ReSolve Riffs on “Everything You Need To Know About Saving For Retirement” with Ben Carlson
This is “ReSolve Riffs” – live on YouTube every Friday afternoon to debate the most relevant investment topics of the day.
As life expectancy increased throughout much of the past century, so did the importance of saving and growing one’s nest egg for retirement. Though most who retired during the last 40 years enjoyed a massive tailwind from stocks and bonds, those that switched from accumulating to drawing down their savings between 2000 and 2002 suffered a rude awakening. Currently, there is widespread concern that typical stocks-and-bonds heuristics will not suffice.
Ben Carlson (Director of Institutional Asset Management at Ritholtz Wealth Management) has given this a lot of thought. He joined the ReSolve crew to talk about his recently launched book, covering topics that included:
- Investment principles as a distant and foreign language outside of finance: the importance of narrative to bridge the comprehension gap (which can often be a chasm)
- The dual role of financial advisors: fiduciaries and behavioral psychologists
- Incentives to create and nurture a savings habit: mindset is key
- The myths surrounding risk tolerance: willingness vs ability
- Savings rate, lifestyle and portfolio returns: understanding the levers we can actually control
- A crucial yet often overlooked factor: sequence of returns
- CPI inflation vs the inflation that individuals experience: the blind spot for most portfolios
We also discussed how remaining active into an older age is correlated not only with a longer lifespan, but also with prolonged health and mental acuity.
Thank you for watching and listening. See you next week.
Ben is the Director of Institutional Asset Management at Ritholtz Wealth Management. His team creates detailed investment plans and manages portfolios for institutions and individuals to help them achieve their goals.
He has been managing institutional portfolios for his entire career. He started out with an institutional investment consulting firm developing portfolio strategies and creating investment plans for various foundations, endowments, pensions, hospitals, insurance companies and high net worth individuals. More recently, he was part of the portfolio management team for an investment office that managed a large endowment fund for a charitable organization.
In 2017, he was named to the Investment News 40 Under 40 list of top financial advisors.
Every Wednesday, you can listen to a new episode of his podcast Animal Spirits with Michael and Ben.
Speaker 1:00:00:09… new intro. I like it. Good Job Adam.
Mike:00:00:14Did that again DJ. Once more time like the record spin. Gentlemen, welcome Ben to the ReSolve happy hour stage with the Riffs and we like to think of this as an opportunity for us to enjoy a little bit of a happy hour/water cooler conversation that whilst people are in lockdown and you may not be able to engage in some of these conversations so it’s a bit of fun, wide ranging as well. So everyone out there be aware that if you’re seeking actual advice go get that from a professional in your jurisdiction and all that said, cheers. I am having a Basil Hayden bourbon today. It’s going down like razor blades.
Adam:00:01:01Can you say that again.
Mike:00:01:02A Basil Hayden bourbon. It’s going down like razor blades.
Adam:00:01:07What’s in that besides basil and bourbon.
Mike:00:01:09It’s the brand name. Anyway, cheers gentlemen.
Adam:00:01:12I see. I got you.
Mike:00:01:13Cheers gentlemen and welcome Ben. I don’t know if you grabbed yourself a beverage or you’re a sober guy or…
Ben:00:01:18No. I drink. I have a Diet Pepsi for me. I don’t have any booze in my office but I wait till like my three young kids are in bed before I start drinking I suppose.
Mike:00:01:27Amen. A good plan always.
Rodrigo:00:01:29Yeah. You don’t want to start getting aggressive too early.
Adam:00:01:33It’s hard to drink around my microphone actually with the boomerang. I might have to drink with my left hand.
Mike:00:01:40I actually always drink with my left hand but that’s another story, one day we’ll have that story. Well, should we- Ben you want to introduce yourself? I’m sure you come with – people are fairly familiar with yourself and your firm but why not get it out there in the beginning and we’ll get started.
Ben:00:02:01Yeah. I work for a firm called Ritholtz Wealth Management. We’re an independent investment advisor firm based in New York but roughly half of our client, half of our employees work remotely. I was the guinea pig so I’ve been working there since 2015. I think I was a seventh employee to join and I was the first one to work remotely and I got to know Josh Brown and Barry Ritholtz who founded the firm through the financial blogging space. It’s kind of a weird thing that I ever got into. I kind of started up writing a blog called The Wealth of Common Sense just on a whim. I just thought like I have something to say, I’m sick of my friends and family asking me questions, I just want to answer questions for normal people like this. I’ve been working in the institutional space my whole career. Non-profits, pensions, endowments, foundations and I was getting all these questions because people knew I was in the investment field. So I started writing about it. I had been writing for a couple years and got to know them a little bit because I would go to New York City because I live in Michigan, would go to New York city meet with investment managers that we worked with and got to know Josh and Barry a little, realized we had some shared interests and principles and values and such and ended up teaming up. In 2015 I work with them, they said, hey move to Manhattan and we had just had my first daughter and that conversation never got off the ground with my wife. Now if it would have been the Cayman Islands like you guys maybe that conversation would have gone a little further.
So working remotely which has been nice for us through the pandemic, we now have up to 30 plus employees at the firm and half of us work remotely and actually I guess now everyone’s working remotely but half of us work in different places. We have people in California and Florida and New Orleans and North Carolina and all over the country and so we’ve always been a remote paperless firm. For us this this pandemic and the disruption has been relatively minor, and we have done most of our communication with prospects and clients like this in a video call or a phone call or email and so that’s been a pretty seamless process for us. I do a lot of writing about personal finance in the markets and what’s going on and trying to help people make decisions with their investments and one of the reasons that I started writing in the first place is just to help myself process a lot of this stuff. I never really was a writer before I got – in high school and college I was never a big writer or reader. I think it just took finding the right subject matter. So once I got into the markets and investing I realized like this is really fascinating to me and all the different wormholes you can go down from the behavioral side to the quantitative side and all these different things. I just fell in love with it and writing about it actually piqued my interest even more and got me more involved and more interested in the process. So that that’s kind of the deal to me.
Rodrigo:00:04:29When did you start Ben?
Adam:00:04:30It’s funny how that works. The cross domain type of experience where – I went through, my degree’s in psychology and a big part of psychology is applied statistics and I hated the applied statistics part of psych when I went through it in an academic program, and then I came out and spent a little time investing, did not use applied statistics at the beginning, did a lot of global macro stuff et cetera and then decided for lots of reasons that I wanted to move into the systematic space and all of a sudden all of those applied statistics lessons that I learned in university became very meaningful and very interesting and fun and engaging and all of a sudden I wanted to write about some of the things that fell out of that domain. So it’s funny you know, you think you don’t like something and then you realize it applies to something else that you really enjoy and it takes on a whole new life.
Ben:00:05:27Yeah. I went to a small liberal arts college and I thought this stuff is such a waste of time for me. All these different areas that they made us focus on and now I come back and say it was actually making more well-rounded and it actually does help to have that wider base of knowledge. Most of the books now that I read, the ones I’m more interested in, are those ones that are vaguely about business and economics in the markets but in a different way and you can apply them to the stuff that you’re doing in this space.
Adam:00:05:53 Speaking of books, you’re out with a new book. What’s it called and what’s it about?
Ben’s New Book
Ben:00:05:58Yeah. This was kind of my pandemic play, it’s called “Everything You Need to Know About Saving for Retirement”. Actually, I don’t think it would have happened if it wasn’t for the pandemic. When we got going in this thing we said we’re not going to have any face to face in terms of our employees because I would go to New York a few times a year, and we have an office in Chicago, I could hop down there so we started doing these video calls like this and at first it was kind of a see what happens and how it works and now twice a week all 30 plus employees are on one of these calls. We had one early on and we have a guy who runs our corporate retirement plan named Dan Larosa and we do these interviews where Josh Brown our CEO will ask every employee at the firm some questions. What are some pain points for you? What is something that the rest of your colleagues don’t know about what you do? And he said, “You guys all produce all this content in blogs and podcasts and books and such, but I’m working with these everyday normal 401k retirement investors, and he’s like and they are just not going to read it they just don’t care about this stuff or it’s over their head, they don’t want to know about the markets they just want to know about the basic stuff.” I stepped back and said, well that’s one of the reasons that I wanted to get into this. I wanted to help regular normal people explain this stuff, understand it a little better, and I think that’s probably something we take for granted being in this space is that most people outside of it just aren’t involved in it on a daily basis like we are. You almost have to take a step back sometimes to realize even people with the non-profit space I’ve worked in.
A lot of these people who are on the boards and committees they’re not involved in this stuff on a daily basis, you have to step back and realize how the storytelling you have to go through and the explanations you have to have and the expectations you have to set, it really makes sense and not to assume people are as interested in it as you are or know as much as you do. So he said, “I just need something that is just bare bones basics, help these people understand why it’s important to save and increase their savings over time.” So I said, well let’s work on an outline. Me and him hashed out an outline. After we talked about it I came up with 20 different topics and he helped me and I wrote this for basic people outside of the finance world. My hope is people inside the finance world will know someone in their life and will say, what? My brother-in-law just doesn’t know what he’s doing, I want to give him this book to help him on his way. It’s really more of a personal finance book than an investing book and it shows how…especially when you’re just getting started why saving is so much more important than investing and I think investing is something that you can pick up along the way and If you build those savings habits and really automate a lot of this process and get that stuff going you can figure out the investing stuff later.
I think if you can get that personal finance stuff going and a lot of the stats I found it’s kind of shocking, so the Fed puts together all this data on how people are doing when they run some of their surveys and they found…This is as of 2016, so maybe it’s a little better now who knows, they found half of all people aged 55 to 61 have 21 thousand dollars saved for retirement. That’s the median number, meaning half of people in that age group have less than that saved for retirement and it’s not much better if you go down the age spectrum it obviously gets worse. I think it’s like 40 or 50 percent of people 18 to 29 have zero dollars in savings.
Adam:00:09:03… a positive.
Mike:00:09:05Did you get any sense of the direction of that? Is that getting better? Is that getting worse when you looked at those stats?
Ben:00:09:12 Unfortunately, for young people and I think there are some explanations for this but especially if you look at the millennials versus their parents the baby boomers, it’s something like 30 percent less wealth now at that age than their parents had. So if you look at someone like 30 to 35, and of course a big reason for that is more people now are going to school and putting off things like buying a house and getting married so that’s part of it that people in the past were doing those things earlier and they were getting jobs earlier, not going to grad school and so you hope that those young people are more educated and they’ll make up for it down the line. But yeah, a lot of the numbers are unfortunately getting worse for people, and people are living longer these days too. Maybe they have more time to play catch up and I get into a little bit about that in the book but unfortunately a lot of people they’re just not in a good place when it comes to this. So they’re reliant on things like social security as their only means of retirement for a lot of people in the States.
Rodrigo:00:10:08Maybe it’s all off book in crypto currency for the millennials. I have hope that they’re richer than we give them credit for.
Ben:00:10:15Yeah, and it’s possible. I think those are kind of retirement assets. That’s I think been a positive of this pandemic is that some people scoff at the way it’s happening and that these young people are getting involved in things like Robinhood and trading stocks and but I think it’s actually a pretty good thing that people were bored and nothing else to do and they decided to get into the markets. So obviously there’s going to be some bad habits developed that way, and some people are going to lose all that money but the fact that people decided, markets are down I want to jump in with both feet here, I think that’s actually a net positive for me.
Rodrigo:00:10:49I think I read from you that you had, your initial experience in the market wasn’t great. Was that you? Like that was one like a formative experience you had before you got into the business or…
Ben:00:11:03That may have been Michael who was my co-host, podcast co-host he was more of a trader. I have always started slow. I came out of school and I had all these friends getting amazing jobs and making a lot of money and frankly way more money than me and I think part of that is my fault because I came out and I was never one of these kids who was reading Baron’s or The Wall Street Journal in high school or middle school. I was more interested in sports and I picked my college based on, because I could play football there. I didn’t look at the academics at all which probably hopefully helped a little bit and I probably partied too much in school and maybe that helped me on my socializing aspects, but I went into my senior of year college realizing I have no idea what the hell I want to do in my life. I had all these friends who had I’m going to be an investment banker, and I didn’t even know what these jobs were, I knew nothing about the markets, I couldn’t have explained to you what a stock and bond are. I was way behind and I luckily got an internship with an investment analyst at this place called JD Montgomery Scott. I did a semester in Philadelphia which is probably the best thing that happened to me. These people they just sat me down and like read The Wall Street Journal and they like gave me the basics and started me and really kind of brought me along and realized I’m interested in numbers, I’m studying finance, I think this can help. So I was starting from a really low place and I think that it kind of helped me because I realized I know absolutely nothing and I’m listening, sitting in these meetings and listening to these people and everything they’re saying is going over my head. So I realized I had to learn so I just started this journey of self-study and reading every book I could find.
So every person in this firm that I talked to it was all these different analysts covering different sectors. Every time I would sit down with one of them and they would have a little job for me because I was the low man on the totem pole. I would ask him like what are your two or three favorite books on investing? And I started compiling a list and I just plowed over the next two or three years I plowed through all these books, and that helped me just get this better sense of being part of the conversation understanding what people are talking about, because to me it was just such a foreign language and so just getting started for me, I was so far behind the eight ball that I had a lot of catching up to do. Actually, my wife who was my then girlfriend we had a long-distance relationship where I’m working in the Detroit area and she’s still going to school after college to her grad program and so I’m by myself in this city where I didn’t know a lot of people and I just use that as a time to really play catch up a little bit because I obviously didn’t do it enough at school.
Individuals and Institutions
Adam:00:13:25So you spent some time on the institutional side and then decided to focus on retail. One of the things we’ve been chatting about on the podcast and just in general is the fact that so many advisors in many high net worth or even medium net worth private individuals tend to try to orient their investment strategy so that it looks like what some big institutions do. Like they maybe model it after the Yale endowment or after big pension plans et cetera. And we always find that to be so silly because these huge pension plans are so large that they are the market and they have so many constraints on the type of investments they can make and I’m just wondering like just coming from the institutional side, what lessons did you bring from the institutional side that are actually applicable to private wealth and what ones did you realize later, or just private wealth should ignore and do something completely different?
Ben:00:14:20One of the reasons I came to the more private side, and I actually do work with a handful of smaller institutions, we have some non-profits but nothing like I was working with in the past. I actually butted heads with a lot of people in that space because… So I worked for an endowment, we probably were one and a half billion, which a lot of people think is a lot of money but in the foundation endowment pension world that’s not that much, in the overall grand scheme of things. And we had three of us that ran the investment office there and that’s actually a space where we had all these different conferences and memberships that you could join that it was like closed doors and … foundation groups and these people would lay it on the line, it was like no media involved, it’s like open book, everyone can talk and so it was a very open and honest group about how things worked and my big take away from that group is how political it is and you’re dealing with committees and all these things but one of the reasons that all the politics there made it so difficult to try to be like Yale. Not only did some of these places do not have the resources and the expertise to do that but they’re trying to get these ideas past their boards and their committees and they couldn’t. So they’re almost doing it halfway and it’s like if you’re not going to go all the way and do it the full weight what’s the point? Then you’re just taking the worst of this stuff which is…
Mike:00:15:40The half measures are the worst.
Ben:00:15:42Exactly, and so I always thought like this doesn’t make- If we’re going to do this let’s do it and if not then we’re just wasting money by paying some of these, and again the size we were at even at 1.5 billion we couldn’t get a seat at the table with some of the best managers as it is, so we were getting the second and third helpings basically, the leftovers. So I kind of butted heads with that industry a little bit where I was telling a lot of them even whatever, 10 billion and under I was trying to tell them this probably doesn’t make sense. You guys should be probably in more liquid strategies and if you’re going to do it maybe instead of trying to pick 10, 15, 20 of these private equity managers or hedge funds just pick a couple of them because trying to be diversified in that space just gives you horrible returns and you’re paying a high cost. So I did butt heads a little bit in that space, one of the things I took away is just, know your constraints as an investor no matter what because if you’re trying to do something and you go halfway especially in that space where there’s so much competition, that’s a tough place to be.
Adam:00:16:46One of the things we spend a lot of time on actually with, especially high net worth clients and especially people that come out of where their wealth is derived from, the sale of a business. They are comfortable in the business space, they’re comfortable with private companies, they think that’s where wealth is generated and that transition from generating wealth which typically comes at least for more extreme wealth from concentrated investment of time and money in a single business that you control and operate, so you come out of this framework where that’s how wealth is built and now you’ve got wealth from selling that business and your intuition says you should use the same techniques to preserve that wealth to achieve the other broader objectives that you have in your life and we always struggle with how do you sort of move a person from that wealth generating mindset to the wealth preservation or sustainable wealth mindset. Do you have any insight on that?
Ben:00:17:55Yeah, it’s tough. We had a conversation a couple weeks ago with a guy who has spent his entire career at a really well-known publicly traded company, he was a high up executive there and he spent his whole career helping build that business and got a lot of stock options there but also used a lot of his money to invest in similar businesses. When he came to us and said, “Okay, I realize I need some help here. I need some advice and I don’t just need investment advice I need financial planning advice and I need to know what happens now because I’m reaching that next stage of my personal life where I want to make sure my family’s okay.” And trying to unwind a lot of these privately held companies he owns is a real problem, it’s not easy and you realize the first step is taking a look at here’s everything you own, here’s your asset mix and you realize it’s just this hodgepodge of different investments and there’s no really coherent strategy. I don’t think he ever realized that. He never put it all in one place and said what am I doing here even though I have all this expertise? So it can be tough and especially when you’ve made your money that way. The other side of it is a lot of people sometimes they don’t want to lose any of it because they’ve put their whole livelihood into it and they don’t want to let go of control and give someone else the steering wheel. So there is a lot of part psychologist in those conversations and helping people understand, yes you were working your butt off for 30 years building this company but now you have to let go of the steering wheel a little bit.
Convincing People to Save
Rodrigo:00:19:22Yeah. Isn’t that the job of the wealth manager? The psychologist’s job. I think it’s 90% of their work. We understand what you do, what your fiduciary duty is, but then how to nudge people along. You talk a lot about savings rates, it’s really tough to get anybody to save and it’s really tough I found to get when I was in my wealth book trying to get individuals to save without having some trick attached to it. How do you think about the savings for the individual? How much they should save and what type of behavioral tricks they can use in order to make sure that they can be successful at it.
Ben:00:20:04Unfortunately, a lot of that is a psychological game, it’s not as easy as just knowing what to do and then going out and doing it. Like in my book I found these statistics in a book, it said between 1989 and 2012 Americans collectively spent like a trillion dollars on weight loss solutions. There was this huge boom and what was the outcome of that? Obesity grew by 50% and severe obesity doubled. So we have all this like the exercise boom really started off in the 60s and 70s and really kicked into the 80s. So people are throwing all this money at it and yet the outcome is people get less healthy because, it’s a cliché to say personal finance is like exercising and eating right but it’s true because if you just have the knowledge that’s not enough to change your behavior. You have to do something, it’s the same thing for building wealth. Everyone knows I should pay myself first and live below my means and all these things and save and invest for the future but it’s hard because people get overwhelmed especially people who are outside of this business and don’t know anything about it and they don’t know where to start and they think that, well if I just know how to pick stocks then that’s my investment plan, but that’s way down the line in terms of things that are important for creating a sustainable financial plan and you have to understand that it doesn’t matter if you’re the second coming of Warren Buffett if you can’t save some money first and put it aside, what’s the point of having the world’s greatest investment strategy if you don’t have any money to invest?
I think you do have to trick people and I think part of it is just starting small, so I talk in the book about myself. When I came out of college again I started slow and I wasn’t making a lot of money at all and after saving a little bit of money for an engagement ring for my future wife and being on my own for the first time and paying some student loans and having a car payment for the first time in my life, I don’t know I had 50 bucks a month to save but I still did it and I started I think it was building those savings habits from a young age where I could see a little bit of slow progress and it wasn’t much and I’d say, man I’m getting nowhere here but then my career progressed and I started making more and then once I had those habits built already I could save some more and save some more and I think the biggest thing for me was learning just to have that stuff automated and pretend saving money is a bill each month. So in my book I talk about pretend like it’s a Netflix subscription or a gym membership where those savings are part of your bills. So every month you have it automatically out of your paycheck, it’s going into your retirement account or your online savings account or whatever it is, wherever your money’s going, your brokerage account, it’s taken out automatically and you realize that I’m spending whatever’s left over. So if you try to go in with the idea that I’m going to scrimp and save all month and then whatever’s left over I’m going to save. We don’t have enough willpower to handle that because eventually you’re just going to spend whatever’s there. So the point is to get it out of the way first and put it on autopilot and then spend whatever is left over so you never even have to think about it.
Mike:00:23:03If we take that to the corporate level too, I think what you want to see corporations doing is having the auto enroll, the auto escalate. You want to see relatively a good option for choices but not too many, because you don’t want the paradox of choice getting in the way of actually just starting to save and then maybe we’ll talk a little bit later about that transition from spender to or from saver to spender which is I think a big topic but I don’t want to jump there now. So you got the personal aspect of that, you’ve got a corporate hopefully aspect of that that we can nudge corporations to do that type of thing, was there anything else that was a psychological trick to engage in for-?
Ben:00:23:48Honestly in terms of the studies that I found, that auto enroll stuff you mentioned was by far the biggest. So it’s like the companies can help their employees automatically. So Vanguard has like a 1.3 trillion dollars in their 401k system and they looked at the companies that did automatic enroll and then they have automatic escalation which increases your savings over time, which I think is great too. So let’s say you get a two or three percent raise each year, you save half of that raise or something and it, you never see it hit your checking account in the first place and it increases your saving, but they found that people who had automatic enroll for their employees had like 56 percent higher savings rates than people who didn’t. Even for people who made less than $50,000 and were under the age of 35, their savings rates were double what people were who didn’t have the automatic rule. So just having that, making someone opt out and just making it easier so people don’t have to think about it and it’s just done for them and they can have the ability to opt out but people will take the path of least resistance.
Rodrigo:00:24:46…Yeah, it’s funny-
Mike:00:24:47Go ahead Rod.
Rodrigo:00:24:50No, I was just saying that when I first got out of school and worked for the largest insurance company in Canada, I remember the discussion was how difficult it was to get enrolled, like the inefficiencies, just the way they developed the software, the amount of choices that you had in the Manulife funds, it was a nightmare to get it going. And I thought it should be auto enroll and don’t spend money and time trying to make it easier to opt in, opt everybody in and keep the inefficiencies in place so that it’s nearly impossible to opt out. Divert the problem.
Ben:00:25:24The other good thing a lot of companies are doing is they’re making the default investment option, it used to be like the stable value fund which now would be paying nothing because interest rates are on the floor. They’ve changed that to target date funds, which admittedly are not perfect in so many ways but they’re so much better than the alternative that most people would do it because it automatically gives you this fully diversified portfolio. So for someone who’s just beginning and they’re putting small amounts of money in 50, 100, 200 bucks a month whatever it is, the fact that they can in one fund be completely diversified geographically across strategies between stocks and bonds without having to make those decisions themselves and then maybe when they build up a little bit of a nest egg they can go, okay I realize this isn’t a perfect strategy for me, now I can diversify and learn this stuff a little more. But in terms of that creating baby steps to just get going that’s been a huge win that they’re all making those the default option for people.
Adam:00:26:18It’s the equivalent to have saving for a home. It’s like the home is not a terrific investment, historically it hasn’t been a terrific investment netted for inflation and operating costs but just the habit of having to sock money away every year it doesn’t really matter that the investment itself is not particularly robust it’s just-
Ben:00:26:40It’s forced savings.
Adam:00:26:41Yeah it’s forced savings exactly. You’re basically putting money into a bank account, the target date funds are imperfect too, but it’s forced savings, you’re putting money into a bank account and over time hopefully it’ll pay off. One of the things that always bothered me when I was dealing with financial planning and actually this was a really interesting conversation, Mike you may remember this, we had this conversation with I think his name was Mike who headed up the financial planning group at one of our previous firms and he was a really thoughtful guy. He had incredible software and he had really good ideas and his idea was that he wanted to present a super concise financial plan that acknowledged the ambiguity of first of all, obviously market return trajectories but also your life trajectory, like included mortality assumptions, health, morbidity assumptions, how long you’re likely to be able to healthfully work and all that kind of stuff and present this sort of concise plan that included all of these distributions acknowledging the probabilities and the uncertainties, and this is what he started out providing to advisors and quickly the backlash from advisors came which was first of all, clients don’t understand the role of probability or uncertainty along any of the dimensions that you’re dealing with in your plan. Second of all they’re not receiving this type of plan from others that they’re sort of shopping their portfolio around to and so you including fifth percentile outcomes when the other advisor is providing a linear extrapolation of investment returns out for 50 60 years and providing a 60 or 80 page booklet, we’re just not able to compete. How does an advisor try to do the right thing and acknowledge the uncertainties along all these different dimensions when the client doesn’t really understand the fact that this 60 or 80 page document that extrapolates cash flows out first for 50 or 80 years is completely meaningless and what actually matters is the uncertainty along with these different dimensions? How do you think about that problem and communicate about it with clients?
Ben:00:29:10I think when our advisors go through this stuff and we have a lot of client-facing advisors who are doing this on a daily basis, I think it’s helpful to show the clients how much of it can be garbage and garbage out of if we change this one little piece here, look at how your probability of success goes from 70 to 80 or down from 70 to say whatever it is. So I think you have to be upfront with people that a lot of it is just guessing because we don’t know the path of returns what they’re going to be, or what your life is going to be like. So I think a lot of it is really just not only helping people understand their goals but clarifying them for them and helping them see what different decisions can mean for the potential and then obviously a lot of the future it’s planning but it’s also guessing too. A lot of it is guessing and then so the whole point of the plan is not like that first time in that 70 or 80 page document that you talk about, it’s the process of it and it’s updating it as you go and having these quarterly meetings or monthly meetings or yearly meetings wherever it is and updating and saying what’s changed and then how would that change what you’re trying to get out of this money and so I think a part of it is just this fluent process that is ongoing constantly and it’s up to the advisor to tell the person that we’re setting expectations but then we’re showing you as reality comes in line with those expectations if things are better or worse, now here’s what we need to do and a lot of it is for people having tough conversations sometimes and especially with interest rates where they are and telling people, either you’re going to have to work longer or you’re going to have to spend less in retirement and change your standard of living or you’re not going to be able to accomplish everything you want to. A lot of these things, some of it is setting expectations and having hard conversations with people who aren’t as prepared as they think they should be.
Mike:00:30:52I think what Adam is getting at is the use of the financial planning tool as a sales mechanism and the implications that come with that because if I go to one wealth manager or financial planner, he provides me a plan and says hey you’re here, just do lots of equities and check the box, you’re there only accounting for a 50th percentile outcome versus a thoughtful advisor that says no you have to save more, future returns are going to be lower because the bond component is at zero, valuations might be here or there and so we have to acknowledge the starting point and so when you think, it makes it really hard for the thoughtful practitioner who’s going to try to guide that conversation when financial planning tools are weaponized as vehicles for sales.
Adam:00:31:40I like that word, weaponized that’s…
Mike:00:31:42Yes and it’s really hard because the end investor is not well equipped as we’ve talked about on these concepts even at a small institutional level as you mentioned, is not well equipped so how might we offer some insight on this conversation is that what investors might look for to try to guide their actions in dissecting that or discerning a really good financial plan from maybe a more sort of rosy but less meaningful?
Ben:00:32:14Part of the way that we view this is almost a little – I’m going to invert this a little bit and part of it is working with the clients who aren’t looking for something that you can’t or won’t give them. So the way that we’ve done our whole process with building our business is trying to create a lot of trust by putting out our content and so people come to us and they kind of know us already, and if they’re coming to us and they’re asking for something that we can’t or won’t provide and they want you to hit grand slams at home runs and they’re looking for, “I want 15% a year,” and we’re open and honest and telling them that’s okay that you want that, we don’t think you can get that but we’re not going to try. Good luck somewhere else and we try to help them along the way and things to look for. I think part of it is looking for the right partners and clients right off the bat in terms of people that are looking for the right things and we’ve said in the past to people If they see our CEO Josh Brown on CNBC we don’t want them to come and say, “hey here’s all my money do whatever you want with it.” We want to make sure that they understand our process and set our expectations and understand what we can and can’t do for them and what we own and why we own it. So part of it is working with the right people and understanding there’s still going to be people that slip through the cracks and say yeah I got it whatever and there are going to be clients that down the line aren’t going to work. Part of it for us as a business is working with the right people so we’re not constantly on the phone with these clients who are saying what’s going on now? Why is the market’s down today? Now what? So, it’s getting those right relationships first to understand that you’re not going to waste your time on these one or two clients who take up all your time and are just a big headache and so we’ve had conversations with people who say we’re probably not the right fit for you, you’re not the right fit for us and here’s the expectations that we’re going to lay out and we try to be open and honest and transparent about what we can do, what we can’t do. Again, just talking about the fact that those financial planning documents you said can be weaponized are used as part of the process but they’re not the be-all, end-all obviously because so much of it is constantly in flux and changing. So I think that’s part of it is just developing trust and working with the right clients to begin with.
Rodrigo:00:34:16Like self-selection is so key and I think one of the wonderful things about the content marketing that you guys put out that we’ve also focused on is that you simply get people flooding in that are your people for the most part. There’s going to be a few stragglers here and there, but it is a wonderful way of putting your personality, your values out there and actually capturing the right individuals that are willing like they’re the horses not being led to water but they’re in the water ready to drink. It is 90% of the battle as you’re building your wealth business, I think. Absolutely key.
Mike:00:34:55That’s great. Let’s dig into just a couple of maybe examples of things. If we look at a financial plan, one of the things that when we’re reviewing a financial plan as an example of something that I would point someone to look for is some volatility assumption in the underlying investment assets because of the difference between the geometric return and the arithmetic return and how those compound wealth. If someone has a financial plan, I would want to see something that addressed that in some way. I think maybe if we all go around and think of that one thing that, hey listen if you’ve got a financial plan it should address that issue in some way. If it doesn’t address that issue then you should ask some questions and maybe that’s my example but I’ll throw that back to you guys just to think about an example that an individual advisor can be familiar with and an individual end investor could maybe point to and ask the question of the advisor and hope to get a robust answer.
Rodrigo:00:35:55When it comes to that, I’ve always, we do our one page financial plan. That one page gives you a probability outcome and the line that I use is a line that my mom used to use on me all the time. If you want to make God laugh, tell him your plans. That appeals to every human that I’ve ever spoken to. Like this is a plan. What are the chances that this is the way it’s going to turn out for you? This is the medium reality, do you actually believe me or this page or are we going to have to iterate every year. You’re going to get a bonus that you didn’t expect, you’re going to get an inheritance you didn’t expect, you’re going to lose your job, you’re going to get sick, you’re going to be healthier, you’re going to live longer. All these things a financial advisor, me I can’t do anything about that. All we can do and all we can help you with is give you a rough estimate but know that everything will actually throw that out the window. So whoever’s coming with a 54-page plan with insane detail that is in our world curve fitting, data mining? You’re not going to get any value from those, you need to know that life has changed and we’re going to be here for you as things go by. You wanted a rough estimate, here’s a one page. Let’s not waste too much time on it. Roughly you’re in the right direction and we’re going to iterate every single year. That’s I think-
Adam:00:37:12I agree and I think it’s important for people to realize that it’s not just individuals who have these biases and make decisions sub-optimally. I recall Mike you’ll remember going to this presentation from Canada’s largest community foundation. It’s a huge institutional foundation with a large prominent board of directors and lots of internal processes and lots of internal staff and I remember going to a presentation by the CIO and hearing how they had come to the realization that since their liabilities were inflation indexed that their benchmark wasn’t the market, but was rather a return which was a function of their distribution rate plus their expected inflation rate. So they went out with a new RFP, they were going to reshuffle their portfolio, we’re going to do things a little differently and they went out to seven firms. How did they source the firms?
Well, they went to their board members who were all senior partners at major investment institutions and asked them for referrals and so they got these referrals with seven or eight different investment firms and so they went out with RFP’s to these investment firms they said, what we want is a portfolio that will do five percent plus inflation in perpetuity and I forget what the number is. Maybe it was seven or eight or ten or eleven I don’t know, but anyways all but one came back and said I’m sorry but in the current market environment we can’t present you with a portfolio that we feel has a high confidence of delivering on your investment objectives. Which actually from a silver lining standpoint was pretty impressive, you’ve got a bunch of profit motivated investment companies who came back and said I’m going to turn down this revenue because I actually don’t think I can meet your objectives as fiduciaries. Which was great, they had one firm come back and say yes, we think we can meet your objectives, here’s how we’re going to do it and what do they do instead of reflecting going back and reflecting on whether their RFP was reasonable, whether objectives were reasonable, they gave the mandate to the one firm that said that they could meet the objectives. So the lesson just being, there are actually a lot of really high quality, high integrity firms and advisors out there but it’s not just institutions or not just individuals that make bad decisions or are not equipped to make good decisions about which advisor to go with. Institutions make very similar bad choices.
Ben:00:39:53Sure. One of the stories Barry Ritholz always likes to tell is we had this person come to us, really wealthy person, 10 plus million dollars and they said all right here’s what I’m going to do, I’m going to pick you and three other advisors and after a year whoever has the best returns is going to get all my money. You don’t realize the crazy that they’re running when you do that- I think the other way to look at it too, to think about some conversations, talk about like tough conversations, there’s also people who come to us who have already won the game. They have more than enough money they’re ever going to need. So even though they can’t make a ton of money in safer assets it’s like balancing this willingness need and ability to take risks. Some of these people they made money by taking insane risks but now you need to talk them off a ledge and say you’re going to be fine if you take less risk than you have now and you just have some of your money in tax-exempt bonds and so it’s like pulling people back too, that’s the other side of the equation where you’re not promising these people that you’re going to make them double and triple the money over the few years. You’re talking about let’s take some of this and not mess it up. So a lot of people, it is that changing that mindset from I’m building wealth too, yeah I’m preserving it and I’m not going to mess it up at this point and really you’re taking too much risk.
Mike:00:41:01You know what’s so interesting about that Ben too, and guys remind me, I think it’s for Moshe Milevsky’s work, I think that’s where I remember this from it might have been Paul Samuelson but they talked about your risk tolerance. Actually being relatively stable through time, that if you have a high risk tolerance you have that through your entire life and so here and I forget the reference point.
Adam:00:41:24It’s Samuelson. Because the volatility of wealth not the volatility of incremental returns.
Mike:00:41:31Right. So here you have someone who has had an insatiable desire for risk throughout their entire life, they have all the money that they could possibly spend for generations, yet it will be entirely unsatisfying to give them a portfolio of T-bills. If we think about Samuelson’s thoughts on this and it’s a really interesting balance that an advisor whoever in whatever capacity is thrust into in in that particular paradigm. I don’t know If you-
Rodrigo:00:42:03I had a client just like that. An executive in one of the Canada’s largest banks, he was a frontier executive that took over South America and made it work and when he retired we had a conversation and I said, you’re retired, you got your nest egg, this is what we’re going to do, gave him a relatively conservative portfolio and he’s like, “No I want like that that 30, 40 vol 20% rated return opportunity.” What are you talking about? It took me four or five months not to talk him into it because I couldn’t, but to understand where he was coming from. He had a pension that was paying him like 10 grand a month. He’s like that’s all I need to live off. I got this nest egg that now I want to have a shot at being like insanely wealthy and I’m willing to go broke in that part of my life in order to try to achieve that. So his risk tolerance was as high as it ever was. I was never going to talk him out of it and we just structured a portfolio for him that way. Sometimes you just have to give in.
Mike:00:43:05It is interesting that this idea is that if you’re on a pension you’ve got to take the board, the board says here’s our desires please go get managers in this risk zone. When you’re dealing with an individual as an individual advisor, you’re in the same position, it is to some degree their money and we are trying to steward that or help guide them. What are your thoughts there Ben? Do you take the hard line on that and try and get them to take the less risk? Or do you say well I’ve informed you, at least of your opportunities, you’re a big boy, caveat emptor and I’m happy to help, it’s better that I guide you through this labyrinth than somebody else. What are your thoughts?
Ben:00:43:42One of the other release valves we’ll do is we’ll tell someone take five or ten percent of that money and we’re going to put it into a brokerage account for you and you can buy and sell crypto and penny stocks and go nuts. So that’s another if you want to really scratch that can help people too. Some people just need to have that release and just get it get it out of their system. So that’s another way that we think behaviorally maybe that’s sub-optimal but it can help them stick with the rest of their portfolio than…
Mike:00:44:09I love that. We call that the cocktail portfolio. Because they got have something to talk about at the cocktail party with their, with their with their guys and girlfriends, that as a hobby or whatever the case maybe,
The Changing Nature of Retirement
Mike:00:44:22Yeah, I want to switch gears just to touch here because there was an area of your book that I was really interested in learning more about and I’m not sure that I’m aware but, the changing nature of retirement. What did you learn there? The idea of retirement is a new concept. Is that the case or have we had in previous generations have there been forms of retirement? Then I don’t know if you had an opportunity to look back and see through time, like 200 years ago what did someone do when they wanted to retire. Or was that even a thing. So just switch gears a little bit and dig into that for me.
Ben:00:44:55The retirement plan of old used to be you died.
Mike:00:45:00You worked and died.
Ben:00:45:03I think it was like 30% of all males by the end of the 1800s lived past their 65th birthday. When they first rolled out even social security in the 30’s, they were assuming people were going to live seven to ten years maybe and so back then it just if you have parents or grandparents who were involved in World War Two it was after that generation that people finally started having to think about it. Because it wasn’t the case that especially in the States that everyone had a pension, but a lot more people did than do now. So it was a lot easier and you didn’t have to plan for quite as long. And people still want to have that mythical 65 age or whatever to retire but now you’re talking two three decades that you have to have your money last for you in some cases. I think that’s one of the reasons it’s so hard for people because there’s not very many good people you can look up to in terms of, hey this person planned it out well and they lived until 90 and their money didn’t run out. So a lot of people just don’t have good role models to look at in terms of retirement because a lot of the personal finance habits are so bad with their parents or the people they…Their friends or whoever. So it is one of those things where you’re really on your own and even though we have 401k plans and such. In the United States only 50% of companies have access to one. So I think it’s probably more like 30 to 40 percent of people are even taking part in them so it’s almost my wish list would be that like the government would open it up to anyone who has a job and this would maybe be another opt-out thing. Australia has the forced retirement savings where they make their employer-
Ben:00:46:35Yeah. People would go into that kicking and screaming because freedom or whatever, but some people need that where again you’d have to do a nudge where you’re opting out instead of being forced to save. But unfortunately, a lot of people just don’t have access to retirement plans either and it’s hard for them to go through the process of opening up an account for themselves because they just don’t know where to turn. There’s so many people that are just left out because they just don’t know any better.
Mike:00:47:05Mathematically speaking the idea of a defined benefit plan that is mandatory, that shares the retirement risk with the mortality table is an insanely important part of a of a well-designed retirement plan having some amount of income that if we think about Maslow’s “hierarchy of needs” with respect to your financial planning and food and shelter and having that shared risk, you’re not having to plan for the 85th percentile because you could have bad luck in your investment returns, you could live really long right, that you’re taking that one side of the risk off the table and that to me is incredibly important and it’s something that’s missed as corporations because of tax rules move to define contribution because they don’t want that liability on their balance sheet. I think individuals should really look at that as a significant benefit when they’re interviewing employers. If the employer has a defined benefit plan that is a massive benefit to you.
Ben:00:48:15My brother works for the US government and that’s one of the main reasons he’s stayed in that job because he knows at a certain age he’s going to get a pension and he’s calculating the present value of that and it’s a pretty big number. If you really think about it that that income people don’t realize it, they don’t put it in those terms if this would be the equivalent of X amount of money in a portfolio. This is one of the reasons that I tell people in the States that social security is never going away because that is the fallback for so many people. I think the number I found was like a quarter of people who are retired rely exclusively on social security and 50% of the people have half their income come from when they’re retired. You’re signing a death wish as a politician if you ever got rid of something like that.
So it’s actually been one of the more successful programs in history probably in terms of helping people because all that stuff that came out of the great depression there was no financial backstop for anyone back then. There was no unemployment insurance, there was no social security, you were on your own. That’s why that generation turned into the baby boomer, the frugal generation that really held things back and it was funny there was a lot of people at the beginning this pandemic who said that’s going to happen again. We’re going to have this generation of people who really pull things back and they become more frugal and they save more because the pandemic really showed that we have a problem and of course the opposite has happened where it’s unleashed all the speculation and obviously part of that is I guess the lesson is never bet against the US consumer but back then they didn’t have the same backstop we have now where the government could send out checks and the Fed could throw this money and so you didn’t have that in the past where people were really on their own for better or worse.
Adam:00:49:59This is what it’s like to live in a risk-free environment? Every generation-
Rodrigo:00:50:04 This is what I was getting at. I don’t know but I was born and raised in Peru and I got to tell you retirement has never been a thing that people discussed up until recently when they about 15, 20 years ago the government started creating a superannuation fund where eight to ten percent of every employee’s paycheck has to go to superannuation. One of five options. What’s interesting about this is that nobody in my father’s generation that I know has ever stopped working. Retirement is not a thing they think about, even lawyer friends of mine that I know have two or three side gigs not because they necessarily need the money but because they know that they’re going to need to depend on that if something goes wrong in their careers, you got a soccer field or they put cameras on in the north of Peru, another one’s like making asparagus on the side, everybody is constantly hustling and what’s happening as we’re getting to the first leg of people forced to retire and forced to use that superannuation money, they have the option of putting it into an annuity or taking the cash and a bit of a penalty, everybody’s taking the cash I know of, and investing in a business. You bang your head Mike but I actually encourage when my clients are like when should I retire I’m like never, you should never retire. I’ve seen people retire and I’ve seen them look 10 years older in five months. Life is hard, you should work and have a hard life until the day that you die because it’s fulfilling, and it’ll keep you going.
Ben:00:51:40I agree. There was some research that I found for my book that said people who retired early actually died earlier because they don’t have the same camaraderie of going into the office or they don’t have that same drive to do something. I still have ways to go obviously now, I’m just about to turn 40 this year but I can’t imagine giving up and never doing anything, I would go crazy and my wife would kick me out of the house because she would go crazy, because I feel like I need to do something. So I think that’s one of the ways that this whole concept of retirement is changing for people and I think that’s something young people have already readied themselves for. I tell them the millennials you’re going to have social security even if it’s pushed back a little bit but they say I’m planning on not having it, I’m planning on being my own, I’m going to work until I’m 75 or whatever it is and maybe that’s the right mindset to have, and if things work out better than they planned great, you’re in a good position to do whatever you want but I think a lot of people are in that mindset of I’m just going to continue working because it does fulfill me and it helps a little bit.
Adam:00:52:40 I think we need to acknowledge the potential for that statistic to be correlation but not causation. Maybe people retire early because they don’t feel well or-
Rodrigo:00:53:09I’m telling you my father is still an entrepreneur, he works with other 75 year old dudes that are coming up with ideas and small businesses here. They have the money for it so they’re funding it, they’re getting younger people to help them run. This is like the last thing I want to do to my clients and my children and anybody that I talk to is not make them think that they can’t make something do with what they have and have this entrepreneurial ability, even when you have a full-time job to have one or two things on the burner that may actually help. In the moment that you say 65 we going to get you the Freedom 55 was that the thing?
Adam:00:53:49All of my parents’ friends are like can you get me out of here? How can you get me out of this job that I’m doing five years before I…
Rodrigo:00:53:59Ben found his passion and look at him now.
Ben:00:54:02But there’s people who have that plan of I’m going to work longer and they might not be able to because at that stage you’re one of the higher earners in the company, you could be forced to retire at an early age. We’ve had to put provisions in our own company because Barry holds our namesake, he’ll work until we put him out of there. So we almost have to put a thing on there, I mean he’s going to be coming to the office until he’s 90 probably but for some people that want to do that you almost have to give them an out.
Mike:00:54:28We have a name for that. The retirement party starts with “CLEAR!”.
Rodrigo:00:54:36Again, my point here is none of these elderly statesmen that my father hangs out with are getting jobs. Nobody’s hiring them. They’re making their own business and if you don’t have the experience of doing that and know how you can make it happen, the gumption to do it. If you haven’t done it in your life then you retire, you play golf and you die. I’m trying to get people to be self-sufficient even if they like their job because they might get pushed. Retirement is not an opportunity to waste.
Adam:00:55:05I applaud you and I think it’s a virtuous position to take…
Mike:00:55:12I’m going to change the topic because Rodrigo is triggered, and we need to move on. Well, let’s get it going somewhere else. Let’s talk a little bit about that really important inflection point where you go from saver to spender. The portfolio goes into decumulation. What did you find there? Any really key points that you want to share Ben and your thoughts on that?
From Saver to Spender
Ben:00:55:41I didn’t really get into that too much in this book. I have looked at this before and I know you have all written in some of your books about the sequence of return risk and that is one that I think every retiree we’ve talked to for the past 10 years has said they just assume when I retire there’s going to be a bear market and I’m screwed because you never want that bear market when you retire and you try to pull the money, there’s obviously ways to protect against that but I think that is one of the things that worries a lot of people, is that their timing is going to be horrible and but it’s Murphy’s Law that the worst thing is going to happen at the worst possible time and they’re going to have bad luck. Unfortunately, as any investor, luck is such a huge element of this game, it’s hard for people to admit it, especially when you’re working with all these masters of the universe that are so smart but just coming up during the right time and having the great returns, how many I don’t know- I want to take away from their track records but how many hedge fund legends were crowned in the 80s and 90s because they started off with higher interest rates and lower valuations. So much of it is timing luck and obviously that’s part of the reason why these big financial plans are not set in stone, because you’re going to have to update and maybe make some course corrections along the way as reality hits what your plans were.
So I think part of it is not setting. Everyone argues over this, what’s the new withdrawal rate? Is it four percent or three percent or one point? Whatever it is. I’ve never heard of anyone who actually uses that rule to take their money out. No one actually says I’m going to take a specific percentage out and then I’m going to increase it by inflation. When things are going really well maybe you take out a little more or you set aside a buffer or when things are going really bad in the markets then you stop taking it out, so I think you just have to have a backup plan in terms of I’m not going to sell my riskiest assets at the worst possible moment, because selling when they’re down is just going to compound the issue. So it’s having enough safe assets to get you through those times or maybe rebalance. I think that’s part of it. It’s just having some flexibility in your portfolio to see you through that stuff because again no one actually does it. So people argue over the 60-40 portfolio or the four percent rule and I found no one actually uses those specific numbers. It’s always unique kind of to someone else someone’s circumstances or plan.
Adam:00:57:48It’s like that’s a neat point because I think that speaks to them. Another reason why the moneyness of stocks has accelerated in the modern era because I mean you just think about the reflexive impact of most people thinking about their spending in the context of their current wealth that they observe in their portfolio. So when the wealth in the portfolio is up their spending goes up and so you’ve got this positive reflexive mechanism happening because earnings, every dollar that’s spent through the Kalecki Equation flows through to the corporate balance sheet. As long as people are feeling wealthier and of course the Fed relies on this exact relationship and their job owning and driving asset prices up but you can imagine people feel wealthy, they spend more. Corporate earnings go up, then you can justify higher stock prices which means people feel wealthier which means that their spending goes up but the same principle happens in reverse where if the market goes down they typically will then adjust their spending lower which means lower corporate earnings which means lower prices which means lower wealth which means et cetera. I always wondered like we struggled with this about 10 years ago where if you just use sort of US benchmarks in order to guide your planning then you’ll make certain decisions. If you use global benchmarks you use different decisions. If you use sort of more what happens if returns during retirement fall in the bottom 50th percentile of returns over any random 15-year period across all different markets. It turns out especially in late if you start saving in later years the return assumption, and especially in retirement that return assumption makes a really big difference. I want to espouse simplicity, but I also want to acknowledge that there’s actually a lot of randomness. Like do you think about how to make portfolios more resilient especially in retirement and not be so reliant on long-term average US returns?
Ben:01:00:02Yeah. One of the things we tell people now it’s like if your portfolio isn’t in a position now after the last 10 years where things have been going great, the next 10 years then if you’re already behind you’ve got a lot of work to do. Because you can’t plan on the last 10 years happening again. So that’s one of the things and we’re constantly updating our assumptions especially- The stock market who knows, interest rates are what they are. Those are the anchor and that’s the easy one for people. That’s where we’re setting concrete expectations saying, listen, we know what this is so either we accept this, or we move out on the risk curve and you basically have no other option in terms of you have to accept some risk, whatever it is. So that’s part of the conversation. I wrote a chapter in here to your point about starting late. I looked at the numbers and I found let’s say you start when you’re 45 or 50 years old you have nothing saved for retirement and you compare two strategies. One where you save 10% of your money and you make a 12% return over 20 years. One where you save 20% of your money but you only make a six percent return. If you did that using the same savings assumptions and the same income you come out ahead by doubling your savings rate versus doubling your investment return. Doubling your investment return is much harder than doubling your savings rate. So especially for someone that late in the game that is really stuck behind the scenes-
Adam:01:01:26We have more control over it certainly.
Ben:01:01:27Yes. That’s one of the things that we tell our clients all the time is, we’re trying to focus on what we control. We don’t control what the Fed does or the president does or tax rates, any of that stuff, we have to take that into account obviously but we can’t control that. So we do have to focus on the stuff we can control which is your spending, your savings rates all this stuff, where we locate your assets in terms of tax implications all that kind of stuff which is boring to so many people but that’s the really important financial planning aspect of the investment process.
Mike:01:01:56What’s so great about the increased savings that I think is sometimes either underappreciated or missed, is if you’re saving 20%, you’re living on eighty dollars not ninety dollars and lifestyle is sticky. When you drive a nice car it’s not fun to drive a shitty car, when you play at a private golf course, it’s not fun to go have to go to the public course. So if you save that 20% remember that your lifestyle, you’re living on eighty dollars not ninety dollars and that’s-
Ben:01:02:27Replacing your retirement.
Mike:01:02:29Correct. So now when you go into retirement the income expectation isn’t the ninety dollars it’s the eighty dollars.
Adam:01:02:35You’re used to driving the Toyota instead of the Lexus and you’re used to playing at medium golf course instead of that-
Mike:01:02:39Right. And the decisions that you make when we come to happiness is about being able to say yes to your friends. But generally your happiness quotient is about being able to say yes to all the things that your circle of friends are doing so that might alter your circle of friends slightly, but in the longer term it’s going to make you happier in the sense that you’ll be able to participate in that, your lifestyle stays steady and so it’s not horrible, it’s a really interesting side benefit to that I think that gets kind of awesome.
Rodrigo:01:03:08I had an attorney who came to me and he’s like, okay, I got a million dollars saved and I’m going to be forced to retire in five years. I’m like, great, how much do you spend a year. Well my lifestyle is such, my wife has horses and whatnot, I spend seven hundred thousand dollars a year. I said well, here’s what you need to do. You need to get another job for the next 20 years and you’re going to need to cut your spending by two-thirds to be able to retire.
Adam:01:03:36Didn’t he have 14 million in the savings account?
Rodrigo:01:03:38No. But this is it right? It was look, you’re either going to have to cut your spending now and have a thoughtful conversation with your wife and make decisions, go to go live in South America, find a place that you think you might like. Think about that type of retirement or it’s going to be a cold bath for her when you get thrown out.
Ben:01:03:57I think there is hope for people who are later in life like that because I have three young kids and kids are obviously expensive if you look at the money on that. I don’t want to know what those numbers are but hopefully as you’re later in life that’s when you can really supercharge your savings because the kids are out of the house hopefully done with college and then they’re off your tab hopefully and I can understand actually why a lot of parents don’t save enough. The whole idea is put your oxygen mask on first and save for yourself but how many parents are going to say that when they’re trying to save for their kids and not let them have as much college student loan debt or whatever. So I can get why a lot of people get behind on this stuff. It makes sense to me now that I have kids, I understand why you’d want to spend more on your kids but-
Mike:01:04:40They’re so grateful always. All 19 or 22 year old kids, and watching you guys have you … they’re just so grateful for it.
Ben:01:04:48But that’s hopefully when you can play catch up a little bit and take that money that you’ve been spending on your kids and paying for their college or whatever it is and then put it in and try to play catch up because obviously there’s a lot of people who need-
Mike:01:05:00They don’t leave home until they’re 30 now. It’s a good idea.
Rodrigo:01:05:07 One of the things you recently wrote like it was an eye opener and I loved it, I’m going to implement it and think about it deeply every single year make sure I plan it right and it’s this idea of, yes sometimes you need to spend today, you need to live today we’re young today and one of the key things is that vacation with your family. You mentioned that rented or bought a house with an expense that you see as a savings.
Ben:01:05:32Yeah I look at it as an investment in experiences. I have three-year-old twins and a six-year-old daughter and the three kids was never in the plan, the twins was kind of a surprise-
Rodrigo:01:05:45You plan the plan…
Ben:01:05:47Yeah. But we had a friend who a number of years ago said they had kids the same age and said we have 15 or 16 summers left with them hopefully unless they stay until they’re 30. That really hit me and so we could have taken this extra income and put it towards our savings and maybe retired earlier but my wife and I had the conversation like what if we do this every summer and we go to the place on the on the lake and we build memories there and so we’ve done it for the last three years and I could have taken the opportunity cost of that and said, over a 15 or 20-year period I’m missing out on X dollars based on this growth but I never look at it like that because we’re building these memories and so I want to have that balance and I think for some people it’s the opposite. I’ve always for whatever reason been a saver, I think it was just kind of passed down to me for my parents, they were always relatively frugal and took care of their money and so I think that helped me a lot. Going the other way and breaking those savings habits and enjoying some of it today and not just saving it for some far-off time in the future, I think that balance is really important and for some people it’s the other way where they spend too much, they need to balance the other way but that’s been something for me where I’ll never look at that money as the opportunity cost of missed market returns or whatever because it’s really money well spent for our family.
Adam:01:06:58I want to make sure we get to some of the questions right because Brian Moriarity has chimed in.
Mike:01:07:04We can backtrack that’s for sure. So if you’d like to do that we can. Brian by the way is going to be on next week. So we could cover it next week as well but let’s hit it.
Adam:01:07:16Also I’m trying to curate a favor since he’s my Dungeon Master and … I’m just kidding, he was asking about sequencing risk we were talking about it earlier and there’s all these strategies about how to manage that transition from saving to retirement and so I guess there’s a bunch of studies and actually one of my favorite studies was from Michael Kitsis which I think I read in like 2005 or six or something and I think what essentially he did although he didn’t or he didn’t articulate it this way but I’ve since gone back and reframed it this way but, essentially he looked at the correlation between the returns in the first five years after retirement and your probability of success for the first 15 years after retirement or probability of success. And the probability as a function of the returns in your first five years, the correlation was about 0.8 and the correlation between returns for 15 years after retirement and probability of success was in the 99% range.
But when you back it out it ends up being really what is the effective duration of your retirement liability and so when I backed it out that way, I realized that the effective duration of a typical male looking at the male mortality tables for US, of a male distribution liability in retirement is about 14,15,16 years. So it really does this – the volatility or the dispersion or the risk in your portfolio returns in the first five years to 15 years after retirement has this massively disproportionate impact on the sustainability of your retirement income and so I don’t think that that’s properly accounted for in many retirement plans. I don’t think you have to go quite as extreme as what Brian articulated there. I don’t think he’s sort of advocating for it, he sort of just said this was studied, but I do think you have to give some thought to how you manage that risk and manage the effective duration of your retirement assets into how sensitive it is to early returns.
Mike:01:09:32When you think about a cash wedge there something like that.
Rodrigo:01:09:37Hold up. I think what people miss here is that we’re assuming that inflation is going to remain steady during your first five years, and if you were an American in the mid-70s in five years your purchasing power got cut in half. So what about the volatility of inflation?
Adam:01:09:54Really good point.
Rodrigo:01:09:55There really isn’t any other way but you’re constantly balancing out risks and I’m just tired people not seeing the inflation risk just because we haven’t had in 30 years.
Ben:01:10:06I do like that idea of the looking at your allocation in terms of spending. Brian talked about two years of spending, I’ve had some people say email me and tell me they keep four years of spending again however you can manage that but if you look at it in terms of a portfolio let’s say you have 30% of your portfolio in cash or bonds or something safe like that. If you tried to break that out into how many years of spending is that going to get me, I think that’s a form of mental accounting but that’s another way of thinking through this of, okay this is what I’m going to go through first before I touch anything else risk here, something like that where you consider some sort of a safe asset as your fallback plan and figure out how much to you is safe enough to get you through however long a bear market could last.
Adam:01:10:54Like a cash wedge like Mike was describing-
Rodrigo:01:10:56But again, I want to emphasize that we keep on calling this a safe asset when it can. It may not be your 20 if you have $20,000 worth of spending and inflation doubles and it has in the US, it has in every other country on the planet, you all of a sudden, your twenty thousand dollars only buys you half as much. Again, I think the story that I had when my grandfather was an accountant in Peru had saved a bunch of money, he had a million dollars’ worth equivalent and Peruvian pesos and in six months inflation went to seven thousand percent and lost it all. Like his purchasing power went away in six months. Now, that’s a third world country, it can happen, but it is a real thing that if there was any time that a developed nation needs to think about that deeply and make sure that there’s a right balance in their portfolio it is now. I think the idea of a cash wedge or being in mostly bonds, in cash is a dangerous idea.
Adam:01:11:53You’re right. Really, it’s diversification. You’re diversifying into a safe asset and I think your point which is extremely well taken is that cash is only safe in certain environments and it actually ends up being extremely dangerous in other environments and just because we haven’t seen those environments recently doesn’t mean that they can’t happen and it’s funny because really it’s been amazing just in the last six or eight weeks we’ve had a baker’s dozen really large institutions reach out and the conversations all focus on the fact that they’re under allocated to an inflation basket. They’re sort of identifying that there’s this major embedded inflation risk in their portfolio and they don’t feel well equipped. How do you guys discuss or think about an allocation to an inflation basket at Ritholz ?
Allocating to Inflation Baskets
Ben:01:12:46Yeah. I think too that’s one of the ones that it’s been so long since people have had to deal with that, that’s pretty tough. I think the obvious answer if you’re thinking on the bond side is that TIPS are the easiest way to think about hedging that, I think TIPS are one of the most unique assets that there is that probably not enough people talk about, just from the simplicity of it. A lot of people don’t really like those because they still think of them as treasury bond but we also think about getting back to Mike’s point about like saving more and lifestyle inflation. So if you build in a higher inflation rate into like your financial plan immediately where you’re talking about the current inflation rate has been one to two percent for a long time, what if we showed you an inflation rate for a financial plan where it’s four or five percent? And how does that change the assumptions for something like that. So we look at the opposite way of that in terms of how would that impact your financial plan if your spending is increasing that much?
Adam:01:13:47So how much more would you want to save in order to insure yourself against that.
Ben:01:13:52And could your financial plan potentially handle that under some different assumptions? And if inflation got to those levels again where they’re much higher than they are today and so that’s one way to stress test it from the financial planning side of things.
Mike:01:14:08Do you talk about incorporating other structural assets that can perform in an inflationary whether it’s inflationary growth stagflationary, deflationary bust or any other assets that you guys consider or sleeves?
Ben:01:14:23Besides TIPS, so something like gold is something that we have in certain strategies in our portfolio so we think that can help in those situations and of course that was one of the better performing assets in the 70s when things get out of hand. I don’t think it even has to be the 70s for it to make an impact because it’s been so low now. I’m curious what investor reaction would be if it was just a little higher than now even like four percent which is not even double digits like it was in the 70s. What would the reaction be if it was three, four percent which is whatever double it is now? I think that would be interesting to see-
Mike:01:14:51With a zero percent risk-free rate. That’s a big spread
Adam:01:14:57Four or five percent inflation with yield curve control holding treasuries at one percent would be a whole other type of risk that I think people haven’t faced before or not.
Ben:01:15:06Well, that’s one of the things I found in the crazy World War Two one where maybe I think that could be the analogy here is you had this one to two year period where inflation jumped to 18% following the war from all the spending. Then it immediately went back down, which is it’s great so we had this one year jump where they basically got all the debt out of their system and they actually – the government at that time held the rates low. So rates stayed low, inflation jumped like 17 or 18% and then it came back down and so you had this one period where you just had this huge loss of purchasing power then it came back in and things leveled out. I think that would be the interesting scenario too here where we get this huge jump and people freak out about, okay the 70s are back again and then it comes down and that’s probably a better case for the government than anyone else because it takes away some of the debt that they own on a real basis. I thought that was an interesting period where rates didn’t really follow the inflation in that time frame.
Mike:01:15:57Yeah. If memory serves that was a bit about taking off price controls though, wasn’t it? It was post World War Two, there’s a bunch of price controls, they removed those-
Ben:01:16:08Yeah. There was wage ceilings too that they took off that part and you obviously had the boom following the war.
Rodrigo:01:16:16 But they controlled the interest rate because they had a massive debt as a government right?
Rodrigo:01:16:22That’s where gold, at the time you could buy I think we have an index for gold miners during that period because gold was pegged and the gold miners did really well during those scenarios. So there’s always an exit, there’s always some pressure somewhere where you can benefit from those scenarios.
Mike:01:16:40I hope so. Well guys what do you think? We’re about an hour and 15, Ben how are you for time or have we-
Rodrigo:01:16:47You have anything that we haven’t covered in your-
Ben:01:16:50No. It’s been another-it has been a great conversation, again I’m still jealous of you guys for being in the Caymans and me being in the cold weather but I appreciate you guys having me on.
Mike:01:16:58You’re welcome to join us down here next time in the palm trees and whatnot. Any last thoughts for your book on everything about everything you ever needed to know?
Rodrigo:01:17:10What do you want investors to do? The three things that you want investors to do. This is just not it, I’m sure he’s got it.
Ben:01:17:16No. This is the book that I wanted investment professionals to give someone else in their life. So that’s my only thing, is hopefully this is a book that people will recommend to other people in their life that just need a little help and maybe just a kick in the pants to just get started.
Rodrigo:01:17:28Good Christmas gift.
Ben:01:17:29Yeah. A good stocking stuffer hopefully.
Mike:01:17:31Yeah, I love it. Well, fantastic thanks for joining us and next week we have the one and only Brian Moriarty from-
Rodrigo:01:17:40And he’s your dungeon master?
Mike:01:17:42Yeah. Maybe we can even role play a session or two or something-
Rodrigo:01:17:46Are you guys going to come and drive … your characters? I want to see some good backgrounds, I don’t know if we can do that.
Adam:01:17:53We’ll dress up and everything.
Mike:01:17:56Now I wonder, hey, I wonder if we have some great outro music. Does Ani come on and give us some great…