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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Intro:
Well, hey there, and welcome to another edition of Retire Smarter. I’m Walter Storholt, alongside Tyler Emrick, Wealth Advisor, CERTIFIED FINANCIAL PLANNER™ at True Wealth Design, serving you in northeast Ohio, southwest Florida, and the greater Pittsburgh area as well. Truewealthdesign.com, the place to go from anywhere you are to learn more about the team and schedule a time to visit, if you are so inclined. Tyler, it’s great to be with you this week. What’s been going on in your world?
Tyler Emrick:
Oh, happy to be here, Walt. Nothing too exciting. Just sitting here in the office looking out, and it’s a snowy wonderland outside here in Cleveland.
Walter Storholt:
That’s nice.
Tyler Emrick:
Yeah, we did, we got quite a bit of snow over the weekend. My oldest is going to be four here pretty soon, so we were able to get out and do the first snowman of the year and sledding.
Walter Storholt:
You’re in prime snow enjoyment territory right there.
Tyler Emrick:
Yeah, she was pretty excited. Definitely wore me out, and I think we got a little more snow coming here this week, so we’ll see. The winter fun is going to probably continue through the week here.
Walter Storholt:
It is that time of year, and glad that you’re able to get out there and enjoy it with the family and appreciate that time together. So fantastic to hear that. We expect to maybe send some pictures out to clients, maybe in the next newsletter, Tyler, of you doing some snow angels or something like that.
Tyler Emrick:
That’s a good idea. Maybe, Walt. We’ll see. We’ll see. We’re already halfway through.
Walter Storholt:
Build a snow fort or something like that.
Tyler Emrick:
I tried the snow fort. She wasn’t interested at all, and I thought I put a pretty good effort into it, but no, she was much more interested in the sledding and snowballs.
Walter Storholt:
Nice. She’s more adventurous than just the stationary fort. She wants to be in motion.
Tyler Emrick:
That’s right.
Walter Storholt:
That’s good.
Tyler Emrick:
Yeah, she wasn’t impressed, that’s for sure.
Walter Storholt:
Oh, too funny. We were snowboarding recently, and they built this humongous snow fort up at the top of the mountain, and it was kind of cool to explore, and they had a slide made out of ice, and then you get going pretty quick at the … It’s not a long slide, but you get going really quick at the bottom.
Tyler Emrick:
This sounds dangerous, Walt, it sounds dangerous. I don’t know.
Walter Storholt:
It wasn’t as dangerous as the snowboarding itself, but the impact at the bottom of the slide, there was like this turn at the last second, and I’m like, oh, this is a cool little kid slide. And then the last second turn, when you’re at your fastest speed, you go, bam, your shoulder right into the side of the ice, and you’re like, oh, that doesn’t help all the other times I’ve fallen today.
Tyler Emrick:
No, not at all.
Walter Storholt:
So a bit deceptive that ice, that always is. Well, let’s dive into today’s conversation, Tyler. A lot of people had a rough 2022 in their portfolios. We know the market was way down, and maybe a good chunk of our listeners today as well experienced some poor returns. And so now we’re into 2023, and we want to explore a little bit of what you guys are doing, what your clients are thinking, what they’re doing, the questions that they’re asking. As we look back at 2022 and now turn the page to the new year, how do we react? How do we move forward? What do we change about our approach this year? Can’t wait to hear your stories and some of the things that you want to go over today about how people are reacting to the past year.
Tyler Emrick:
That’s right. Yeah, tough year, Walt. To share a few of the numbers, they can be a little bit staggering, but you look at the S&P 500 last year in 2022, is down around 19%. NASDAQ down almost 33%. Kind of getting a little more granular there if you go into some of the more growthier names like the ARK ETF. For those that are familiar, Kathy Wood, she manages the ARK ETF. She was sort of the darling of the 2020 and 2021 when tech was doing so well. And her fund last year was down, it was 67%.
Walter Storholt:
67?
Tyler Emrick:
67, that’s right. All three of the major indexes had the worst year since 2008. And you kind of pair that onto the inflation that we experienced, the S&P 500 being down 19%. Okay, but then you tack on the inflation-adjusted loss. You’re touching close to 25% last year in the S&P 500 decline, inflation-adjusted. You go back over the last almost a hundred years; that’s the bottom decile and stock returns. So bottom 10% of returns over almost a hundred-year period, quite staggering.
Walter Storholt:
Not unprecedented, but certainly in the upper, like the Hall of Fame, it’s Hall of Fame worthy in a bad direction.
Tyler Emrick:
Right. Well, you say unprecedented, stocks is one thing, but if you look at the bond market, I’d say we had unprecedented returns there. You measure the Vanguard total bond index; it was down 14%; you tack on inflation and adjust that, you’re kind of touching negative 20% return in bonds or the total bond index over a 12-month period.
Walter Storholt:
That’s not supposed to happen, right?
Tyler Emrick:
No, that’s actually the worst annual bond return we’ve seen in the last 97 years.
Walter Storholt:
All right, there’s our unprecedented.
Tyler Emrick:
There’s your unprecedented; we did hit it. And you take a minute to digest some of those numbers. It could be tough, especially if you’re a retiree or someone looking to retire in the next year. You see numbers like that, and you start to maybe rethink and say, “Hey, how’s this impacting me? Am I going to be in okay shape?” And our families that we work with are no different, so we thought it would be a good time to share some of the stories and elaborate on some of the decisions that our clients are making as they kind of navigate what we’ve experienced last year and kind of look forward over the next say, 12 months.
Walter Storholt:
All right, I’ve got some warm hot chocolate and some cookies. I’m ready for storytime.
Tyler Emrick:
And marshmallows, as my youngest would say. You got to have the marshmallows in there.
Walter Storholt:
One big one or the minis, the little mini marshmallows?
Tyler Emrick:
The minis. She’s addicted to the minis. Now what I’ve, I guess, experienced or as I think about over the last few months, maybe even can going back over the last year, what I’ve found is I think a lot of families are utilizing the flexibility more so now than ever that they’ve built into their retirement plan and income and distribution planning. So what do I mean by flexibility? And probably the easiest way for me to explain that would be talking about the family I actually just met with over the past month, and this family, I’ve known them for a number of years, and really over the last, let’s just say three years, they’ve kind of had a singular goal of, hey, we are retiring, and we are retiring at the beginning of 2023, and that’s when we’re going to do it. And a lot of the decisions that they’ve made over the last few years have really been made to get them to this point.
They’ve increased their 401(k) contributions, they’ve done some things to the house to get it in preparation for retirement. They paid off some of their cars, they’ve taken a look at their spending. By all accounts, done a great job. And as I look at their situation specifically, as with a lot of our clients, they still have a mortgage. And that was something that, as they looked at their situation, was very important to them, especially heading into retirement. They didn’t want to have that mortgage. They had a goal of having it paid off within the first few years of retirement, and it was really an emotional thing for them. And we hear it quite a bit where I don’t want to be in retirement, and I don’t want to have this huge mortgage payment. I want to get that alleviated before retirement or very early in retirement. And they were really no different.
And over the last few years, we’ve had conversations around the mortgage; they actually refinanced. So get this, Walt, almost a two and a half percent, just over a two and a half percent fixed rate on a 10-year loan.
Walter Storholt:
That’s awesome.
Tyler Emrick:
Is where they were at.
Walter Storholt:
Very nice.
Tyler Emrick:
So they refinanced a couple years ago, took advantage of low rates, and by all intents and purposes, a finance guy, I look at that and go, wow, that’s a historically low rate for you. Are you sure you want to pay that off? Are you sure you want to aggressively target that? And their answer was always the same, and they really wanted to aggressively pay it down. And we literally met within the last month, and the time has come, hey, we’re retiring, we’re doing this. And we were sitting in there for a meeting, and we were chitchatting, and they came out and just said it and said, “Hey, Tyler, I think we need to rethink or reevaluate paying off the mortgage early.”
And I was like, “What?” I was almost floored, Walt. You probably should have seen my face. Three years of, hey, we’re going to aggressively pay down this mortgage. We built it in the income plan, we knew how high we were going to take their income and how we were going to get it accomplished. And they changed their tune. So, of course, I had to ask, so what changed? And they really alluded to the fact of, hey, last year, the market was really bad. And as we kind of look at the opportunities that we have for this money, their cash positions in their high yield savings account, they’re getting close to 4% interest. And you kind of compare that to what their loan was through their mortgage at a little over two and a half. It’s a really compelling argument to keep that money invested. And that’s just in cash, not even talking about what their return expectations in bonds are.
Walter Storholt:
Just pile the extra you would be putting into the mortgage into that account, and you’re coming out ahead just even by a little bit.
Tyler Emrick:
Just by that, right. With very minimal to no risk as you think about those FDIC insured high yield savings accounts. When I heard them say that, I was like, wow. They had built in some of that flexibility into the retirement plan. They had planned on doing this for the last three years, and then all of a sudden, you kind of have a year like we did in the market, and they changed the strategy a bit. And I think it’s a testament to their planning that they were able to do that change. If they would have not built in some of that flexibility, and maybe they would’ve said, “Hey, we’re going to purchase an annuity.” or do something that would get them those payments, but they would have to be taken, well, they wouldn’t have been able to change their mind. So they’re really utilizing, or that’s an example of them utilizing that flexibility that they had built in and kind of looking at their situation and going from there.
Now, just because they’re not using that money to pay off the mortgage, still going to likely pull that money out. We look at their tax situation, and they could pull money out of their retirement accounts to 22%, which in their case is really good. So instead of us appropriating that money towards the mortgage, we’re going to look at a Roth conversion, which is something to maybe piggyback off the story a bit that I think some families are doing as well. Maybe not quite this year, but we’ve seen it quite a bit back in 2020. So you go back a few years and the March of 2020 downturn, where the market dropped almost 30% in one month. Not too far off, Walt; I’m sure you have some pretty negative memories of that month as well.
Walter Storholt:
That was a nerve-wracking month. Yeah. It was the month I was finally able to get my parents to start paying attention to their retirement.
Tyler Emrick:
Was it?
Walter Storholt:
I remember standing outside of a shopping center talking to my dad, and it was the first time I had ever heard him talk about the stock market before. And he was just wondering like, “Oh my God, what should we do?” I was like, “Well, you should have listened to me before and already been working on this.”
Tyler Emrick:
No better time than now, right?
Walter Storholt:
Yes.
Tyler Emrick:
No better time than now. So during that time, we really took a hard look at those Roth conversions because typically, you’re going to do your Roth conversions at the end of the year. You have a good understanding of your income situation, no tax surprises, and you do those conversions in the fourth quarter, and you feel confident about your tax situation then. But for those individuals that have a pretty clear game plan and know how much they’re going to convert and it’s very unlikely that that’s going to change. Well, when you look at market prices and if the market’s down quite a bit, you doing part or some of that Roth conversion earlier in the year might be advantageous because any growth that you can get inside of that Roth, of course, is going to be tax-free.
So their questions were kind of around that as well. And hey, do we maybe do the conversion earlier in the year or not and kind of go through, and that’s where their mind was at and where it was thinking. So a complete change, complete 180 from where we were a few years ago with them as to not paying off the mortgage, looking at a Roth conversion, and then, hey, should we maybe do that Roth conversion a little earlier in the year? And I think that’s, again, a perfect example of kind of using that flexibility retirees have built in their plan.
The only other thing I would say along the lines of flexibility is I think we’ve had a few individuals take a look at their cash reserves and analyze and say, hey, typically, we do some big distributions early in the year. Do we have the ability to kick the can down the road a bit, postpone those distributions, maybe use a little bit more of our cash so that way we can keep our money invested and see what happens here over the long term?
Walter Storholt:
Great to hear that story.
Tyler Emrick:
Flexibility, flexibility.
Walter Storholt:
Flexibility became a really big piece of the puzzle for them.
Tyler Emrick:
You got it. And to build off that, I’d say the other thing to switch gears, not necessarily to build off that, but switch gears a bit, is we’ve really, over the last six months or so, taken a look at a lot of our retiree spending, and when I say spending, I don’t want there to be red flags that come up and say, well, hey, of course, I can just cut my spending or I can’t cut my spending. I’m not really alluding to that fact of cutting spending. And that’s not necessarily what I mean. What I mean is I think we’ve really been deliberate on taking a look at individual spending over the last six months and say, how has it changed? You don’t need me to tell you, Walt, none of the listeners; they know inflation has been a big deal over the last 18 months.
And I think with the individuals we work with, a lot of them, they don’t like uncertainty or the old mutual mystification, and they really want to know and say, hey, how has this increased spending? We’re spending more on goods and services; how is that impacting our plan, and do we need to be concerned? So it’s not necessarily a situation where they’re trying to … Oh no, already?
voiceover:
Alert.
Tyler Emrick:
You got me. All right.
Walter Storholt:
I didn’t have it queued up right off the bat there, Tyler. Unfortunately, I had to go grab it. But when I heard-
Tyler Emrick:
You found it quickly.
Walter Storholt:
Mystical something or another. It was almost like you intentionally were hoping I would trigger the egghead alert.
Tyler Emrick:
Mutual mystification.
Walter Storholt:
Yeah, you got to give us some detail. What in the world is mutual mystification?
Tyler Emrick:
Mutual mystification. I stole that from Kevin, actually.
Walter Storholt:
I figured.
Tyler Emrick:
And he’s like, Hey. Throw him under the bus. No, just the unknowns. Not to get into your unknown unknowns quotes, but it’s just, mutual mystification is essentially that scenario where you almost put your head in the sand because you don’t want to know how it impacts you because you’re afraid of the result almost. So we really try to stay away from that and really saying, hey, let’s be honest. Your spending probably has gone up over the last year, 18 months. How has that impacted results? How does that impact your plan? And is there any changes that we need to make from a distribution standpoint or a planning standpoint that’ll get you the money that you need? That’s all it is.
Walter Storholt:
All right. Decent, decent enough. I felt we couldn’t let that just pass by. I had to get some more explanation on that one. I’m afraid I ruined your flow, though, but by disrupting you there.
Tyler Emrick:
No, you’re good. Now sometimes, though, Walt, it’s great where you can plan for your spending. You can do your deep dive; you can run through plan results and say, Hey, how is our change in spending impacted? And yes, we’re in good shape. Nothing needs to change. But sometimes unexpected spending is going to come up, and it’s going to happen. And although now is maybe not the ideal time for that to happen, it does. I had an individual, her car. She gave me a call back at the end of the year and said, “Hey, you’re not going to believe this. I’m driving down the road and literally check engine light comes on, car stops on the side. Tow and get it to the dealership, and they give the old, hey, it’s going to cost more to repair this than it is your car’s worth.”
Walter Storholt:
Oh, no.
Tyler Emrick:
Not exactly an ideal situation.
Walter Storholt:
Not what you want to hear, yeah.
Tyler Emrick:
No, not at all. And for her, definitely not. She’s a big planner, so her trying to buy a car that quickly was a big deal for her. And she wasn’t able to shop. She didn’t have it in the plan to get a new car, but it was unexpected. And so she gave me a call saying, “Hey, you’re not going to believe this happened. I had to get a new car, and now I’m sitting here with a new car that I had to finance, and I’m not very happy with the interest rates.” If anybody’s bought a car within the last few months, interest rates have gone up on many financing. Same thing with mortgages. Cars are no different. And so, she really was not happy with the loan options that she got. So as with anybody, she’s given me a call saying, “Hey, I had this unexpected expense. How do we deal with it now? Should we make a distribution from my accounts to pay off the car? When should we do that distribution, and how should we approach the situation?”
So with her, it was kind of like, okay, let’s kind of break it down and let’s look and make sure that we can optimize the decision as much as possible. What do I mean by optimize is just kind of break it down and say, all right, hey, what’s your financing rate look like? What’s the expected return on your assets? If we wanted to pull the money out, which account would we pull from? She had a few different accounts, some retirement, some non-retirement account, and had some flexibility there. And then two, since this happened in December of last year, for her, it was like, well, do we maybe wait until 2023 to do a distribution and pay it off, or what’s going to be best in her situation?
So although not a great situation, it’s saying, hey, let’s break it down to each of these kinds of core factors and make the best decision that we can for her. And for her, she actually did end up paying off the car. She took the distribution in 2023 versus 2024, and it worked out from a tax standpoint, and it was all okay. But I think there’s a heightened sense of, okay, when I have these big expenses, how do we do it? And do we have any options on when and how we pay it off, and then make the best decision that you can for you? Or at least that was the way that she approached it.
Walter Storholt:
You mentioned buying a car. This year, people having to go through that, noticing the higher interest rates, but at least the prices are a little bit lower on cars this year. I had to buy a car last year, so I’m looking at prices now, and I’m like, ah, man.
Tyler Emrick:
Hindsight’s always 20/20, right?
Walter Storholt:
Yep. Exactly.
Tyler Emrick:
Did you do it out of pleasure, or did you do it because you had to? You weren’t on the side of the road.
Walter Storholt:
I was on 270,000 miles on my other vehicle, and it didn’t make the cross-country trip when we moved out to Colorado. So yeah, we did the one-car deal for a little while, and we’re like, yeah, that’s not going to last long, especially since that was just a sedan, and we’re going up in the mountains and doing crazy stuff. So yeah, I was like, yeah, we need a truck.
Tyler Emrick:
All-wheel drive, four-wheel drive.
Walter Storholt:
Yeah, a little bit of that kind of stuff. So it’s not so bad, but I’m just like, oh man, you hate it when prices go down right after you bought something.
Tyler Emrick:
So as we think about the things we covered so far, families are looking at, hey, is there any flexibility built in their plan? How can they use that flexibility to put them in a good situation or make a decent situation out of a bad one? And then, two, what is your spending look like? Making sure you feel comfortable with that spending. Does it still fit within the plan? And then when a bad situation comes up where you have some unexpected spending you have to do, just make sure you approach that in a way that’s going to put you in the best foot forward and you’re really thinking through your options as opposed to making any rash decisions.
And I’ll finish up with one final point and one other thing that we’re kind of looking at, which would be more portfolio related. That’s probably where I guess most listeners would’ve expected me to start as we start thinking about returns last year being poor. Well, should we look at the portfolio and, yes, I definitely think that’s important. And frankly, if you haven’t looked at your portfolio over the last year and you’ve just kind of gotten the statements and kind of rode things out, I don’t think that’s necessarily the right approach at all.
One thing we’ve been doing through the last 12 months is rebalancing portfolios. We’ve experienced quite a bit of fluctuation, as we’ve already discussed. And not only fluctuation in the market, but also depending on the actual investments that make up your portfolio, there’s been a wide array of volatility. Going back to those numbers, we started the podcast with. Well, the S&P 500 down almost 19%, but if you would’ve been in that ARK fund tech-heavy, you might’ve been down almost 67%. That’s a huge difference.
Walter Storholt:
Just slight. Yeah.
Tyler Emrick:
Just slight, yeah.
Walter Storholt:
Complete meltdown versus just a … It’s like a cut versus losing a limb a little bit.
Tyler Emrick:
Yes. So depending on how you positioned your portfolio and what you are in, you might have things that are way off base from where you started with. So it’s extremely important that you’re going in and actively rebalancing those accounts to ensure that not only the amount of stocks and bonds are correct, but also, what’s the makeup of those stocks and do we need to make some tweaks and changes there and how can we position ourselves going forward in the long run to be a more weatherproof and a better overall diversified portfolio. So rebalancing, I think, is a big key, something we’ve been doing very frequently and something we’ll continue to do. But also, a lot of our families are retired, so some of our families are pulling distributions out, say monthly, from their IRA accounts and using that money to live off of.
So as you think about those distributions, sometimes we don’t have that flexibility to not sell out, and we need that cash. So how you’re managing those distributions from an investment standpoint can be key as well. I’ll go back to our most recent big market downturn or quick market downturn in March of 2020. We talked a lot about runway, and what I mean by runway is really the amount that you have inside your portfolio that you can pull from before you have to start selling out of stocks, for example. And for some families, that runway was as high as eight to 10 years.
So when you understand how much runway you have, so how much, basically, as you’re doing distributions, how long can you do distributions before you have to sell out of, say, stocks or depressed securities. Then that can give you some confidence and give you almost that good angel in your ear per se that says, hey, I know the market’s down, but I don’t have to sell out of positions that are extremely depressed for X number of years. And that’ll promote, I think, good activity, and it promotes good habits, I guess, is the way I would phrase this to where you can understand and feel confident and say, well, if I’m doing these distributions, at least I’m pulling from positions inside the account that are prepared and not hurting me as much, and we can kind of ride out some of that volatility. We call that, again, runway inside of the account.
Walter Storholt:
Sounds like between runway and the word flexibility, those are really resonating with me on the show today, Tyler, and kind of just understanding that. That’s really important to a lot of your clients, making sure that those elements are worked into the plan. It also sounds like it’s important for you guys too.
Tyler Emrick:
Yeah, I think it’s something we try to build into our plan. I think as you think about and you’re digesting some of the things that we talked about today, a big theme, not only runway and flexibility, but also being proactive and planning. Never too late to start, like you mentioned with the story about your family. These are things to where if you’re proactive with them, when you go through experiences and when we have the market volatility that we’ve seen over the last year, yeah, I think you are feeling a little bit more comfortable and equipped to handle and make some of these financial decisions as they come up.
Walter Storholt:
Well, very good. If you are looking for that kind of planning, something that’s flexible, that keeps that in there because maybe you don’t know all the answers of when you retire in two, three, four, five years, what the landscape is going to look like, what your personal situation’s going to turn into, there’s a reason to value that flexibility. It’s something that Kevin and Tyler, and the team at True Wealth Design build into their plans, among many other elements and benefits as well. Give a call if you’ve got questions or if you want to schedule a 15-minute call with an experienced advisor on the True Wealth Team. All you have to do is go to the website truewealthdesign.com and click on the, Are We Right for You, button. Or you can call 855-TWD-Plan, that’s 855-893-7526. And we’ll put that contact info in the description of today’s show so you can find that easily as well.
Well, Tyler, thank you so much. Really appreciate all of the help and the guidance on the show today. Get on out there and make some snow angels or do some more sledding and all that good stuff. And yeah, let’s get some pictures in the newsletter.
Tyler Emrick:
Sounds good.
Walter Storholt:
All right, take care. That’s Tyler. I’m Walter. Thanks for joining us on today’s show. We’ll be back with another great episode next time, right back here on Retire Smarter.
Disclaimer:
Information provided is for informational purposes only and does not constitute investment, tax, or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance references, historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.
