Power Up Wealth podcast – Will You Outlive Your Money – Episode 15 transcript:
Sharla Jessop 0:00
Are you going to run out of money in retirement? I’m Sharla Jessop. Today, we will talk about the fear of outliving your money with our guest and expert, Mikal Aune.
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Mikal. Thank you for joining us today.
Mikal Aune 0:44
Glad to be here Sharla.
Sharla Jessop 0:45
Mikal is a wealth management advisor and Vice President of the Wealth Management team at Smedley Financial Services. He also holds a Certified Financial Planner designation. Mikal, why do so many people fear that they’re going to run out of money during retirement?
Mikal Aune 1:00
Because not having money is more painful than dying. So there’s been many research studies done on this and I quoted one in a recent article that we did. But more people fear running out of money than they do dying. We all know that we’re not going to live forever. And if something happens, you pass away, you don’t worry about money anymore, it becomes a concern for your heirs, right? But it’s no longer your concern. But if you live too long, and you outlive your money, well, living becomes very painful. And so that’s a concern that everybody is scared of. Like if I run out of money, then what? What do I do? What is life like? How tight is it? How uncomfortable is life? I can’t live a fulfilling life anymore and do the things that I want to do with the time that I have left on this planet.
Sharla Jessop 1:44
What causes issues of running out of money?
Mikal Aune 1:47
Alright, there’s two main causes. So some of it too, is, what are you doing as you lead up to retirement? And what do you do in retirement? One of the main causes of running out of money in retirement is also the same reason you don’t have enough money. If you aren’t wise with your money, and you’re living on more than you make. So number one, if you can be wise and say, for every, for every dollar that I make, I’m going to at least save, save a penny. If I can save 10 cents for each dollar, great. If I can save 20, great. As long as you are saving more than you’re spending, you’re going to have more money later on in life.
Sharla Jessop 2:20
I was gonna say, you know, that’s interesting because when it comes to spending, a lot of people who are pre-retirees that you and I have met with. And I would say this is probably true of most people, you are past some of those expensive years. Your kids are out of the house. Maybe the mortgage is paid off.
Mikal Aune 2:36
High spend years.
Sharla Jessop 2:37
And now you have more free cash flow than you’ve ever had before. And most people don’t live on a budget at that point in time.
Mikal Aune 2:44
They don’t have to because they have gotten to a point of they’ve gotten through the high spend years, right, and they’re like, great, my income is the highest that has been in my career. My expenses are going down. And I don’t have to live on a budget, which is nice to be there. The only challenge is as you get back into retirement if your income stops, you don’t have any more coming in from work, then how do I provide income for the rest of my retirement?
Sharla Jessop 3:08
I can see how spending could be an issue.
Mikal Aune 3:11
And a lot of times we don’t change our money personality. And so I have different conversations with people. Because there are people that are coming in that they need to spend a lot of money to maintain their lifestyle. We talked about lifestyle, too. And sometimes it has a negative connotation. But really lifestyle is just what makes you comfortable. Right. And for some people moving to Mongolia, and living in a yurt might be their lifestyle, and it might be comfortable. But for a lot of people, that’s not their idea of retirement or what a lifestyle should look like. So as long as you have enough money to do the things that you want to do and that you’re comfortable, that’s a lifestyle, right. And so as long as you’re able to maintain that lifestyle that you want, and be comfortable with what you have, then you’re good. And as long as you don’t spend too much and spend down your nest egg and blow it up too fast, then you’re okay. And I have conversations on both sides of that aisle because I have some people that want to spend too much. And I have other people that aren’t spending enough. Right, their goal is not to leave 10s of millions of dollars to their kids, they might leave a good chunk anyway. But they just don’t know how to spend money because they’re like, okay, I have this chunk of money. And I’m not using it all. And I don’t know how to go out and what else do I spend it on? Like I have everything that I need. And so those conversations are a little different, where you’re like, okay, what are you doing to make sure that your life is fulfilling and that you’re doing everything that you want to do? And those are in some ways easier conversations than it is on the other side where you’re telling people that they have to cut back on their spending because if they don’t cut back on it now, it’s going to be detrimental for the long run.
Sharla Jessop 4:47
I can see how understanding and maybe even practicing living on a budget before you retire, especially after having those, you know, free cash years would be really, really important. What are some of the other threats that people face?
Mikal Aune 4:59
You know the second biggest threat is one over which you have no control. Because what you spend, you can control that, at least to a certain extent. But the year in which you retire, or when you retire matters a lot, and you have no control over it. So we’ve seen a lot of research on this too, that says, okay, when is the worst time to retire? And it’s just the luck of when you retire, and what happens in the stock market after you retire. And a lot of people think, hey, the worst times to retire would be like in the Great Depression. So if you retired in 1929, and the market drops out, and it falls 80%? Gosh, could you make it? Right? And what about in 1987, when the market dropped 20%? Or what about in 2000, when the market dropped 57%, or even 2000, or 55, at that time, and in 2008, the market dropped 57. And when I say that, I’m saying the S&P 500 is the is a good measure. Those sound really scary because they’re huge numbers. And I think that’s why a lot of people don’t want to take risk as they get into retirement. But those were not the worst times to retire. Because most of the time as people get into retirement, they take a balanced approach. And so as a general rule, I mean, we do things that are more sophisticated into this. But the general rule is you have a portfolio that is 60% in stocks and 40% in bonds. So if you go back through history and run it every single year, and said if I had the 60/40 portfolio, and I retired in the year 1900. Did my money last? What if I retired in 1901? And 1902? What if I retired in 1929, right before the Great Depression. Even through those really bad ones that I just named 1929, 1987, 2000, 2008. You were still fine. And those were okay to retire. Because even if stocks went down, your bonds held up, okay. And then you had enough time for the stocks to recover. And your portfolio made it through the rest of your retirement. Okay, and that’d be through like age 95. You did not run out of money. The worst year to retire was actually 1965, which is kind of surprising when you look at it. It wasn’t like there was anything crazy going on in the market. Well, there wasn’t a huge downturn that we faced. It was just for the next couple of decades we had inflation. okay. And because of inflation, and stocks, they still had good returns, but they struggled. They didn’t have as good of returns. But at the same time bonds did not have good returns because of rising inflation. So here you had both your 60/40 portfolio that is 60 in stocks and 40 in bonds, didn’t do as good for a couple of decades. Right? So what do you do? How do you combat that? Because we look at where we are now. And we worry about inflation and interest rates going up. And we worry that that could be for another couple of decades, right? We have seen declining interest rates for the last 40 years. So since the 80s, interest rates have been coming down. We haven’t been in a period of significant rising interest rates. There have been little periods where it’s gone up for, you know, a year or so. But it hasn’t been for extended periods like it was 65 to 85. So we could have a period where interest rates are really climbing. And that could be bad for bonds. And it could be make stocks struggle a little more than they have. We don’t think inflation is going to be as bad in the coming decades as it was during that that period. Mostly because of demographics. There’s a few other reasons. But during that period of time, when we had really high inflation, you had baby boomers coming into the workforce. So there was this whole crowd of people that were now competing for jobs and homes and cars. And so the economy was growing and it was hot. And right now we don’t have a ton of people coming into the workforce. As households, we don’t have a growing population. Our population is relatively stagnant. Like you talk about birth rate. And as far as birth rate, we’re having 1.9 children per household, which is not replacing our current households, because you have two people per household, you have 1.9 children, and you’re a declining population. The only reason why we have increasing population right now is because of immigration. So that’s one thing that would say inflation isn’t going to be as bad in the next decade as it was back when it was really bad.
Sharla Jessop 9:15
Well, where we don’t really know. We’re in a high inflationary period right now. Every one of us is feeling the pinch in one way or another. So we are experiencing inflation. And even if we don’t believe it’s going to be maybe drawn out as far as length and time that we have to, you know that we’re in high inflation. How are people preparing in their retirement plans for this type of event or equation?
Mikal Aune 9:36
So two things right, it goes back to your spending and it goes back to how your portfolio is managed. So one, you still make sure that you’re living the life that you want to live that’s fulfilling, without being extravagant and you taking out too much to where it blows up your portfolio. Again, that goes back to a balance because there are some people that want to spend more than they really can and there are other people that aren’t spending enough. So it depends on where you fall in that category. And sometimes you just don’t know when you need to talk with an expert. And we can help you figure that out and help people feel like because there are people that don’t feel like they can spend, that really can. And you can help them realize that. So one, you have to take a balanced approach with your budget, and how you are living life. But make sure that it is a fulfilling life and one that you’re comfortable and doing the things that you want to do with the time that you have left on this planet. The second thing is you have to find a way to combat both inflation and downturns. So this is the big problem that we face. And people as they get into retirement, they’re like, oh, I don’t want to experience in 2008. So I’m going to put all my money in really conservative investments. And you’re like, okay, that can help protect you against downturns. But that’s not going to protect you against inflation. And like we’ve seen recently like you alluded to that inflation is bad, and it’s spiked up really high. And it will probably go back down a bit. It but it’s not going to go back down to where it was before. We have to have something that is going to keep up with that. And that’s why we like to split our portfolios into different segments. Time segments based on when you’re going to use it. So money that you would use in the next one to five years needs to be more conservative and protected. Six to 10 years can be moderate. And 10 plus years can be aggressive. Now that conservative segment, that’s going to be there to protect you against big downturns. Right, that’s what people fear. We’re almost more worried about inflation, and that sequence of return risk that we can face. And so we need to have some things that are moderate and aggressive that will grow for the long run that can keep up with inflation.
Sharla Jessop 11:38
Mikal, it sounds and it’s obvious that preparing is key to having financial stability regardless. Thank you so much for joining us today.
Mikal Aune 11:47
No, glad to be here, Sharla. Thank you.
Shane Thomas 11:53
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn.
The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Lorayne B. Taylor, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
