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Getting more conservative with your investments as you age is a rule of thumb. But it doesn’t always make sense — especially when interest rates are historically low. 

How can you properly plan for your retirement when “common knowledge” can wreck all your retirement plans?

In this episode, I’m revealing a new way to approach your investment strategy so you don't have to worry about running out of money in retirement. 

Show Highlights Include:

  • Why getting “safer” with your investment strategy as you age could cost you money (2:28) 
  • How a deferred comp plan drives you to a happy and healthy retirement (3:36) 
  • Why historically low interest rates steal your wealth if you follow the “age equals bond percentage” method (10:20) 
  • The “20 Year Adaptation Strategy” that prevents you from bankrupting your retirement (16:55) 
  • How to turn your financial weaknesses into cold, hard cash (20:38) 

To schedule your free retirement tracking meeting, specifically for first responders, head to http://pensionattention.com/ or call us at 805-409-8150.

Read Full Transcript

Welcome to Pension Attention, the best show for first responders who want to take control of their finances.

After advising Los Angeles city firefighters for over 12 years, financial advisor, Brad Barrett now shares how you can grow your wealth, build your legacy and enjoy a life of freedom. And now here's your host, Brad Barrett. [00:19.9]

Brad: Welcome to Pension Attention, the show for you, first responders who want more out of their deferred compensation and pension plan. My goal with this podcast is to reach you where you are at whatever stage in your career you are in, in order to provide my nearly 15 years of experience working with both active and retired service members on their investment and retirement planning. My team of fiduciary advisors here at ONE Fire and Police are dedicated to ensuring you not only take control of your finances but you build the life you deserve. To find out more about me or my team here at ONE Fire and Police, you can go to our website at PensionAttention.com or you can always give us a call. You can reach us at (805) 409-8150. Now, before we get started on this week's episode of Pension Attention, I want to send a special shout out to each of you listening here each week. I really appreciate the feedback I really do. Thank you. And if you haven't already done so you can go to our website again PensionAttention.com. You can download and subscribe the podcast. You can also download it on any platform where you would otherwise download a podcast, whether that's Spotify, SoundCloud, Google podcast, or the apple app on your phone. And you’ve already heard me started to say this these past few weeks, if you like the episode, if you like the podcast itself, share with somebody like if you don't like it, I guess share with someone you don't like, but share it, I guess, is the message. And today we're gonna be talking about something that we all know too well. There's a couple of things I've noticed. And almost 20 years of being a financial advisor that each of us has as knowledge around investing, or let's say investing principles. One of the main ones is buy low, sell high, right? [02:04.7]

We've all kind of understand that concept to make money or a profit on anything, whether that's real estate, a stock or any other sort of purchase, you need to buy it lower than you sell it for. Makes sense, right? Now, one of the other adages, it's a little more component as you get older, but one of the other things and the biggest thing we're going to talk about today on today's episode, which we titled Changing Allocations as We Age, the rule of thumb that I think I hear a lot. And I know each of you thinking about this kind of says, well, as I get older, I should get more conservative. So, we're going to dissect that today and go through number one, where that came from, and number two, how we actually should be perceiving it because just like most things’ adages or rules of thumb, they may be there for a reason, but they may not serve the purpose as to which it is intended for you for your own personal planning. So, let's get into it. [02:58.4]

So, I'm going to talk about the people who maybe have not heard of that adage before. And it comes from the rule of thumb of, Hey, as we get older, we're more about income, less about accumulation, which by the way, I agree with, you've heard me on this show and at stations and those clients listening, right? Talking about how we manage assets for each of our clients and we custom tailor it, which is important. Those are important words, cause you want to build an investment portfolio that fits into your retirement plan, not the other way around. It's very common to have a retirement plan set out and have an investment plan, basically fit into whatever the goal is. But the reality is the investment portfolio, your deferred comp plan for example, is the engine that drives this car, this frame, these tires, this body to the ultimate goal and destination, which is for you a happy, healthy retirement. So, the idea as, okay, wait a minute, I'm 30, I’m 40, I'm 50. I'm still working, I'm actively contributing to my deferred comp plan. That is all mindset of accumulation. And I've said that many times on this show, as I mentioned, we talk about the accumulation mindset that climbing the mountain as you're working. Very common, we all go through this phase. I personally am also in this phase where we work, my wife and I, we save, we put into our 401k, which is basically for you guys or deferred comp plan. So, you are saving for your retirement. We're also saving cash. Like you should be as well. Like we talk about and also interim or middle range or that middle bucket of planning, those items that are not necessarily for next year, but also not for 30 years from now. So that middle range ideas you want to have all these buckets being planned for. And it's important to make sure we keep the mindset of as we grow in age and as we closer to retirement, the concept of, okay, wait a minute, the old adage I've heard of is as we get older, we get more conservative. That's what I wanted to set today. [04:51.6]

So, here's the rule of thumb that I've heard a couple of times, and there's many ways to say this, so, I'm going to use one of the versions, okay? And it starts out with your age should equal your fixed income or bond percentage in your investment. So, let's go through that. If you're 20 years old, the rule of thumb, if you will, is saying, you should be 80% equity, 20% fixed income, and let's just go up the scale for a second. If you're 30 years old, you should be 30% fixed income and 70% equity, 40, 40% of your portfolio should be in fixed income or bonds or more conservative related investments. And the other 60% should be inequity. And as you can see, this rule of thumb keep rising. So, at 50 and at 60, when you're 70 years old than it inverts really at 60 years old inverts, it goes from equity to fixed income on the majority. So, when you're 70 years old, as an example, the rule of thumb, if you just follow that rule all the way out, you should be 70% fixed income and 30% equity. So, this is what I want to talk about because why the rule of thumb may not work for specific and personal planning is very much related to topical and current events that are not only happening in your own life from a planning perspective, but also the policies and procedures that are coming out of DC, the economy as a whole, you can see why I'm bringing this up in the past year in particular, a lot of these, again, quote unquote, rules of thumb are just that they are just ideas, but here's the thing I want to bring up is they usually get like planted in our soul, like in our mind that this is what we should be doing and it's almost hard to chip away at that. [06:33.9]

So, when we talk about these two adjectives and I'm gonna use these two main ones, conservative and aggressive, and here's why I'm bringing up those two words in particular, because each of us in our investing life have most likely put ourselves in one of those camps. Maybe we are in our twenties, just starting our deferred comp plan. And we think, okay, we talked to a captain, they say, we should probably do a deferred comp plan. Now it should be somewhat aggressive, maybe ultra-aggressive. That's typically the advice that comes around. And then again, this rule of thumb gets implanted in us that okay, as we age, maybe in our forties and fifties and sixties, we should get more conservative. I want almost want to debunk that for a second because when you go from labeling, which is really what you're doing, labeling yourself as aggressive, and then ultimately over time as you age again, still labeling yourself as conservative. I think that's, in my opinion, a very marketed way for the financial industry to sell different philosophies or theories or even products there I say, right. [07:34.6]

And so, they really are just trying to put you into this box. And again, I'm not saying that's right or wrong, but just hear me out because as you heard me talk every week on Pension Attention and those clients listening, as we talk about building a plan for you, you'll notice that we don't necessarily talk heavily about being aggressive or conservative. The idea is to find out who you are individually as an investor and ultimately how we would allocate your portfolio, eventually you're drop, but starting out with deferred comp plan or other assets, how we would manage that for you. Again, has a lot to do with your goals and objectives. You hear me say that probably at nausea and I apologize, but it is so important. And here's where I want to debunk maybe the rule of thumb and why it may not work for everyone. You've heard me say this before, but a rate of return will always only be half of the story. The other half is your distribution rate, what you need to take in retirement. [08:31.8]

So, if you are 60 years old and you followed that rule of thumb and you were at that point 60% more fixed income or bond oriented and 40% equity driven, a couple of things come to mind for me as an investment manager for nearly 20 years. One, if you have a distribution rate, as I mentioned, basically, a spending rate that you'll need to pull from your retirement accounts on top of your pension. And that rate is anywhere in the 4 or 5% range, which is historically very sustainable. Well, if you have an portfolio that is heavily fixed income, naturally, if you look at historical returns, your rate of return will go down. So, if you have a rate of distribution that you need at four and 5%, you may not automatically be able to. And I'm not saying this as a drastic statement, but you may not be able to have the luxury so to speak of being more conservative. And even if you did, I'm not saying you'd want too either. So, understanding your distribution rate is as important as understanding your rate of return, which ultimately is driven by the allocation you are setting for your deferred comp plan. Is it not? [09:41.9]

For example, you look at a historical performance of bonds and this is pulled and tracked on money.com or Financial Samurai. You can look up any historical data, but since 1926, historical returns for bonds is anywhere between 4 and 6%. Now you have to take in the current economic climate, which a couple of minutes ago, as I mentioned to you is largely the biggest reason why a rule of thumb such as your age should be your fixed income exposure may not work. Right now, as we stand in August of 2021, we are at historical low interest rates, quick little education around fixed income or bonds as interest rates rise, your bond prices go down. It works as like a Seesaw. It's inverted by the way, inversely, if interest rates decrease, which we're not anywhere near that, haven't been that way in 10 or 15 plus years since away. If they decrease your bond prices will rise. [10:41.4]

Do you know how much you should be contributing to your deferred compensation plan? Are you getting the most out of your current investment options? Looking at entering or about to exit the DROP program? Go to www.pensionattention.com to find out how we can help. [10:57.8]

Now I've gotten the question before. Why is that? Well, if you think about it logically for a second, if your interest rates is right now, let's say 0%. Let's just assume it's at 0%. And it goes from 0 to 2%, just as an example. Okay, so the open market now bonds or new bonds being issued by whether it's a government or a company or a city, whether that's corporate bonds, government bonds, or municipality bonds, when they reissue something for a project they're trying to build, that's essentially what a bond is, right. We, as the bond, investors are lending money to someone and in return receiving an interest rate back, which by the way is why it's called fixed income. It's a fixed payment, usually paid in semi-annual coupons they call it and it comes back to us. So, if I'm a new issuer or a city or a state or a government or a company that is issuing a bond, and I'm in a current economic climate where fed funds rates, central bank rates are at 2%. in my example, here, I no longer can lend money or want to seek money out there for 0 or 1% because the open market people like you and I are like, wait a minute, why would I go and then lend that at such a low interest rate. Correct? [12:11.0]

So, what do they have to do? When interest rates rise, they can decrease their bond price to make it more attractive people to invest. That's where that marriage, that symbiotic relationship comes between interest rates and bond prices. So back to my example, we're making here why the rule of thumb is important to think about the changing your allocations as we age, we may not need to be able to stick to a rule of thumb because currently, and I would think for the next five or 10 years, we're going to see a rising interest rate, largely due to maybe staving off some inflation, but also just generally you think about it, we can't go below where we're at right now. We have to increase. So, when we think about that as bond investors and here at One Capital Management, we're always thinking about that when we're allocating our portfolios for each of you listening here. And for those of you who aren't listening, you have a manager making sure that their bond management is strong is paramount. [13:00.0]

No one likes to talk about it, but I'll be honest with you, bonds run the market. And if you don't believe me in that, take a look at mortgage rates, they're run on the 10-year note. They fluctuate based on that example. So, bonds, aren't the sexiest thing to talk about, trust me, but they do matter, they very heavily matter. It's a big indicator economically for many forecasters, many portfolio managers see what we are seeing. Essentially it tells the market, or it tells us managers what the market will receive as a good rate of return. Back to my example, when we buy a bond, you are literally loaning money to again, a company, a city, a state, and in return getting a fixed payment. Well, we want enough return to reward for the risk. Correct? So, if we have a portfolio that we now need some money coming off for your own personal life on top of your pension plan, we have a distribution rate and we just live by the rule of thumb where we get more conservative simply because we are now older us there and that's okay. It's just being open and honest and truthful with each of our clients here as money managers, but also with yourselves and understanding, okay, I can still diversify my assets, find good management in an investment manager or a financial advisor to be able to not only receive on a sustainable basis on an average, our distribution rate that we need to pull from to live the life we want to live now in retirement, but also have that happy marriage, that symbiotic relationship within the portfolio between stocks and bonds, that may not hear me loud and clear, it may not be the rule of thumb. [14:35.8]

We're just going to say, okay, as we get older, every five or 10 years, we're just going to keep upping our allocation towards fixed income. If we do that and I guess one of the big words of caution on today, or this week's episode I want to bring up is if you were to do that, you are literally blind, fully the current economic climate. And I'm bringing that up today as I was thinking about this a couple of weeks ago, when I wrote the inflate gate episode, for those of you who listen to that one around inflation, and we're going to talk a little bit more about inflation this summer, cause it's obviously a hot topic, but fixed income and these discussions have a lot to do with that. So, I was thinking about this, I'm kind of going, I see this a lot in our practice where we think just because we get older, we need to get more conservative. And again, I'm not saying that's wrong. What I'm saying is is that the rule of thumb may not work for you if you put it all together, which by the way, is the whole thesis of us here at One Capital Management of the over $3 billion that we manage for our clients is making sure that we custom build and design a portfolio that fits the risk tolerance. Again, that being conservative or aggressive based on your own tolerance of what you can weather, but also putting that together with a needs-based analysis, essentially what you need in retirement. [15:45.2]

Cause that'll largely, I don't hate to use this word this way, but it might dictate a little bit more strongly and more, and I should say this way, actually it'll educate you as a client or you as a investor as, okay. The risks that I'm taking on is appropriate based on what my needs analysis shows me. And then if it's not, we can discuss that and figure out what the right level of allocation is for each. So, we can't just blindly go and say, okay, I'm just cause I'm getting older. I'm going to get more conservative because you have to look at one, the current economic climate, which right now is very topical, which is why I'm bringing it up this week. And number two, really talk to yourself and say, okay, wait a minute. Is that me? Because if I'm 60 years old and I'm just supposed to get more conservative, but I believe I'm pretty healthy and God's got a long life for me to live. I got, you know, 20, 25, 30 more years on this earth. That's a long-time horizon. Wouldn't you say? Now, if you’re listening to this right now and you're 85 years old may be different discussion because we may be past our spending years. We're now more spending on health care or longevity, or just care in general, different than travel and seeing grandkids maybe. Grandkids at that point are probably coming to you. [16:55.7]

So, every 20 or so years, your outflow changes. So, adapting your portfolio. Something we do for our clients to those changes is what we mean by planning. And I personally feel that far supersedes a rule of thumb that may be out there, especially one that just says every 10 years, you get 10% more conservative. And to add one last piece there, as you've heard me say before, when you are working, yes, you are typically younger while you are working, but you are more so in a phase that I think is more appropriate to talk about. And that phase is the accumulation phase. We are in the working and saving years, right? You're having active-duty income. You're having overtime all of your working for, okay. And then during those time periods, every other Wednesday, hopefully you're contributing to your deferred comp plan. So, you're actively contributing. So, in a portfolio where most people just say, okay, you can be more aggressive when you're younger, there's also other factors at play. Not only are you being more aggressive because you're younger, I understand that because you have more time to recover. That's fine. But what's more important is that you are doing the two DS that I always say about investing. [18:04.0]

The two D’s are discipline and discernment. Discipline is the biggest one. Every other Wednesday you're contributing to your deferred comp plan, you are on a disciplined approach, to do something called dollar cost averaging. You are averaging the dollars every two weeks into your portfolio, smoothing out volatility. Dare I say taking advantage of volatility because when we have some volatile markets, whether it's in the bond market or the stock market, and you are contributing fresh capital to that deferred comp plan, you are now smoothing out volatility, meaning you're buying at different prices. So over time as things ultimately grow, as we see longevity in our markets, you're getting the benefit of buying your investments over time at different prices, some lower, some higher. I've always made this example. I'm not sure it's the best one, but I'm going to go with it. Okay. I've always made it at stations when I'm talking with firemen in particular. So, policemen, if you're listening right now, just bear with us for a second, right. But if you have a room, a fires happening in, you really need two things. [19:04.3]

Now I know I'm going to probably not hit all the fire sciences here, but just bear with me again. You need stuff to burn and you need oxygen to fuel that fire, right? Well, the stuff to burn in a portfolio, which is a living, breathing animal, a portfolio, your deferred comp plan is a living, breathing animal. No different than how you would treat a fire, right. And the stuff to burn is the items, the portfolio, the actual companies that we're investing in, in your deferred comp plan, that's the stuff to burn. And then the dollar cost averaging your bi-weekly contributions is the oxygen you're adding to that fire stoking it. It's growing. That's what it means to dollar cost, average. Letting compound interest do its work. So, when you're younger, yes, you can be more aggressive. That makes sense, logically understand it. But I talked to a lot of clients who have a lot of fear around the market, in their twenties and thirties. And largely the fear comes from not understanding the market. Look, we're all human beings, pkay. We don't like what we don't understand. That's a simple fact, no one likes to go to a party where we know nobody. Okay. You don't, you don't know anyone there. Right? It's uncomfortable. So, when you look at the market, it's uncomfortable for most because they don't know what they're looking at. [20:13.7]

I've said this before, it's a little embarrassing as a man, but I'll just bring it up. I don't know much about a car. I wish I did, but I don't, but I have a lot of friends who I know there's something ticking on the, on the engine, that doesn't sound right. They'll look into the engine; they'll know exactly what it is. All, it's a timing belt issue or that's a transmission issue. So, finding that good mechanic, if you will, to know what they're looking at is largely about finding the portfolio structure of the portfolio manager that knows what they're looking at. So usually, the best thing for us as humans, right, is to partner to our weaknesses and essentially where there's items in your life, both personally, professionally, that you tend to stay away from because you don't truly understand it. Being honest with yourself as the first step and then seeking that counsel is the next step. Otherwise, we get into the trapper, we just follow these rules of thumb and they will get you there. I do believe that a lot of the stuff in the things you can Google nowadays, and we have information overload nowadays, but there is some merit to a lot of it. [21:09.5]

But before you go taking advice from some influencer on Instagram or something, calling him some money guru, really make sure it fits for you. That's the real point of this before you just adhere to a rule of thumb, understand how that rule of thumb needs to be added into your complexities because everyone's unique. So, a rule of thumb that I'm bringing up today as an example of allocations, as we change, we should get more conservative as we get older that can serve as a baseline model, but we need to add to that and take a look at some factors. And those factors are really important to making sure that your retirement, your investment plans meets again, the golden objectives you have, and those are different for each person. [21:52.5]

Thank you for listening to Pension Attention. And before acting on anything discussed today, remember speak with a financial advisor near you about your specific situation. Or again, if you'd like our help, you can visit us at PensionAttention.com or give us a call (805) 409-8150. Next week on Pension Attention, we'll be going through Economic Forecast, we see them, we hear them, we talk about them. Let's understand what they actually mean. So, we're going to go through what economic forecasts actually mean for us as it relates to our retirement, as it relates to your deferred comp plan, and I'm looking forward to it until then they stay safe. [22:31.8]

The information in this podcast is educational and general in nature and does not take into consideration the listeners personal circumstances. Therefore, it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.

To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision. [22:55.0]

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