Your 401K Is NOT Your Retirement Plan | The Retirement Income Show
Retirement Success:
Mark Elliot: Glad you’re with us today for The Retirement Income Show with Troy Sharpe, the CEO and founder of Oak Harvest Financial Group. You can always go to the website to learn more about Troy and the team at oakharvestfinancialgroup.com, and of course, check out the YouTube channel. There are over 300 videos now on the YouTube channel. Just search Troy Sharpe and Oak Harvest. The retirement success plan starts with an investment plan. Then it’s an income plan. Then it’s a tax plan, a health plan, and an estate plan and you really can’t miss any of those. Nobody’s the same as the neighbor, your relatives, your coworkers. The planning process is all about you at Oak Harvest.
That’s how they create their retirement success plan. You’re talking about the three phases, really the accumulation phase is working years, then it’s the pre-retirement phase, and then of course we’re in retirement and now it’s a distribution phase. I wonder how many people think that their retirement plan are there 401Ks, are there IRAs? They’re important, but that’s not the planning you’re talking about, is it?
Troy Sharpe: No, you’re absolutely right, and it’s that light bulb moment, Mark. It really truly is. It’s when you’re young, working, as you’re progressing into your career and you’re getting into your 40s and 50s, you have so much going on in life. You don’t really think about retirement necessarily, and especially the financial aspect. You may think about I want to rent an RV and go to the ball games. I want to spend more time fishing or golfing. You think about those things, but most people don’t think about when you’re 50 years old, you’re not thinking about, “Well, what’s the tax ramification of taking social security at 67 while I’m also taking money out of my retirement account, combined with the rental income that I have and the dividends and interest from my non-qualified investment account.” That’s not a question that comes into your mind when you’re–
Mark: Here’s a good one for you, Troy. I got divorced. Wow. I got to find a place because I have a daughter. I look at apartments. I’m like, “Well, that’s crazy. I can get a house for way cheaper than what rent is,” and so I go, “Well, I’ll just take my 401K money and put $15,000 down. Just pull it out of my 401K, having no idea about taxes, Troy. It took me about five years to pay off all the back taxes. It’s easy to make a mistake, and you don’t even really realize you did, because that was a mistake in doing what I did, I can tell you.
Troy: The biggest, and we see it all the time, of course, people cost themselves so much money. The number one thing that we see is when the market starts to get volatile, people cost themselves so much money by selling out, getting scared, going to cash. If you’re in the pre-retirement phase, let’s say you’re seven years away from retirement. That’s seven full years. The market has never, at any point, been down for seven consecutive years. The market is never taking, as best as I know, I’d want to go back and maybe look around the great depression. The new deal really extended out the recovery of the economy.
I’d need to look in that period a little bit more, but even going back to 2008, 2007 to 2009, the financial collapse. The market came down, and then it took about five years for the market to regain its prior levels.
Now, when you’re in that accumulation phase or pre-retirement phase, one of the big reasons why you don’t want to be moving in and out of the market, besides that it’s historically been proven that investors are extremely poor timers of the market. That means knowing when to get in and when to get out, but if you have an investment strategy that is paying interest and paying dividends and you’re reinvesting those dividends, what you’re doing is you’re accumulating more shares at cheaper prices, and those shares are now spinning off dividends or spinning off some type of interest, and if you continue to reinvest, one of the best ways that you can build wealth over time in this country is through what we call a dividend reinvestment plan. It can take many years, of course, depending on what types of stocks you’re invested in.
The Markets:
If you’re in companies that pay flats, dividends, or companies that pay growing dividends. Not too far down this rabbit hole, but just understand the concept that when the market is down, it’s like you get to go shopping and it’s an automatic shopping where you’re buying things that are on sale, and as long as you believe, 5 years, 10 years, 15 years later capital markets will be higher in value than they are today, that is one of the ways that you can really build wealth is by accumulating shares at discounted prices during times of economic stress or recession or market pullbacks, corrections, crashes.
If you’re in that accumulation phase or you have 5 years, 8 years, 10 years before retirement, and I personally even if you were a little bit closer to retirement it just depends on so many different factors. I’m speaking high level in general here and not giving specific advice but if you can accelerate your investments into a recession, let’s say you’re normally at your 35 years old, 45 years old and you’re normally putting 4% of your salary into your retirement account during times where the market is down, you should really be trying as much as possible to increase your savings contribution to that plan buying investments when the prices are down. That’s how you build wealth. It’s called the marginal return on invested capital.
If I buy when everything is going great and prices are really, really high, the marginal return that’s expected on that capital that I’ve invested is much smaller, meaning the incremental growth anticipated in the future from dollars invested at very high level is much smaller than the growth that you would anticipate receiving if you invest when equity prices are depressed. Basic concepts that as a finance person it’s just like speaking English to me. I just know it to be factually true but the average person costs themselves so much money during the accumulation phase or during the pre-retirement phase and even the retirement phase.
If you have a proper plan set up in retirement, you shouldn’t have more in equities than what we call your risk willingness where you should have some guard rails on your portfolio. I’m going to get into this in detail in the next segment, but that marginal return on invested capital, understanding that the lower you buy something, in this case, we’re talking about a recession, a market correction, a market crash, the cheaper prices are relative to their fair market value the higher your expected return on that invested capital is. When we’re getting in and we’re getting out and we’re getting in and we’re getting out and we’re trying to time this it’s absolutely a failing strategy.
We know that to be true based on empirical data, decades and decades and decades of research.
Investor Behavior:
Dalbar, a company called Dalbar, D-A-L-B-A-R put out a study every single year that details the behavior of the average investor based on publicly available information on equity fund flows buying and selling equity mutual funds essentially. In 2021 last year, the average retail investor, underperformed the market by 10% points. The market did, let’s say 28, the average person did 18, or maybe it was 24 and 14, but it was 10% points. We have this study. We can send it to you if you want, give us a call, reach out. 1-800-822-6434. That type of difference and here’s the catcher or the killer.
Most of you that made 14% or 15% last year, you feel like you did great. You’re not looking at that 24% or 25% that you should have done if you had a more disciplined approach to investing and staying invested. Most people when they make 14% or 15%, they’re thrilled. Again, as a finance person, I look at the opportunity cost. What did you cost yourself by making that emotional decision to get out of the market because you didn’t like who was president or you didn’t like policies that were being passed, or you didn’t like the direction of the country. The stock market doesn’t care about those feelings. It simply doesn’t.
The stock market is a discounting mechanism for expected future cash flows for return on a company or a company’s capital that they’ve invested. What type of future cash flows are projected, going to discount them to a present value and the policies that are being passed by presidents, by Congress.
The majority of them do not impact what the stock market is going to do. This is why many people are far better off with someone to help guide them during these difficult times, economically speaking, within their portfolio, building a retirement income plan, looking at social security, Medicare, health insurance, all of these combined components because not only do you need extreme expertise to put all this together and do it properly, but you also need a guiding hand so to speak during times of high levels of emotion that can often cause us to make irrational or illogical decisions based on fear or greed as opposed to sound hard data.
That’s what we do here at Oak Harvest Financial Group is we help build that plan that requires the expertise about taxes, about investments, about risk management, about generating multiple streams of income, about health insurance, estate planning, trust, et cetera, that’s the expertise.
The true value that we provide is when a client calls us in June, for example, of this past year, when the market had a tough six months, and they’re saying, “Troy, we really need to get out. We really need to get out. We can’t take it. We can’t take it.” First and foremost, we have to remind them, look, we have a plan, this money that we have in the market here, we don’t need this money for at least seven years.
Because we’re getting income from over here and if we get out now, this is the long-term impact. This is how it impacts you negatively. By going through and having that calm conversation and explaining the facts, people– A large majority of the time, you know what Troy? You’re right, we get it. We feel much better.
Just some people need to be reminded more often than others, or some people need to have phone calls and conversations or meetings more often than others. That’s fine. That’s what we’re here to do. We always come back to that plan, whether you’re in the pre-retirement phase or the retirement phase.
If you understand that oftentimes the biggest cost you incur in retirement or pre-retirement is by the decisions that you make personally when it comes to trying to get in and out of the market. Time it, just have a plan, stick to it, have the discipline, understand the pros, and cons time, horizon, risk tolerance, et cetera, and don’t cost yourself money by allowing these emotions to dictate your decisions.
Mark: 1-800-822-6434. We’re talking about those critical steps in the retirement phase. Stay with us. We’re back with more in 60 seconds. Investment advisory services offered through OakHarvest financial group, LLC OakHarvest 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 principle, 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. OakHarvest 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’re not affiliated with the US government or any governmental agency. This radio show is a paid placement.
