Where Are You Putting Your Retirement Savings and Do You Understand Your Risk Tolerance

Distribution Phase:

Mark Elliot: Welcome back to the Retirement Income Show with Troy Sharpe, the CEO and founder of Oak Harvest Financial Group. I’m Mark Elliot. Glad you’re with us. We’re talking about the critical steps in the pre-retirement phase, and Troy was talking about we have the accumulation phase, our working years. Then we have that pre-retirement phase, 5, 10 years out from retirement. Because the more time you actually put a plan in place that is about you and your specific situation, I would think the more confidence and clarity you would have heading into retirement, the more confident you’d feel that, hey, my money’s going to last as long as I need it to last.

Then, of course, you get into the retirement phase, and it’s the distribution phase, which is much different than the accumulation phase. Now instead of saving, you’re taking, because you’ve got to live on the money that you’ve created during your working years. The big question is, how much have you saved? The next big question is, where is your money saved?

Troy, I know you sat down with people that had $2 million, and that really wasn’t enough for them to retire because of their lifestyle. You sat down with people that have a quarter million dollars saved, and they’re good to go, because it’s about how much you spend, what’s coming in, and all of that, but when you talk about where is your money saved, that one can get a little complicated. I think most of us just think, “Oh, I’ve got 401k’s. I’ve got some IRAs. I might have some real estate. I might have a little life insurance. I got some tools in my toolbox. That’s my plan.” Then you were talking about guardrails. How does that all fit in with maybe where your money is saved? Do the guardrails fit into that category?

Troy Sharpe: It’s an interesting analogy there with the tools and the tool belt, because if you were going to build something, you’re going to put something together, and you have all the tools. You also have to have a plan of what steps you’re going to take. You’re going to prioritize certain things. You’re going to take certain steps, and you’re going to rely on the experience and skill and capability that you have in order to build whatever it is that you want to build. Same thing in retirement.

Png business proposal purchase hands holding money

Now when we’re in the pre-retirement phase, we need to add more tools to the tool belt. One of the things that we can do is save money inside the Roth part of our 401k or save money in what we call non-qualified investment accounts. You want to always make sure you get your company match, and put as much into your 401k as you can to get that company match. It’s free money. It’s a 100% guaranteed return on your money, and that money will compound over the years based on how you’ve invested it and the performance. We want to start to add more tools and, just to summarize what we’ve talked about so far, how much you’ve saved a very simple one, but where have you saved that?

Measuring the Importance:

Why that’s important is because once you do get to retirement and those paychecks stop, you have to start paying yourself. Where you take your income from is what determines what goes on your tax return. On your 1040, if you take it all out of your retirement account, all of it goes right there onto that little line that says retirement account distributions. If you take some from the Roth and your retirement account and your non-IRA accounts, guess what? Two of three of those, assuming there’s no basis, or excuse me, assuming we’re withdrawing from basis on the non-qualified accounts, two of those three do not go on your tax return.

Now why is that important:

 

  • let’s say you retired 62, health insurance premiums $24,000 a year for a husband and wife on average. If we can take money that doesn’t go on your tax return so you can have the lifestyle you want, now all of a sudden we can get a $20,000 to $24,000 subsidy from the US government to pay for those health insurance premiums for you.

 

Now look, I don’t make the rules. I’m not saying for someone who has a million-five, say for retirement, it’s right or wrong for them to be able to get a $20,000 subsidy to pay for their health insurance premiums. I’m just telling you what the law is. It’s my job as a certified financial planner professional to put you into a position to where you’re paying less for the things that you need in retirement where possible, and that’s taxes, and that’s health insurance, and that’s investment costs and transaction costs, et cetera. Acting as a fiduciary means having not just the best, this is my definition here, not just the best interest of your client, but it’s also, you can’t act that way unless you have the base knowledge and you go through the continuing education and the training to understand what’s out there and how it all comes together to help your clients.

That’s who we are at Oak Harvest Financial Group. That’s what we do. If you want to sit down to have a conversation about your retirement, the phone number is 1-800-822-6434. Visit us on the web, at oakharvestfg.com. When you have prepared, and you have these different tools, going back to the analogy about the tool belt in building something, you have your 401k. You have your Roth. You have your non-IRA.

Now we can take the money and help qualify for other benefits when you need them when the paychecks have stopped to position you for a better retirement, or at least a more secure retirement where you keep more money in your pocket. Now that’s all the planning. There’s a lot more planning involved, but in the pre-retirement phase, that’s why that’s important.

Man and wooden cubes on table. management concept

Now coming back to the guardrails conversation, if you think about your investment portfolio, think of it as a highway. Just stay with me here. If you think about your stocks, your bonds, and you’re going down this highway, and the performance of those stocks and bonds essentially is this highway. There are guardrails on this highway. Do you know the potential upside, statistically speaking, your portfolio has, based on probabilities, historical performance, what we call standard deviation, historical returns, or average or mean returns? There is a quantifiable based on the portfolio that you own, the stocks, the bonds, not just the allocation percentage, how much you have in stocks, how much you have in bonds, but what we call the correlation between the investments that you own.

There is a statistically quantifiable way to calculate the maximum, I shouldn’t say maximum, but the expected return with a high degree, 95% probability, potential upside return, and also the maximum downside return based on a 95% probability. Most people aren’t aware of this. If I ask you this right now, I’ve never really asked a client this because I don’t expect them to know, but I could virtually guarantee a thousand out of a thousand people would say no. This is a huge part of risk management. This is extremely important when it comes to retirement, investing in the portfolio that you have in retirement.

We need to have congruence between our willingness to take risks and the expected positive and negative return potential or capability of our portfolio in retirement. I’m talking about these guardrails. I’ll give you a great example. We had someone come in, and I’m not going to mention the firm he was with, but we did this analysis for him, and first and foremost we talked to him about his risk willingness. That is very simple. If the market is down 20%, what’s your reaction? If the market is down 30%, how do you feel? Can you sleep at night? Are you jumping out of windows?

Kind of a funny story. First, we said he had about a million dollars safe for retirement. I asked him, I said, okay, so if the market is down 20%, how do you feel? He’s like, “You know, I’ve been through worse. I can withstand that. It’s okay.” I repeated myself. I said, “Okay, so if the market goes down, and you lose $200,000, how do you feel?” He says, “Oh, Troy, I’d fire you instantly.” [chuckles] I said, “Well, sir, 20% of your 1 million is about $200,000.” When we talk about percentages, we need to look at it in terms of dollars. We understand from an emotional comfort standpoint, emotional stability, what is your reaction going to be? Are you going to be on the phone with us telling me to get out to sell everything, to go to cash? Because I can’t work with you if that’s the case.

The reason I can’t work with you is because if you’re constantly trying to get in and out to the market, one of two things is going on. I’ve either done a very, very bad job, understanding your willingness to take risk, or two, you just shouldn’t be invested at all, or you should have a really, really conservative portfolio. In that case, it may not make sense for us to even work together on the investment side. There are safe vehicles out there that we can help people with, but that’s the direction I would steer someone in.

What we then did with this gentleman, coming back to the story, we got some common ground there. We settled on somewhere between 10% to 15% or 100,000 to 150,000 would be his maximum risk willingness. We have an in-house investment team. We have an in-house team of analysts. When you come in to see us, in between that first and that second visit, our in-house teams go to work, looking at your situation, understanding the risk that you have, understanding your income needs, all the information that we’ve gathered on that first appointment, and we’re starting to lay the groundwork for that retirement success plan.

How are we going to manage risk? What is the maximum downside you’re comfortable with? How can we build a portfolio that gets you the income you need within those guardrails, within that maximum downside of risk that you’re willing to take? How do we reduce taxes? How do we plan for healthcare? What are we doing on the estate side? This oftentimes is done over a period of two or three months, putting the full plan together. Sometimes we’ll do it over the course of the first 12 months of the relationship, but that’s what the retirement success plan is that we do for clients. It’s one by one. We take care of all those things.

In between the first and the second visit here, our team went to work, and they analyzed his portfolio. He comes back, and his portfolio was currently constructed based on the firm that he was working with where his maximum downside was about 48%. He had no idea that, one, there was either a tremendous miscommunication between he and the advisor that he was working for. Or the advisor just did a really, really bad job constructing a portfolio that fit within his guardrails.

Guardrailings:

The guardrails, again, we can statistically quantify with up to about a 95% probability. This is two standard deviations when we look at the mean return of your portfolio and the historical performance of those individual securities that you have and the correlation amongst those individual securities. If one goes up, does the other historically go down? What is the relationship from a statistical standpoint based on historical information between all the securities that you own? This is what we call correlation. Within two standard deviations, which is a 95% statistical probability, his maximum downside based on all of the positions that he owned was about 48%.

This is a great example of an incongruence of his emotional willingness to stay invested and how the portfolio was currently constructed.

Car overpass road on lake shore with mountains

Now, what does this mean:

 

  • Well, what this means is when the market does go down, and the market will go down, if you have a portfolio that is incongruent with your willingness to take risk, or if your portfolio’s capability for downside loss is beyond your guardrails, you are highly likely to make an emotional decision that will impact you financially for years and years to come, could possibly ruin your retirement.

 

This is really the first step in this retirement success plan is having these conversations, really identifying not just your willingness to take risk, but what we call your portfolio’s capacity to take risk, and that has to do with how much income can your portfolio realistically generate at what level of risk for your standard of living.

1-800-822-6434 if you want to sit down and have a conversation. This is part of the process. This is kind of what it’s like to sit down with one of our advisors. We’re really getting to know you, and how you define success in retirement. If you want to take the kids on vacation, if you want to spend an extra 10, 15, 20, $25,000 in the first five years of retirement, the first 10 years of retirement, we call that a go-go income plan. Then typically things slow down a little bit later in retirement.

We’re going to customize this. We’re not going to put you into a box. We’re going to build that box around you, and that’s what we do here at Oak Harvest Financial Group. Check out the YouTube channel, tons of videos, tons of content for you to learn on your own time. If you want to have this conversation, if you want to sit down, see if we can be of service to you, be of value to your financial life, and of course, we want to make sure that you’re a good fit for us, needs to be a good fit all the way around. Give us a call. Let’s have a conversation. No obligation, no cost. 1-800-822-6434.

 

Mark Elliot: We’re headed to our final segment of the Retirement Income Show with Troy Sharpe, the CEO and founder of Oak Harvest Financial Group. We’re talking about those critical steps in the pre-retirement phase that will all go through. The question is, are you taking steps to prepare yourself for retirement? We’ve got one more segment to go. Stay with us. We’re back in one minute.

Investment advisory services are offered through Oak Harvest Financial Group, LLC. Oak Harvest Financial Group is an independent financial services firm that helps people create retirement strategies using a variety of insurance and investment products. Investing involves risk, including the loss of principal. Any references to protection benefits or lifetime income generally referred to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.

Oak Harvest Financial Group, LLC is not permitted to offer, and no statement made during this show shall constitute tax or legal advice. You should speak to a qualified professional before making any decisions about your personal situation. We are not affiliated with the US government or any governmental agency. This radio show is a paid placement.