5 Truths About Retirement Your Advisor Probably Isn’t Telling You

Derek and Dave take over this week and break down five retirement truths most people never hear from their advisor. They start with the difference between average returns and real returns, and why volatility matters more than the headline number on your statement. They unpack sequence-of-returns risk, explain how taxes quietly drain retirement savings, and walk through why a tax-diversified portfolio can make your money last much longer. Derek and Dave also hit inflation, over-lapping mutual funds, and the mindset shift every retiree needs to enjoy their next chapter. This is one of the clearest, most practical retirement conversations we’ve released all year.

Transcript

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You. Heard. All right. Welcome back everybody. We got a special guest here today Dave Roberts. How you doing, buddy? I'm doing great. Great to be. Back. Yeah. It's good to have you back. Our boy Tony has a presentation, I guess. So, you know, we want him to. To save his voice. Be his best. He's got rest. Up. Yeah, I mean, he does talk a lot on the show, so I do understand why he was a little time off, so, So, yeah, you know, today we're going to talk about, you know, the, the five truths about retirement savings, that maybe your, your advisor is not telling you right now. So, yeah, I, I saw this one. I thought it was a pretty, pretty good idea for, you know, kind of one of the end of the year topics, you know, when, when things are, you know, a little bit more quiet, I'd say. Right. So, this kind of just gives us a good, kind of overview, of things that you should be thinking about, about your finances. You know, coming up on the end of the year and then obviously kicking off a new year here pretty soon. So, yeah. Go ahead. You're about to say something. Yeah. I think there's a, you know, there's so much good stuff with this one. I'm glad we're, you know, we're hitting on it today and you know, I just had a conversation yesterday with a client and, you know, one of these and, I can't wait to kind of jump into it. Yep. I'm, I'm the same way I, you know, go go through the lesson. I was like, oh, I talked to this client about that one and this client about that. So, so, yeah, it's, it's a good list from, from that perspective as it's, you know, real life stuff that we're dealing with every day. So, truth number one, average returns don't equal real returns. So this is a this is, probably one of the most important things in investing. And, you know, I'm sure you have lots of takes on this one. The one I'll go with to start with is, you know, if if someone told me right now, you know, I'm, I'm not that young anymore, but still relatively young, relative to retirement age. And and someone told me that I could, I could get 6% every year, year in and year out with no volatility whatsoever. I would sign up for that deal ten times out of ten. Sure. And is because there is no volatility at all in that number. So you're just getting a nice flat rate of return. So you know, if you everyone should have a nice average rate, it's about kind of smoothing out that ride and not and not losing a lot in the down years. You know, just your average rate of return really isn't, isn't going to tell you a whole lot. That's exactly right. Like the market, the investment doesn't exist where you get that 7%. Or so of just risk free with no volatility return. That's kind of a magic bean type investment. Not out there. But really and that's, that's the whole like connection is like when you're an investor because of that volatility, the swings up and down you're feeling, your emotions are kind of feeling excited or scared riding on how the market's performing at any given time. And, you know, that's one of the biggest behavioral things that we help our clients with is navigating that. Not even navigating. But it's almost like pre preparing, embracing yourself that hey, this is stuff. This is how it's going to work. This is how it's going to happen. Here's our plan to deal with it. Yeah for sure. So yeah. You know and I think you know being in the business for for a while now, you know, people, you know, people have certain expectations or, thoughts about kind of what we do and how we do it. And I would say kind of a lot of people think, you know, really before, talking with anyone like, us as advisors, we have, like, extra, tools or crystal balls that are going to, you know, help you get into good investments before anyone else knows. And then help, help you get out of the way of bad investments. You know, before anyone else knows that as well, you know, that that, you know, to a degree is somewhat true. You know, obviously, we are spending a lot of time and effort on, on research and things like that. And, you know, making a difference in the portfolio that way. But what we're really trying to do is we're trying to get you a try to get our clients a good risk adjusted return. You know, that's really all we're shooting for. You know, we want to have that nice return year in and year out while taking less risk than the average investor out there. Yeah, absolutely. And and the next, you know, the next one that's kind of coming up here with the sequence of returns risk. This one's like huge to me. Especially when you know we're dealing with a lot of families and individuals that are kind of entering another retirement transition phase. And with that, you know, income shot off. And all of a sudden I call it like the rubber hitting the road. Right? Like what that means is like, now we're in retirement and we're relying on this portfolio that we've built up over time to fund our living expenses when we don't have that income anymore. So the way that we kind of bottom line, this thing, if you really want the whole like summary in a nutshell, is you look at really the way to prepare for this is you're looking at your shortfall in retirement or like, how much money do I need on a monthly or an annual basis to pay my bills? Right. And then how many years of coverage do I have from that safe part of my portfolio? Right. Because we know storms are going to come. They're navigable. Yep. And we know like historically, on average, the drawdown from, you know, a peak, a relative peak to trough back to that, you know, previous high point is on average a little bit less than two years. So then we start sizing it and we say, well, how many years of coverage are we going to feel comfortable with because the markets at some point are not going to cooperate. And if the worst timing happens and you retire and you need to draw from your portfolio, we need to have that safe haven asset that we can draw from to weather the storm. Yep. Absolutely. Perfectly said. So, so yeah, your average return. Not that important of a number. Like like Dave just explained, you know, make sure, you know, you have a cohesive strategy when it comes to your assets and when you're getting close to retirement or in retirement, you got to have that income strategy. So you're not selling those, you know, depressed assets, during a downturn to, to fund your retirement. So truth number two, you know, we've, we've talked about this quite a bit on this podcast. But taxes destroying your retirement nest egg. This is definitely the most overlooked aspect of retirement planning is tax planning. And that is because, it's really just human nature, right? Like, I would say not a lot of people wake up in the morning and say, oh, my gosh, is, this is the best day ever. I get to go in and talk to Derek about my finances. You know, no one's really saying that. You know, it's, you know, some of the times, you know, I'm telling them things they might not necessarily want to hear. It's kind of like going to the doctor, all that good stuff. So no one's really getting a huge jump on retirement planning. I would say. But if you do, you are at a tremendous advantage. And I would say taxes are one of the most important things. And I'll just kick us off here. Building a diversified tax portfolio, can be extremely helpful in retirement. And what does that mean? So saving money into all three levels of kind of the tax ladder. So you got, you know, tax free at the top, like, Roth accounts, tax deferred in the middle. So your 401 K is traditional IRAs and then non-qualified. So, you know, your brokerage accounts, cash accounts, you know, every IRA withdrawal is taxable in retirement. So, and you've been told your whole life, you know, save as much money as you can into your 401 K. Yeah. I'm here to tell you that might not necessarily be the best strategy for everybody. We need to look at what your lifestyle is like. And how you're getting that income in retirement and how it's going to ultimately be taxed because it can make a huge impact on your overall situation. Yeah. Derek. Right on the nose with this one. It's like to me the key is like working with someone that's helping you understand the rules of the system. Right game. Right. We're in a progressive income tax environment. Rates go up as your income levels go up. So understanding how the rules work and how you can sequence your returns to make your money last as long as it can. Like that's the key to the game because for most people you work for a certain period of time. We'll call it that accumulation phase. You retire and then, you know, there's there's a period of time where you're in a low income tax situation for a lot of people. And how do we take advantage of those low income tax years can be key. Yeah for sure. Absolutely. And that's where Roth conversions come in. But again, Roth conversions might not be for everyone. Right. Roth conversions. I've seen a can hurt a situation, you know, just just because you hear it on the internet or on Instagram doesn't necessarily mean that's going to be a great strategy for you. I mean, yes, Roth conversions are a powerful tool. They can help. But you know what I was alluding to kind of when we, kicked off this topic, if you get money into a Roth beforehand, you don't have to do a conversion later, right? That's right. If you do, you know, if, another one that just came to mind, a lot of clients seem to, you know, they don't want to have that in retirement. So if they're looking at buying, like a condo or a second home type of situation, you know, inevitably I get a phone call that says, hey, Derek, should I take out, you know, $400,000 and pay cash for this for this house? And, you know, usually it's all in their IRA, and usually it's a quick conversation. And the answer is no. Because all that money is going to be tax. So having a long term strategy on how you're going to be taxed in retirement, can add years and years on to your retirement plan. So, number three, they have any more on on that one? No, I think you unpacked a lot of it. It's good. Let's, let's. I'm I'm excited to hear number three. All right. Well, let's you kick off number three. I don't want to I don't want to, steal the share. So number three, the truth out there is inflation is still the silent killer. Yeah. And this one, I think, resonates with a lot of people, especially now. Like, think of, like, let's think about what's going on. Right? It's like it's it's risks comes in a lot of different forms. At the end of the day, what we're trying to do here is protect your purchasing power. Right. So let's go back to like the example, you know, returns like, hey, my advisor said, you know, I'm getting 7% a year, like on average. Well, in the context of what like interest rate environment is in the background, that kind of gives more context and information in terms of how well you're actually doing now relative to historical inflation. You're probably doing pretty good, right? Because you're keeping up with inflation. Your purchasing power is being preserved. And what that literally means is a loaf of bread always didn't cost $4, right? It used to cost $2. Well, over time things get more expensive. So just because your bank account grew, did it grow as fast as the goods cost that you're purchasing it with? So that's kind of the name of the game is how can we protect that purchasing power. Absolutely. And I'll throw in another client conversation, you know, seed investors, at the bank, in, in the last couple of years, it's actually flipped a little bit where it's not, a negative. But, you know, if you're investing in CDs, because you like the nice stable return, like, like everyone else, you know, you have to consider taxes into that equation. But you also have to consider inflation. So, on the chart that I saw basically over the last 20 years, there's only been like 3 or 4 years where there's been a positive return on CDs after factoring in taxes and inflation. So, so, you know, when when you don't factor in inflation into that scenario, you may be thinking, hey, we'll even after taxes, I'm still getting a guaranteed, you know, 2.5%. But but you're actually losing purchasing power over that time that you have that money in that CD. So, like Dave outlined there, make sure you're, you're you're not only, factoring in taxes, but also inflation and into the overall picture. Absolutely. So number four, Dave, once you you did number three. So well we'll have you keep going. We'll keep it rolling. So Derek, truth number four diversification does not necessarily mean protection. Right. So what you know what this is getting at is a lot of times we'll see prospective clients come through our doors and they'll say, you know we'll talk about some of the key concepts of building an investment strategy or constructing a portfolio. And they'll show us their statement and they'll say, hey, you know, look at this. I'm fully diversified, right? And it'll be just a bucket of 12 different mutual funds. And they all have different names. Right? But really the the the investor may not really have a great idea of what's inside of those mutual funds. Right. They're essentially a wrapper so they can hold anything inside of them. But until you do what we call an x ray and really examine like the securities inside of those mutual funds, you really don't necessarily know what you're holding, you know, without doing that level of analysis. And what we find out is there tends to be a lot of overlap. So that so the two funds have different names, but 80% of the holdings are exactly the same. So that's, you know, really leading to you maybe being more concentrated and less diversified than you think you are. Absolutely. The I mean, this is probably one of this is one of my my bugaboo is out there about talking to people about, you know, their investments. Because that's exactly right. There are so many mutual funds out there that hold the same stocks that you can own, own, ten different mutual funds and ETFs, but you're invested in largely the same thing. And again, you know, it doesn't come up when the returns are decent, right? Especially when they're, you know, you got overlapping investments in good performing sectors. You know, you might think your portfolio is perfect, but, like, like I mentioned earlier, just an absolute rate of return isn't necessarily what we're what we're after, right? We're we're after that risk adjusted return. So the more overlap that you have, the less that that that outcome is going to be likely to have a good, risk adjusted return. That. That's right. Derek. And one other thing. I just wanted to hit on in the spirit of this, you know, set it and forget it. A lot of times there's so much like, there's been so much PR or, you know, talk about all you need to do is like, buy the S&P 500 and, you know, your golden like there's no other action required after that. When, when when you ask like or when you go under the hood of like all these ETFs that represent the S&P 500, you really look at it like most investors, I don't know if they realize like it is comprised of 500 stocks, right? Right. But it's market cap weighted. Right. So what that that's a fancy way of saying like the biggest companies are driving the results inside of that ETF. So you're never so you're spread out. But close to 40% of your results are being driven by less than ten stocks. Yeah. So it works great when those stocks are performing well. And you know the market the tide is rising. But we all know there's cycles to this. So when the the script flips you can expect the opposite to happen. So I think investors have been kind of lulled into this false sense of complacency of like, hey, the stock market only goes one direction. And we've been around long enough to know that, you know, that that reverses at some points and you really understand what the implications are going to be of you holding this super concentrated investment as your only investment tool. Yeah. Yeah, that that reminds me of a story. So, that was someone, talk about their you know, investment strategy. Long story short, they said they hated Elon Musk and Tesla and didn't want to own any. And I looked at their holdings. I was like, oh, boy, I got some bad news for you because your portfolio was like 10% Tesla. Yeah, it's amazing when you hear that stuff. It's like, and you can't really blame the investors. Exactly. Kind of like paying it, like doing their own homework because they're just buying the name of the fund or the ETF, and they don't realize what's actually inside. But yes, pull open the pull, open the hood. And it tells a different story. Yeah. For sure. So, number five, which is an important one, you know, and we've touched on a little bit, retirement isn't only a math problem, it's a mindset problem. You know, the biggest, you know, I would still say the biggest risk is running out of money. You don't want to run out of money. But, you know, having a purpose in retirement, having a plan of, you know, the things that you want to be doing to to keep yourself busy and to and to have fun and, you know, to pay yourself off for all the work that you've done over the last, you know, 30, 40 years. Is extremely important. And I think it is most definitely, overlooked. Especially, again, that meeting with me isn't necessarily like the number one thing, that they want to do that week. Just from the pure finance side of things. But, they may be completely overlooking kind of, you know, when, when we, retire, when we stop working, when we stop having to having to get up every day, you know, what are you going to be doing? And and I've, I've seen this, unfortunately, a few times, as, you know, you know, sitting home and watching TV is, is not really, it sounds like fun when when you're working. Right. But after a while, that gets pretty old. So, you know, having, at least three things to do is kind of what I've been telling people lately, you know, three places to go, whether that's you know, your kid's house to watch your grandkids and, you know, the golf course, whatever the case may be, understanding kind of what you want your retirement to look like is a huge portion of this, puzzle. So make sure you take a look at that, too. Yeah. And then I'd say they're equally important is to do is to put some kind of formal structure in place, like take the time to define your goals and your objectives, like why? Why are you getting up at seven in the morning. Right. What do you what is the end goal. What are you trying to achieve that way? I think it helps you have some motivation for the decisions behind what you're doing. Each action. Okay, I'm doing this because it's helping me get to where I want to ultimately go retirement wise. So you can enjoy all those things that you've decided how you're going to spend your time after working. And some folks like, they love working, so that may just transition down into a part time role, but they ultimately find that balance that gives them the most enjoyment of life. Yeah for sure. Yeah. So, you know, please, it's not in I would say it's almost a generational thing as well. And that goes to, you know, having trouble spending money in retirement because the mindset has always been saving, saving, saving. Now you got to spend. And I have a retirement plan that says you can spend it, and it's still uncomfortable. So, you know that that's that's why we do these podcasts. That's why we meet with clients. And and we're not just talking about absolute rate of return. We're talking about their goals. Right? What we're talking about what they want to do. So, so all of its planned in there. But it's also important to be talking about this stuff because it does become a real issue. Absolutely. And there's so many studies out there that show, like when you have a goal, when you start tracking progress towards that goal, those people that take that stuff, they're they're far more successful than the people that just kind of wing it and say, hey, I'm gonna do this today. I'm gonna do that tomorrow. And you're not really, like, honed in on where you're headed. Yeah. Beliefs can disappear quickly. Yes. So all right, Dave, any, any closing remarks here? No, I think this is all good stuff. I'm glad we're hitting on. It's appropriate. And we're just. We're hoping Tony's ready to roll. Yeah. Get that, to you going, make sure that that voice stays good. And, but, yeah, you know, guys, thanks for listening this week. If you have any ideas for show, topics you'd like us to cover or just general comments, hit us up at info@connect.com, and we'll talk to you next week. The opinions expressed in the podcast. Are for general informational purposes only, and are not intended to provide specific advice or recommendations for any investment, legal, financial or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.