EP 95: Sequence Risk: The Hidden Threat to Your Retirement Plan
The X's and O's
In this episode of the Retirement Plan Playbook, hosts Brent Pasqua, Matthew Theal, and Joshua Winterswyk discuss the concept of sequence risk in retirement planning.
Sequence risk refers to the risk of receiving lower or negative returns early in a period when retirees begin to withdraw money from their retirement funds. They examine how strategies like portfolio diversification, maintaining a bigger cash reserve, and hiring a financial planner can mitigate sequence risk.
Nevertheless, they caution against relying on annuities, as they often yield poor returns.
00:02 Introduction to the Retirement Plan Playbook
02:21 Impact of Southern California’s Rain Storm
03:38 Discussing Federal Reserve Meeting and Interest Rates
09:03 Exploring the Influence of Tech Companies on Economy
13:24 Deep Dive into Sequence Risk and Retirement Planning
23:28 The Impact of Market Downturns on Retirement Portfolios
26:14 Strategies to Mitigate Sequence Risk
28:19 The Importance of Detailed Planning and Clear Communication
28:36 The Fear of Missing Out (FOMO) in Investment Decisions
29:30 The Controversy Surrounding Annuities
34:11 The Role of Financial Advisors in Retirement Planning
35:35 The Importance of Proactive Planning and Review
37:24 The Importance of Tax Planning in Retirement
38:35 Final Thoughts on Sequence Risk and Retirement Planning
40:46 Recommendations and Concluding Remarks
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Transcript
Welcome to the Retirement Plan Playbook hosted by Brent Pasqua, Matthew Theal, and Joshua Winterswyk of Evermont Wealth. This podcast dives deep into investment strategies, retirement planning, and current events, equipping you with the insights needed to craft a robust retirement playbook adaptable to any political or economic climate.
Join Brent, Matthew, and Joshua as they guide you through the complexities of retirement planning, offering expert advice.
It's time to build your optimal retirement playbook. Now let's dive into today's episode.
Brent Pasqua: Welcome to the retirement plan playbook. I'm the founder and host Brent Pasqua, the founder of Evermont wealth. And I'm here with Matthew Theal, certified financial planner and Joshua Winterswyk certified financial planner. Today we're going to talk about navigating sequence risk and sequence risk is, you know, what happens to the market when you're potentially retiring and you're going to potentially start taking out your money from your portfolio and how impactful that can be to your actual retirement plan.
Brent Pasqua: Seems like something that is very
Matthew Theal: impactful. Yeah. This is most retirees biggest fear. They just don't call it sequence risks. They say, Hey, what happens if the market crashes a year or two after I retire? And that's what today shows
Joshua Winterswyk: on. Yeah. Or even the year you retire.
Matthew Theal: Yeah. It's scary.
Brent Pasqua: Yeah. I think the big concern is like, what happens if 2008 happens again, right?
Brent Pasqua: When you're about to retire. Right. It could be very detrimental. So we're going to get into that. But before we do, how did you guys, and what'd you guys think of that California storm that we just
Matthew Theal: experienced? I tell you, Brent, I'm still trying to dry off. I'm still wet. My car's a mess. My yard's a mess.
Matthew Theal: It was no fun for me.
Joshua Winterswyk: Are you guys talking about the atmospheric river? Yeah. Yeah, that was a lot of rain. It was
Brent Pasqua: bad. We did get a lot of rain, but it didn't impact my life at all. I mean, traffic was much
Joshua Winterswyk: better. You did have to adjust your baseball practice.
Brent Pasqua: I did, but that happens every year, so that wasn't uncommon for
Matthew Theal: this time of year.
Matthew Theal: I walked in here one day with soaking wet suit pants and I had a meeting. So I'm in a meeting. And my pants were completely soaked because my daughter threw up in the car on a rainy day So I had to clean the car in the rain. It was awful
Joshua Winterswyk: I like that the rest of the country does like to make fun of california though when like it rains But it doesn't happen that often and especially like it happened just you know last week To where like people just aren't prepared to drive in it to to be in it.
Joshua Winterswyk: And so when it happens, it's You know, I guess we're I think
Brent Pasqua: things went to like a three day work from home during that span.
Joshua Winterswyk: Yeah, there was like no one on the road. It was beautiful.
Brent Pasqua: I was like coming to work, no traffic.
Joshua Winterswyk: It was nice out there. I did see so many accidents though.
Matthew Theal: Accidents and potholes.
Joshua Winterswyk: Yeah. A lot of potholes. It's just, it's just not milk for, for all that rain. Yeah.
Matthew Theal: And the freeways in certain parts are just collecting so much water is like a little pond that you'd have to drive through is awful.
Brent Pasqua: Awful. Well, at least we got more water and our plants got watered.
Joshua Winterswyk: Two very different takes though.
Joshua Winterswyk: Brent not affected at all. Matt. He was wet, he's still wet and he's still drying off. So so if
Brent Pasqua: you're the tiebreaker, I mean, was it bad or not bad?
Joshua Winterswyk: You know what? It's like everything. It's somewhere in between. And it was, it was some pretty good rain. You know, but it wasn't, I don't think awful.
Brent Pasqua: All right.
Brent Pasqua: So let's get in the headlines. Matthew, what do you have for
Matthew Theal: us? All right, so our first headline, we're going to talk about the Federal Reserve meeting that happened a week ago. And what ended up happening is the Federal Reserve said, Hey, we're not going to cut interest rates quite yet. A lot of people had expected them to cut but they put that on pause and said they're going to hold rates where they are.
Matthew Theal: And, you know, I think the Fed's in a really interesting spot because the market's priced these cuts in, but the economy is still pretty strong. And who
Brent Pasqua: are the people that were predicting there were going to be cuts?
Matthew Theal: The bond market basically. So I guess wall street upper rational on wall street guys.
Brent Pasqua: Yeah. And so it became very clear that that they missed the mark on that. Like it sounded like it wasn't even close for them to cut rates.
Matthew Theal: Right. So then when they came out and said, Hey, like we're not cutting rates, probably not going to happen in the first quarter, the market kind of sold off. And then, you know, they did the press conference and pal kind of lifted spirits a little bit.
Matthew Theal: But what I would be afraid of is that they cut rates and housing prices, everything's going to go bananas again because there's so many people who are waiting on the sidelines for, you know, rates to get cut.
Joshua Winterswyk: I think that's the balancing act though. Right? It's like the expectation to cut rates was to prevent the upcoming bad data.
Joshua Winterswyk: And the data actually is pretty good. Like you had just mentioned. So, you know, how do they balance that rate cut without it going into a recession? Right. That's the whole worry is to avoid the recessionary period. That's potentially looming. But I, I feel like the federal reserve up to this point. It's actually done a pretty good job.
Joshua Winterswyk: I don't know how you guys feel. I think they've been
Brent Pasqua: criticizing them throughout that. They don't know what they're talking about, but they essentially avoided a complete recession. Yeah. Soft
Joshua Winterswyk: landing. I mean, it's, it's here. We're we're in it now, if we're looking at it, you know. They were
Matthew Theal: behind the curve in 21 and 22.
Matthew Theal: I mean, well, they caught up in 22, right? But they were behind the curve in 21. But I mean, so is the administration. Biden got in office and he dropped like, what 4 trillion on the economy. That was, that was so, but what about now? The administration or the fed, the fed? Well, they're doing a pretty good job now they've caught up.
Matthew Theal: I think their biggest risk and what they're afraid of, I'm actually afraid of this too. Is that inflation picks up again? I agree. And prices start going higher.
Brent Pasqua: Yeah. And that's, that's where my thought would be is people are now saying, okay, well, they're not going to cut rates in March. Now we're looking at June.
Brent Pasqua: I don't, how are they going to cut rates in June? Because then you run that exact
Matthew Theal: risk. Yeah, I don't know. I mean, I guess maybe they anticipate the data to keep softening, but I mean, if it doesn't, they're not going to cut, then the market's going to get mad. And by mad, I mean, it's going to sell off.
Brent Pasqua: And didn't we just see them post like the day after they said they're not going to cut rates, like 300 and something thousand new jobs.
Matthew Theal: Yeah, strong jobs, strong GDP, everything's strong right now. Strong wage growth. Like the risk is for inflation. But
Joshua Winterswyk: on the other side of that though, too, we do see layoffs in a lot of different pockets. So it's kind of, it's kind of, you know, industry dependent where you're picking the data from.
Matthew Theal: That's true.
Matthew Theal: I know it's a lot on tech and media. A lot of white collar jobs are being lost right now, but it seems
Joshua Winterswyk: like a lot of people thought. And predicted that the Federal Reserve wasn't going to cut rates till the end of this year anyway, right?
Brent Pasqua: And that's why was it such a surprise to so many
Joshua Winterswyk: I think it was just like the people who were hoping for rate cuts Right, you know maybe real estate market Things like that that you know people who are just really like bulled up And really wanting the market to even price in additional rate cuts for those rates to come down with the expectation that the market was going to explode.
Joshua Winterswyk: But I, I really, in my opinion, I never really had the thought that rates cuts were coming at the beginning of the year from what, you know, they were expressing or the federal reserve was. I
Brent Pasqua: mean, every real estate person that I've talked to have said the same thing. They've had a bad two year stretch.
Brent Pasqua: There's just not the inventory, not the selling going on. Nobody's moving. It seems hard to get a deal right now. And to
Joshua Winterswyk: maneuver rates. It's just really, I mean, I feel for them in that capacity to have rates at three, 4%, and now you're having to place people in new homes at 8%. That's a really tough discussion and a really tough sell for that whole industry.
Matthew Theal: I could get the real estate market moving. Come up with a program called take your rate with you. And you get to take your mortgage rate with you to a new house. I, I've never
Brent Pasqua: understood why that doesn't happen. I'm sure there's a lot of legal areas about that. But I don't understand why that doesn't happen.
Joshua Winterswyk: Follow the money, man. Every time you refinance your house. The amount of dollars that goes into that, into even a transaction of you moving. How many people does that affect? How many people does that cut out just from just from real estate? Oh, a lot escrow, the lender, all of that.
Brent Pasqua: But even if you had, let's say you're buying a.
Brent Pasqua: 1 million house. And you had already a loan on your previous house for a half million dollars. You had a balance. You could take that loan and then take a new loan on the new half million. And now you're not getting a whole loan for the whole house, but you have a first and a second that you've kind of been grandfathered into the right way.
Brent Pasqua: Oh, that's cool. Like a blended loan. Yes. I mean, I don't understand why they don't come up with more creative ways to have people keep moving forward in life.
Matthew Theal: People are so creative. And so it's wall street. I imagine they're thinking of it and they're working on the product behind the scenes. Cause like Joshua, it's a big industry.
Brent Pasqua: What's our other
Matthew Theal: headline? Let's talk about Facebook also known as Meta. They came out with some good earnings, probably the best earnings out of the Magnificent seven which is, I'll probably forget one of them, but it's Amazon, Tesla, Apple, Nvidia, Facebook, and Google, right? Is that seven? Yeah, that's seven.
Matthew Theal: They said a couple of interesting things. The first thing that I thought was really interesting that meta said was that they're having a dividend for the first time. And so I think only Apple pays a dividend, correct? Out of the mag seven. So the NVIDIA does too. So they're joining those three companies and having a dividend.
Matthew Theal: And then they also said, and this kind of goes off of what we were talking about last time on the podcast about those Apple goggles. That there, I think they call it like meta reality labs or something that those goggles that you got your son for Christmas for video games. Yeah. The video game goggles is growing pretty fast.
Matthew Theal: So a couple of interesting things from that quarter. But overall those seven companies are making so much money. They're the only companies driving the S and P 500 growth right now.
Brent Pasqua: The meta goggles, the metal meta quest is a completely different price point than the vision pros. They're not even in the same range.
Matthew Theal: Yeah, we could go buy, I think, 20 Vision Pro, 20 MetaQuest for a price of one Vision Pro, right? How much are the MetaQuest?
Brent Pasqua: They can be anywhere from 250 to 600, I think. And then the vision pros are about anywhere from 000. Yeah.
Matthew Theal: Most of it sounds like most people who are buying vision pros with the add ons and everything are spending about five grand, but
Brent Pasqua: everybody criticized meta for a long time, just from heading over to virtual reality, it's kind of their business structure and then re retooling their company.
Brent Pasqua: And they seem to be doing pretty well.
Joshua Winterswyk: Yeah. I mean, it comes out right now with issuing a dividend, the best earnings, like Matt mentioned. I think that the vision pro from apple actually helps them because a lot of the reviews from the vision pro are like those meta quest virtual reality goggles, aren't that far off from the vision pro.
Joshua Winterswyk: So if you're looking for like a discounted product, you know, you were going to attract a lot more people because of your price point from, from meta. So I think that they're in a really unique spot, but then also with their emergence of they're using AI for all of their Google ads. Now that was like a big part of, you know, the story for this earnings is that artificial intelligence is now being implemented even into the marketing and ad strategies that they're using for their platforms which is pretty cool to see.
Joshua Winterswyk: Yeah.
Matthew Theal: And the stock was up 20 percent because
Brent Pasqua: they're running lean as a company right now. Yeah. They're laying off a lot of people because I don't think I could be wrong, but I would feel like Facebook as like the social media platform probably phases out at some point.
Joshua Winterswyk: I don't know, man. A lot of users.
Matthew Theal: And they have Instagram. Instagram's cool. I like Instagram. Yeah, that's true. And then you know what a lot of people are using is another product they own called WhatsApp. That's really popular for like messaging. Especially like if you have a buddy overseas and you want to talk to them, it sounds like
Joshua Winterswyk: WhatsApp.
Joshua Winterswyk: It's really good for
Brent Pasqua: international communication. But that doesn't mean that Facebook stays
Joshua Winterswyk: around though. But see what we're forgetting about Facebook though is that like They have communities and there's a lot of big communities that use Facebook. That's like a different, unique service than like Instagram is, but even Facebook marketplace.
Joshua Winterswyk: I mean, I don't know if you guys use that, but I know it's really popular and it's like an offer up, but through Facebook that a lot of people use. So it is kind of unique compared to Instagram. I don't, I'm, I'm just not as strong on it going away. It's just in those reasons.
Brent Pasqua: It is interesting to me how.
Brent Pasqua: Myspace back in the day when it started when it wanted to be like a Facebook didn't evolve and then you look at Facebook and How much they completely evolved and now look at where they're at. Mm
Joshua Winterswyk: hmm My space is gone. My space is gone. Hey, my space is cool You could list your top friends and put music on your profile.
Joshua Winterswyk: I thought that was pretty cool It lasted
Brent Pasqua: for a little bit and then Facebook took
Matthew Theal: over If anybody who's like under 25 is listening to this podcast or have it gonna have no idea what my space is
Brent Pasqua: They won't, but they'll know, you know, there's always some founding father companies that led to them having things like
Joshua Winterswyk: Tik TOK.
Joshua Winterswyk: What was it called before? Frenster? I think so. Yeah. Yeah.
Brent Pasqua: All right. Let's get in the retirement planning corner. Let's get into some sequence risk and understanding what the risk can be to not only your financial plan, but to your retirement could also be a risk to your livelihood. To how you create expenses, how it impacts your portfolio.
Brent Pasqua: Let's get into that. Tell us a little bit more about what is sequence risk.
Matthew Theal: So sequence risk is basically the risk that impacts your investment return. When you go to retire, that will impact your withdrawals. And that's kind of a mouthful. So I think it's easier to look at an example. Let's go back to 2007.
Matthew Theal: Economies flying high housing markets still pretty strong. But there's some cracks in the market. So you roll over your money and it's a million bucks. You're set to retire. Your advisor tells you you could withdraw 4 percent like we talked about on our last podcast. That's 40 grand a year. Great.
Matthew Theal: This is all fine and dandy. Few months later, Oh, eight happens in the market starts to go down and you're still withdrawing that 4%. Your portfolio still keeps dropping the markets down. What? 30, 40 percent. It's peak in 2008, right? Your million bucks is now 600, 000 because you've been withdrawing to that sequence risk.
Brent Pasqua: Yeah. So that you can't control market timing. Not at all. And you probably are going to control when you do potentially retire. I mean, some people retire earlier or later than what they. Projected, but you're never going to know what the market's going to do as you make that transition.
Matthew Theal: No, no, never. And what's crazy too, about sequence risk is it kind of works in both directions, meaning you would rather be safer in the early years of retirement and more risky in the later years of retirement is going to impact you less.
Joshua Winterswyk: Correct. You could also make the argument timing is everything with this though, right? And it's just like gardening, you know, you plant at the wrong time and it could ruin the whole harvest. Right. I guess this is what really like sequence versus related to, right. Cause if you
Brent Pasqua: take, let's say two retirees that have pretty much identical risk or debt identical sequences in the market.
Brent Pasqua: And in example, one, They start off with a positive return. And in example two, they start off with a negative return, but they have the same sequence. You just kind of flip them upside down. The one that starts off with a negative return is much, much more likely to run out of money than the one who has negative returns in their last years of life.
Brent Pasqua: Yes. You have to be very careful. I think what happens in those first few years, because that may or may not determine. You know, how long your money lasts
Joshua Winterswyk: and you, and like you said, you saved the same, like you did your part. And unfortunately this variable you can't control could really affect your outcome.
Brent Pasqua: I remember we ran a study years and years and years ago with that exact example where. You had the same sequence of returns. Just one was flipped upside down and one started with a positive couple of years and one started with a negative couple of years and one completely ran out of money and then in a relatively short amount of time, you know, 10, 12, 13 years and the other ones, money lasted and had plenty of money left over to go to inheritance.
Joshua Winterswyk: I remember the study.
Matthew Theal: Yeah, me too. And you know, I guess it goes back to what we were talking about in the last podcast. You know, if you're ultra conservative, your best strategy for retirement might just be living frugally, living on your social security and your pension for the first few years and letting your portfolio continue to grow.
Matthew Theal: It's probably not ideal for, you know, your lifestyle. But, you know, it could work because basically what's impacting this is, you know, the withdrawal portion, right? And not having a flexible withdrawal strategy,
Joshua Winterswyk: but I think we're going to get into some strategies about also protecting against those first few years without not having to not touch it.
Matthew Theal: Yeah. Yeah, we are. Brent, do you have an example for us? Yeah. So let's
Brent Pasqua: say somebody would begins withdrawing. On a million dollars, 4 percent annually and the portfolio enters a downturn in the market experience in 20 percent decline in the first year which could be just a modest decline and then a modest decline in year two due to the early losses and subsequent withdrawals for cost of living.
Brent Pasqua: You could at that point never recover because of those withdrawals. You never get back to that original high point in the market. And the portfolio would deplete faster because of that sequence of those losses and returns and because you were taking out of money. You know what? This example,
Matthew Theal: it reminds me of this.
Matthew Theal: This sounds like 2021, 2022. Right? Like, so if you retired at the end of 21, you got in in 22 and everything went down, right? 90 percent of all funds were down, you know, a 60, 40 portfolio, even if your advisor had you balanced probably lost 16%. You just retired. You're not going to be happy. I know we had a few clients who weren't very happy in 2022.
Matthew Theal: But luckily things recovered in 23. That's the difference, right? Is we didn't have that back to back negative years like that happened during the. com
Brent Pasqua: crash, right? And, but the challenge to it, that is, is yes, you could say looking back 23 did recover, but if you take the data back to October of 23. The market was still down and hadn't recovered very much.
Brent Pasqua: And you're 22 months now into retirement, taking out money potentially, and your portfolio being down 15, let's call it percent that could be detrimental to somebody's retirement.
Joshua Winterswyk: Yeah. And your fixed income was down. Like you, like Matt said, 90 percent of funds were down. You had no really safe haven to pull money from.
Joshua Winterswyk: At that time. And so it's taking you so long to recover from both stocks and bonds. Now you
Brent Pasqua: take that same example and somebody retires at, you know, the summer of 2023 when they've been putting money into their 401k, they make the transition. All of a sudden the market goes on an absolute rip from October to January.
Brent Pasqua: And all of a sudden now they're retiring and they've had a, what, potentially a 20 percent increase in that short amount of time. And now they start taking out money. Start of the year, they're living great
Joshua Winterswyk: and in such a small timeframe, right? 20, 2021 at the end, maybe to 2023 in the summer and two drastically different, you know, starts to retirement.
Matthew Theal: That's a good point because the market sells off on average 10 percent every year. Right. There'll be one, what we call 10 percent correction. And someone who retires and hits that correction perfectly is going to have a different outcome than someone who retires and maybe a month or two later who puts, gets their money in right at the bottom.
Matthew Theal: Right. Right. So yeah, it's everything. And it can even be in smaller increments like monthly increments.
Brent Pasqua: Yeah, there's, I think there's, there's strategies that you have to implement that could minimize or negate a lot of the downside risk here, but you can't just be flying blind going into retirement thinking that you're going to pull the 4 percent rule.
Brent Pasqua: And nothing's going to happen. Anybody who's retired is going to experience a very drastic downturn in the market multiple times.
Matthew Theal: Our listeners who listened to the last week are going to be like, Oh, you guys, some of the 4 percent where it was perfect. Now you're telling me to caution on it.
Joshua Winterswyk: And this is where my example comes in.
Joshua Winterswyk: It's kind of that lacks lack of flexibility, right? So it doesn't necessarily have to be, you're just preparing for a big downfall, but you know, even if you have a well planned portfolio that you plan to last 30 years and you have your. You know, withdrawal fixed amount that you're going to adjust for inflation annually, regardless of the market performance.
Joshua Winterswyk: And you're going to keep that withdrawal percentage after a few years of market performance and not adjusting those withdrawals to actually reflect the difference in market returns could really compromise the portfolio's longevity. Because again, you're not adjusting the withdrawal percentage to the fluctuations of the portfolio.
Joshua Winterswyk: Let's say after three or four bad
Matthew Theal: years. So like one strategy maybe you can implement like you're I think this is what you're saying is maybe you lower your withdrawals.
Joshua Winterswyk: Yeah, or you're not with lowering your withdrawals through down periods taking out a higher percentage withdrawal rate from that portfolio because your account value is decreased.
Joshua Winterswyk: So instead
Matthew Theal: of being at four you're at six or seven. Yeah, that's not good. And another thing I think that ends up happening and this is a prime time example of what happened probably to a lot of retirees in the 2000, 2002 bear mark. I know Brent, I think you started your career around that time. I was still in high school back then.
Matthew Theal: But you call me old. You're a little bit older than us. Yeah.
Joshua Winterswyk: But I was in high school too.
Matthew Theal: Yeah. I mean, there's a couple of your age gap. Yep. There is. You're the senior of the group. That's true. You don't look it though. I mean, I clearly look like the oldest person
Brent Pasqua: here. I'm still not at age where I can get the AARP discount, but I'm closing in fast.
Brent Pasqua: Yeah. When you,
Joshua Winterswyk: when both of you pull into the parking lot and you guys get out of your cars, I definitely think Matt's older than you. Yeah.
Matthew Theal: Most people do. All right, well, let me get into my example here. And so let's look at that 2000, 2002 bear market, right? Let's say you retired then and we just got three negative years of markets in a row, right?
Matthew Theal: And so then you're, you're pulling out your money. You're still taking that 4 percent or 5%, whatever your advisor told you or whatever. You read online that was good, but you're having to sell shares every year at a loss when it's, it's not the best strategy. Cause what you really want to do in the market is buy low, sell high, but you're, you're flipping it.
Matthew Theal: You're, you bought high and you're selling low. So you're chipping away at these shares every time it's going to take that much longer for your portfolio to come back when the market does recover. I think it's very, very possible if someone did not have a good advisor. During that 2000, 2002 bear market.
Matthew Theal: And if they were withdrawing from their portfolio. To have never made it back to even by the time Oh, it happens. So then they hit away and my guess would be it took them till 13, 14 or 15 to get back to that original amount. If they retired in 2000 or 2001,
Brent Pasqua: if they ever did, because if they were taking withdrawals during that whole time period, there's a good chance they never even got back
Joshua Winterswyk: to that point.
Joshua Winterswyk: That's my thought. And that's true. I thought they never recovered.
Matthew Theal: And here, let me like a lot of people make fun of diversification. They think it's stupid. And they're like, why am I not in just the best performing stuff? Like this, making the most amount of money. And you see a lot of this on social media too.
Matthew Theal: And the NASDAQ in 2000, 2002 fell from peak to trough 78%. And that was like the hot investment that everybody wanted. Right? We want to be an internet stocks. We want to be in the Intel's, the Microsoft's, the Cisco 78 percent fall. If your retirement funds are in that you're done, it's over. You're not retiring.
Joshua Winterswyk: We see a lot of, I feel like when people reach out to us, still a lot of stories around that period and also 2008, right? It was either their parents or they had an aunt and uncle or a neighbor, they lost everything and there's still like in, it's 2024, there's still a lot of talk about both of those time frames for people.
Joshua Winterswyk: Like, so people haven't forgotten that those times were bad and you know, we can even see it today.
Matthew Theal: Financial market PTSD. Yeah,
Joshua Winterswyk: absolutely. We don't
Brent Pasqua: spend, you know, a tremendous amount of time in the client reviews, just talking about how we're micromanaging selling positions in a down market to create income for the client, because there's so many complexities with it that we're handling that all internally.
Brent Pasqua: And we're always doing that for each individual client. But I think it is a understated value that an advisor provides to have the wherewithal to know what to sell, when to sell, why you're selling it. Because what we did is when we, in 2022. And throughout 23, we weren't selling large quantities of shares to have this money sitting on the sideline so that they could take their monthly income.
Brent Pasqua: We were just micro selling shares as, as little as possible to get just what they needed out because we knew the bounce and recovery was going to happen. It wasn't a matter if it was just a matter of when, and we now know when it happened, it happened at the end of October. But how do we put, you know, in 12 months into reserves for them in the money market account?
Brent Pasqua: They don't make that balance of the recovery like they
Joshua Winterswyk: did.
Matthew Theal: Right. Yeah, absolutely. That's a great point. Josh, what are some strategies that we could use here to work with a minute mitigate sequence risk?
Joshua Winterswyk: The first one that that really comes to mind, and you've already mentioned it, but it is just diversification, right?
Joshua Winterswyk: You had just mentioned that, but I'll start there with making sure your portfolio is diversified. That's going to alleviate, you know, systematic risk, which we already love. But it's going to give you options through different market conditions for what Brent just mentioned as well of what to sell, right?
Joshua Winterswyk: A lot of people don't think about, you know, when I create income, I'm going to need to sell some of these investments. That's not the first thought. So turning that portfolio into income, having diversification gives you options in different market conditions to actually not sell you know, positions that are either down or that you have higher growth potential for, and this is going to protect you in town.
Joshua Winterswyk: Different times that the markets are, you know, up or down. I
Matthew Theal: think the biggest con to diversification is really a mental block that people have. Cause if you're, if someone's telling you they're going to diversify you like, Oh, I'm well diversified. That means you're not making a lot of money or as much money as you could be making if you were betting on single assets.
Matthew Theal: And I think some people struggle with that and that's why they want to continue to take risk in retirement because they're more about making money instead of preserving their capital and enjoying their retirement.
Brent Pasqua: And here's where another challenge actually comes in because there are these studies saying that people are going to live longer, which means that you would either have to work longer in your life or your money is going to have to last you a longer period of time.
Brent Pasqua: So they're saying potentially the 60 40 portfolio is not a sufficient portfolio because you're going to need more stocks. So now you say, okay, well, maybe the, the new strategy is a 70, 30 portfolio, but you throw the 70, 30 portfolio in here. You talk about the 4 percent rule and now you talk about sequence risk.
Brent Pasqua: I would not want to be sitting in a 70, 30 when the market drops 20 percent and taking
Matthew Theal: income. Yeah. And that's going to wipe you out. You know, an extra 5 percent at least compared to unless you're willing
Joshua Winterswyk: to go back to
Brent Pasqua: work. Yeah. And to me, the only way to offset this type of risk is to have a detailed plan and very clear communication.
Brent Pasqua: What's happening within your financial retirement plan, what's happening in your portfolio. You have a good advisor that has oversight on it. Cause if not, I think this presents an even bigger challenge.
Joshua Winterswyk: I think there's also like for clients, there's a lot of FOMO. So when you look at your portfolio and you're seeing, you know, your large equity, you know, mutual fund grow at the rate it's growing, and you're even looking at your fixed income and you're comparing them, you know, 13 percent against two or 3%.
Joshua Winterswyk: You're like, why don't I have all of my money inside of equities or in stocks? Like there's the fear of missing out on the good times and I want more of them. And I feel like there's always factors out there that are like tempting us to get rid of the diversification. And that can be a really, you know, a situation where that relates to an unsuccessful retirement.
Joshua Winterswyk: If you, you know, act on those feelings and that fear of missing out.
Matthew Theal: Yeah. So it's, it's a good and bad thing in a way.
Joshua Winterswyk: Yeah, and it's a diversification to me as an advisor is like, I'm always saying, sorry, I think Michael Kits has said that, but
Matthew Theal: I, I think the most controversial strategy that mitigates sequence risk is annuities.
Matthew Theal: Yeah,
Brent Pasqua: this is a perfect time for an annuity sales pitch that an insurance agent would come in and tell you that solves all the problems. But I'll tell you, it will not solve any of the problems. It'll just make your problems worse.
Matthew Theal: Why is that? Is it because the nudity is not going higher? Is it because what is it that's causing
Brent Pasqua: the problem?
Brent Pasqua: So what we're talking about is sequent risks or risk because of market timing and returns, but we're also talking about having returns and the nudity is you're not going to have any returns. You're going to have very poor rates of returns. We've seen them historically cap rates are controlled by the insurance companies, especially in what my primary focus is on or index annuities, fixed annuities, even a lot, most variable news, all these annuities that pay insurance agents and advisors commissions have very poor rates.
Brent Pasqua: And the rates are determined by, you know, what's in the market, but they lock you into a contract, they control the rates and I've seen time and time and time again, these awful rates of return that aren't even a small portion of what market returns are year over year over year. And people will think that the income strategy can be solved by a news.
Brent Pasqua: Let me tell you, it does not solve it. It's only going to impact you later on in life.
Matthew Theal: Right. And I think with sequence risk that's set up the way insurance advisors or insurance agents, right? They're pretty much insurance advisors that act like they're financial advisors. They're not financial advisors.
Matthew Theal: Well,
Brent Pasqua: they can be, their advisors could be selling insurance products, but typically do. That's true.
Matthew Theal: A rabbit hole, right? Okay, so they're setting up using, they're using sequence risk to sell all of them. Do it. I I've met enough of them, seen enough of the presentations from my clients. Like that's how these people are selling annuities.
Matthew Theal: They're scaring them with
Brent Pasqua: sequence risk. Correct. We can go onto an advisor's website and read the headline of the website and we'll know exactly what products are selling.
Joshua Winterswyk: Exactly. What I hear though is, is also with the annuities, we'll take on the risk for you, but you're paying us so much money that's taking away from your return.
Joshua Winterswyk: That it's going to hurt you in a different way, right? So we'll take on the risk, but you're going to pay us a lot of money to do it. And there's just better ways to do
Brent Pasqua: it. You have interest rate risk. You have inflation risk. Now you have risk after risk at a risk because you're not going to make the money you need to sustain your
Joshua Winterswyk: lifestyle, but they're solving for the sequence risk.
Joshua Winterswyk: Correct.
Matthew Theal: I heard those insurance companies have really good parties and retreats though. So they got that
Brent Pasqua: going for them. They do. And they're the insurance industry is the cash industry. They have so much money and you know, just like anything else, you know, you've been paying for your homeowner's policy for how long?
Brent Pasqua: And tell me how many times you actually called the insurance company to file a claim. So far, same with auto, same with all your insurance. So let me tell you something. They're not going to pay you big returns. Because they're not in the business of paying out.
Matthew Theal: Nope. They're in the business of making money on your money.
Matthew Theal: Yes. Okay. So we got a nudies out of the way. I think this strategy is a little better. This one kind of comes near and dear to my heart. If I was working with this conservative client, this is exactly what I would do is I would use a money market mutual fund and build a bigger cash reserve. Into their portfolio and completely, this should completely alleviate all fears.
Matthew Theal: Let's say it's maybe eight months or 12 months of income in the cash fund. It gains whatever the rate is rates jump around all the time, right? Today they're almost at 5 percent for cash funds. Previously, they're at zero. It doesn't matter on the interest rate. There's a trade off, right? You're trading off return for safety But if I had an ultra conservative client, that's how I do it and then build on a 60 40 portfolio on top of that
Brent Pasqua: Seems valid to me.
Brent Pasqua: It worked for a lot of
Joshua Winterswyk: clients. What I'm hearing also is similar to like the bucket strategy Oh yeah. Buckets. Yeah, you know, you like put buckets for different time horizons. And that first bucket is a money market fund for the next 12 months. And then your fixed incomes, let's just say for the next five years.
Joshua Winterswyk: And then the equities are for the 10 plus years. I like that strategy. I really like bucketing money. Cause just like mental accounting and visually you can see it. Like, here's what I have for now. Here's what's for later. And here's what's for the far future. But I think that that's a good strategy also to alleviate some sequence risk and also just for retirement planning.
Brent Pasqua: So how do you plan for the unknown?
Matthew Theal: Well, I think that's where we come in. You know, you hire a good financial planner. Hopefully they have a CFP, so, you know, they've been trained properly. And, you know, there's multiple things we do to help our clients. You know, my angle, one of my, the favorite things I do is like, I like to try and teach clients.
Matthew Theal: Like if you, I feel like if the more educated you are, the more you can know, and then the more you don't worry when these things happen. For instance, let's take what we're actually talking about. We're talking about something that's happened six times since 1926. What does that, what do you mean?
Matthew Theal: The market being down 20 percent or more. Six times since 1926 that's happened. Yeah, so that's
Brent Pasqua: less than, let's call it 8 percent of the time.
Matthew Theal: Exactly. And I think once you tell that to people, they're like, oh wow, I didn't realize it doesn't happen that frequently. We basically went from the 70s until the 2000s without a 20 percent or more decline in the stock market.
Brent Pasqua: That's a long period of time. It's bananas. I mean, if you look at market data, the market is up generally three out of every four years. And if that's the case, should people even worry about sequence risk?
Joshua Winterswyk: I don't know if you need to worry about it. When you're looking at the data as much, but it has to be planned for.
Joshua Winterswyk: Yes. Just like every other risk that that's comes with retirement. And I think, you know, you were talking about strategies to like help. And I think that being proactive, right. Continuing to review your financial plan, reviewing your portfolio. Being proactive is going to really help with avoid some of these big risk factors that come throughout retirement.
Joshua Winterswyk: So staying on, on top of, on top of it, just like anything you're going to be successful with, right? And
Matthew Theal: I think where the future of like financial advice and financial planning is going. Is more towards that coaching angle where we're kind of helping clients avoid these bad habits, avoid the things that they know they shouldn't be doing, but they really want to do.
Matthew Theal: For example, you know, let's say you go through a big market correction and your portfolio is down, but you see this house you really want to buy, right? You want to, you want to upgrade. It's a bigger house. It's a little nicer than you have. You've been waiting for it. But it's going to require a significant portion of your retirement savings to close the deal.
Matthew Theal: You know, do you do that? Do you not do it? I mean, it's situation based, but as advisors, our job is to kind of play that sounding board, listen, and then walk you through your financial plan to see if it actually makes sense or if it's going to end up harming you in retirement. It could work both ways.
Matthew Theal: I've seen it work both ways.
Joshua Winterswyk: Yeah. What I hear you say is, is also, you know, working on different scenarios, being proactive and planning for these future events, instead of us just continuing to like repair the bad decisions, right? Like a, instead of like a treatment or a prescription for, you know, an event or a bad habit that you had before that we're fixing, we're actually working on the future and proactively planning to help you then achieve those goals and work on different strategies.
Matthew Theal: Yeah. You're like plugging a hole in a boat,
Joshua Winterswyk: right? Yeah. Yeah. Instead we're on the boat together on a cruise
Brent Pasqua: and I think what we've, we've done a lot of, and I think what's important for clients to do, especially in these scenarios is do tax planning because you may need, let's just call it to make numbers simple, 3, 000 a month from your portfolio.
Brent Pasqua: But if you're taking out of your IRA, you may be taking 4, 000 out. To get your three because you got to pay taxes in a bad sequence of market timing. And if you have a very good financial plan, you're maybe only having to take three out because you're taking it from the right type of accounts. You're selling the right shares.
Brent Pasqua: You're not creating phantom income. Like you're doing a lot of things fundamentally and structurally within your portfolio and within your financial plan to mitigate you from having to sell more shares.
Matthew Theal: Yeah, absolutely. And the, you know, the flip side is, is maybe you have lower tax rates or something for a few years and you could pull some money out at a different tax rate than you would in the future.
Matthew Theal: So yeah, tax plan is really important.
Joshua Winterswyk: It's adding value and it's not adding it in a rate of return, which you can't control way from the investment portfolio. You're preserving money, which is adding value to the overall plan, which is helping your net worth. What are your final thoughts?
Matthew Theal: So final thoughts, you know, a sequencer is really scary and I understand why it's scary.
Matthew Theal: But if you go in with a flexible mindset when you retire and you're willing to make adjustments, sequence risk is nothing to fear. However, if you're not flexible you have a set mindset and you're not willing to make changes, then yeah, sequence risk could really be a big deal. So, you know, it's really just person by person and, you know, make sure this is something you're going through with, with your financial advisor.
Matthew Theal: And they
Joshua Winterswyk: understand it. I relate it to like landing a plane. You know, the flight's all easy. You're flying, and you're coming up to retirement, and that takes some concise planning and skill to land that plane and avoid a crash on the landing mat, right? And it, you know, most planes land, right? Flying's Relatively pretty safe, but I think that, you know, you need to have a plan and you need to lay this out so you can glide into your landing safely.
Joshua Winterswyk: And
Matthew Theal: sometimes when you're on that plane, the door falls off like on that Alaska.
Joshua Winterswyk: I know my analogy, I was like, Oh, my plane analogy, I'm looking forward to this. Then I'm like, ah, there's a lot of like kind of bad stories out there right now, but we know that flying is relatively safe. It's actually safer than driving.
Joshua Winterswyk: Hey, the plane still landed safely. And no one got hurt. There you go.
Brent Pasqua: Yeah, I think this is a, a, a, a portion of retirement planning that is extremely delicate. It's very complicated. It does take detailed and thorough planning. And if you're heading towards retirement, without thinking about or solving for this already, you could be putting yourself at tremendous risk.
Brent Pasqua: It needs to be thought out. It needs to be looked at. You need to have detail to the plan to know what you're going to do in case this happens. Because let me tell you something, we'll be sitting here a year, two, three, or four from now. And we'll talk, we'll be talking about the downturn in the market and how it's impacting people's retirement.
Brent Pasqua: And you don't want that. So yeah, plan ahead.
Matthew Theal: Recommends. Yeah. Yes. That was a good segment. Okay. Recommends is you guys want me to go
Joshua Winterswyk: first? Who wants to go first? Did you guys watch the waste management open? I haven't
Matthew Theal: really been watching it now.
Brent Pasqua: When is it? So it's
Joshua Winterswyk: a Superbowl weekend and it's a golf tournament in the desert in Scottsdale, Arizona.
Joshua Winterswyk: And it's like the only golf tournament that is just a full blown party, but it's awesome to watch. I want to go. I've never been. Cause it just looks so fun. It is like complete off opposite of like normal golf tournament. I mean, they have stands around like. You know, some of the signature holes and they're yelling and cheering and having a good time.
Joshua Winterswyk: I think like post Malone performed at this one. And like, it just looks like a really fun event that I eventually want to go to.
Matthew Theal: So basically what you're saying is golf needs to make every event like this is what I'm hearing. I don't know
Joshua Winterswyk: if every event, cause you like, you know, masters are like, it's serious.
Joshua Winterswyk: It's like. You know, all the majors like tradition, it's tradition. It's serious. I mean, maybe add a couple more like this. Cause you know, every year now, since I got into golf, like I watch this event, cause I think it's just awesome. And everyone's having fun and now I want to go. So hopefully one of these years upcoming I'm going to, I'm going to get out there because that's the problem with
Matthew Theal: the PGA right now, right?
Matthew Theal: Like the, the majors are serious and everybody wants to play those, meaning the professional golfers, but all the other events are kind of like, ah, we'll set these out.
Joshua Winterswyk: Yeah, and I think one of the backlash to the PGA is like, they're not doing anything to make the fan experience better, but they have like a perfect example of like a fun event that people are going to.
Joshua Winterswyk: I mean, you watch how many people are there. There's no lack of selling tickets to that waste management open. So maybe do some more of that. We're going to California. We should go in
Matthew Theal: here. That'd be fun.
Brent Pasqua: Yeah. It seems like a, seems like a really good time. And I think outside of like the major PGA tournaments, it's This is a tournament to go to.
Brent Pasqua: Oh,
Joshua Winterswyk: absolutely. And so my recommends is if you haven't watched it, you should definitely tune in. Probably make you want to go like me or you can search for
Matthew Theal: it on social media, right? Yeah. Videos you're talking about. Exactly. Yeah. All right. So my recommend, I watched a movie on Netflix called dumb money, and it's about the game stop 2021 when there's that short squeeze, when the stock started shooting up and everyone who was trading on Robin hood.
Matthew Theal: And you know, it really captured the nation. Everybody was talking about it. You guys remember? Yeah. Good. Really good movie. It's not a documentary. So like Seth Rogan's in it. I, I can't say her first name, but I think her name is Shiloh Woodley.
Joshua Winterswyk: Yeah. Does she date Aaron Rogers?
Matthew Theal: Yeah. That girl. Yeah.
Matthew Theal: She's in it. Pretty good movie. I enjoyed
Joshua Winterswyk: it. It's a nice watch. What's the guy with the glasses? What's his name? I, I saw, I saw who's in it.
Matthew Theal: I don't know his name, but he's the guy who plays Roaring Kitty.
Joshua Winterswyk: Yeah, yeah. I have a client that recommended that I watch it, so I have to watch that soon. So was it good?
Joshua Winterswyk: It was good. It was
Matthew Theal: enjoyable. Very easy watch. It's not heavy at all. It
Joshua Winterswyk: seems like they got a lot of, like, actors, though, to be in that movie. It's like, not just a, you know, one big name or nobodies. Yeah,
Matthew Theal: they did, and it's another one of those like, secret sleeper hits where the movie did nothing in theaters.
Matthew Theal: It was picked up by Netflix and put on their streaming service, and now it's one of the most popular movies in the U. S.
Joshua Winterswyk: When did it come out on FX? It must have just been recently. I think a couple weeks ago I saw it, yeah. I'll have to watch that. So, good movie. I recommend
Matthew Theal: it.
Brent Pasqua: My recommend is going back to an old American company.
Brent Pasqua: If you're looking for something stylish to wear, I feel like Nike is just thriving right now. They are bringing I don't know. For me, I felt like there was a dead period with Nike where they just weren't as cool. They were just making a lot of things that were just stylish. Not cool to me now, and maybe I'm just getting older, but I see no matter what young and old, if you want to look like you have.
Brent Pasqua: Cool style our outfit on if you put a fresh pair of Nikes on to me. It's the business
Joshua Winterswyk: now I like that it did you like that you you're like you're turning into like somewhat of a sneakerhead
Brent Pasqua: I don't feel like I'm a sneakerhead, but I think that they're they are dominating Continuously and it's amazing that they've been able to do it The shoe game for this many years,
Joshua Winterswyk: it
Matthew Theal: was street.
Matthew Theal: Where's really hot right now. Like if you're watching any, any show, like, you know, leading up to the super bowl, all the analysts and stuff, they're wearing Nike's with suits now, right? That's that's the style. Yep. No, one's wearing dress shoes anymore.
Joshua Winterswyk: Yeah. You got fresh dunks on with your fitted suit and that's kind of the look.
Brent Pasqua: Yeah. So, but it's just amazing to me that they're able to reinvent themselves continually to keep up with trends and styles. And keep them on top of the shoe game for as long as they have.
Joshua Winterswyk: I've always just been a Nike guy. It was passed down from my grandpa. He was always like a Nike guy and I've always just worn Nikes.
Joshua Winterswyk: And I, I pretty amazed like you that like they just continue, like you said, to keep pumping out really cool shoes with tons of style and stay at the top of the game. Yeah. So
Brent Pasqua: if you're out there looking for a new pair of shoes, just go on Nike website. Grab your spouse pair a pair of new shoes and you know be fresh
Joshua Winterswyk: out there You're gonna have to post some pairs of your new necks.
Matthew Theal: Put them on the company Instagram. There you go
Brent Pasqua: All right, so we have an announcement to here. We are continuing and currently Accepting new clients if you'd like to schedule an appointment with any of us, please go to evermont. com and schedule a complimentary consultation If you'd like our show notes, please go to retirement plan playbook.
Brent Pasqua: com. But as always, thank you for listening to the retirement plan playbook. Thank you. Thank you.
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