like these great investors already. You just need to invest more like them and change your thinking away from all just being capital appreciation. Now, what is capital appreciation? Capital appreciation is growing your money through something increasing in value. A couple of examples of this would be a stock. You buy a stock for $10, and over time, hypothetically, it grows to $20. Well, that $10 growth is your capital appreciation. You went from 10 to $20. Another example would be a house. You buy a home for $100,000, it appreciates to 150,000. That $50,000 is your capital appreciation. That's one way to approach investing or trying to grow your wealth. The preferred method for generating consistent returns is to focus on producing passive income. An example of this would be rental property. Say you have a rental property that's worth $100,000 and you have a renter in that home that's paying you rent each month which is income back to you. This income can be used to live on be used to purchase more income producing assets. So your growth comes from the income your assets are generating not simply the hope that the asset appreciates in value. There are other programs that can be used to create income such as private equity, private debt, annuities, businesses and other forms of real estate. Regardless of the specific mechanism for creating the income, the goal is to preserve the asset and utilize the income off of that asset. This is what the wealthy do differently and is something you can recreate for yourself with the right programs and the right coaching. If you want a done for you, plan, design for yourself and have questions about what you've just learned, let me know and I'll do my best to point you in the right direction. That concludes today's podcast. I'm Brian Scribonia and thank you for listening to the Common Sense Financial Podcast SA.