Check out Episode 88 of The Best Interest Podcast below.
Referring back to his article, Fundamentals Of Retirement: Is the Summit “Good Enough?”, Jesse uses an experience hiking in the Adirondack Mountains as a metaphor to explore retirement preparedness. He recounts how being poorly equipped for a challenging hike can mirror the pitfalls of entering retirement without thorough planning – you might reach the summit, but the journey and destination may not be as enjoyable. Sharing the example of a couple, John and Eva, who are on the brink of retirement with substantial assets and a solid financial plan, Jesse raises critical questions about their investment strategy, withdrawal plans, and tax considerations, suggesting that while they are well-positioned, their retirement journey could be smoother with additional preparation.
For today’s interview, Jesse is joined by Rob Berger. Rob is a contributing editor for Forbes Advisor, host of the Financial Freedom Show, and author of “Retire Before Mom and Dad: The Simple Numbers Behind A Lifetime of Financial Freedom”. He founded Doughroller.net in 2007, a popular personal finance blog that attracted millions of visitors. With a background as a litigation attorney, Rob is now a prominent voice in retirement planning, providing valuable education through his YouTube channel and other platforms.
If you’re looking for quality retirement finance tips, no matter where you are on your journey, this is a great episode for you!
Key Takeaways:
- Preparing for retirement allows you to enjoy the journey and the destination (just like hiking!).
- Learn about key aspects of retirement planning, such as investment strategy, withdrawal plans, and tax considerations, and the need for comprehensive preparation.
- What is the “Retirement Income Death Spiral”? And how can we avoid it?
- How does inflation and stock market conditions really affect your retirement savings?
- How to take a conservative approach to Social Security and still have cautious optimism about the future.
- Why you should not focus on individual stocks when planning for retirement!
Key Timestamps:
- (02:10) Jesse’s Monologue: Retirement Planning Fundamentals
- (05:47) John and Eva’s Retirement Scenario
- (13:09) Interview with Rob Berger
- (14:00) Understanding the Retirement Income Death Spiral
- (15:55) Inflation and Retirement Planning
- (23:40) Social Security Concerns and Assumptions
- (25:48) The Future of Social Security and Political Solutions
- (27:24) The Importance of Diversified Income in Retirement
- (29:26) The Role of Cash and Bonds in Retirement Portfolios
- (34:21) The Emotional Side of Market Volatility
- (39:26) Common Financial Mistakes and How to Avoid Them
Key Topics Discussed:
The Best Interest, Jesse Cramer, Rochester New York, financial planner, financial advisor, wealth management, retirement planning, tax planning, personal finance, Rob Berger, Retire Before Mom and Dad, Social Security, retirement account mistakes
Mentions:
Website: https://robberger.com/
YouTube: https://www.youtube.com/@rob_berger
LinkedIn: https://www.linkedin.com/in/bergerra/
Mentions:
Retire Before Mom and Dad: The Simple Numbers Behind A Lifetime of Financial Freedom
How Much Cash Should You Hold In Retirement?
Should Cash Replace Bonds in a Portfolio?
How to Avoid the Retirement Income Death Spiral?
More of The Best Interest:
Check out the Best Interest Blog at bestinterest.blog
Contact me at [email protected]
The Best Interest Podcast is a personal podcast meant for educational and entertainment. It should not be taken as financial advice, and is not prescriptive of your financial situation.
Transcript – Episode 88
[00:00:00] Welcome to the Best Interest Podcast, where we believe Benjamin Franklin’s advice that an investment in knowledge pays the best interest, both in finances and in your life. Every episode teaches you personal finance and investing in simple terms. Now, here’s your host, Jesse Cramer.
[00:00:21] Jesse: Hello, and welcome to episode 88 of the Best Interest Podcast.
[00:00:25] My name is Jesse Cramer. Later in today’s episode, Rob Berger will be joining me, but first we’ll do our normal housekeeping. Let’s start with a review of the week. This one comes from Ah Bing, who left a review on Apple Podcasts. And Bing wrote in and said, clear thinker, clear communicator. I’m not a fan of financial advisors because in my own 30 year experience, their self interest in every case resulted in collecting abusive fees, pitching inappropriate products, or providing dismal analysis.
[00:00:54] But I like Jesse. I have no financial involvement with him, yet he has responded to my email questions with thoughtful and actionable ideas. He thinks clearly, cutting through the muddle of information to provide clarity and understanding. Thank you for those kind words. You’re right. Like in many professions, there is a spectrum of financial advisors, financial planners, whatever you want to call us.
[00:01:15] That spectrum is pretty far and wide. And you’re right, some folks are not on a good end of that spectrum, and I do my best to stay above the noise, I think long term, and provide good advice to you guys, whether you work with me professionally or not. So thank you, Bing. If you’re hearing this, Bing, feel free to shoot me an email at jesseatbestinterest.
[00:01:32] blog and I’ll get you hooked up with a super soft best interest t shirt. Like I alluded to before, later in today’s episode, Rob Berger will be joining the podcast. Rob is a contributing editor for Forbes Advisor. He’s the host of the Financial Freedom Show. He’s the author of a really good book called Retire Before Mom and Dad.
[00:01:50] And Rob has perhaps the single best YouTube channel out there for retirement planning education. I can honestly say that. I probably watch Rob’s YouTube content just as much as anyone else out there. Even when it’s topics that I’m already pretty familiar with, I just like Rob’s presentation style and it’s always good to see how someone else thinks about these problems.
[00:02:10] But before we get to Rob and before we talk about some retirement planning topics with him, I want to read from one of my retirement articles. I wrote it this past February, February of 2024, and I titled the article, Fundamentals of retirement. Is the summit good enough? Now, the Adirondack Mountains are this gorgeous outdoor wonderland here in upstate New York, attracting tourists from all over the world.
[00:02:33] The park actually covers about 20 percent of the state of New York. That’s three times larger than Yellowstone Park. And perhaps, you know, the ADKs, that’s what people call the Adirondacks. Perhaps the ADK’s most extraordinary natural resources are the 46 high peaks, these tall mountains in the park’s northeast corner.
[00:02:51] Now, a good friend of the blog and the podcast, Tyler, not the same Tyler who appeared here on episode 87, but Tyler Sokash is his name, Tyler led me on one of my first high peak adventures. And thanks for listening and reading, Tyler. He and I conquered the Dix Range, that’s D I X, the Dix Range, summiting four peaks in one day, trudging about 15 miles through the mountainous woods over about a 12 hour day.
[00:03:16] And it’s hard work. It was a draining day. I drank much more water than expected. I chafed in some uncomfortable ways. I probably ate dinner for two people that night and slept like a baby. and learned a lot of applicable lessons for my next hike. For example, during our rest breaks at the summits, I observed the other hikers around us.
[00:03:36] Now what were they doing that I wasn’t? Some of them were fit and lean. Other hikers though, they were maybe a little bit overweight. Some of the hikers had expensive gear, lightweight gear, all the gadgets. Other people were wearing gym shorts and sneakers. The people who looked like they knew what they were doing, they were drinking from Nalgene bottles, they were eating rehydrated meals or calorie dense meals.
[00:03:59] Whereas the more amateur looking people, they had Poland spring water bottles and Nutri Grain bars. There were all shapes and sizes of hikers, a really broad spectrum between the expertly prepared hikers and the woefully inexperienced ones. But all of these hikers, as I’m sitting there on the top of the mountain, I mean, they all had reached the top of the mountain, right?
[00:04:18] And hopefully they were all going to get back to the bottom of the mountain too. I, for one, I’m a little bit on the taller side. And going down the mountain, especially after you’re tired from going up can be just as hard. But anyway, that’s a bit of a side quest, a side topic for another day. I’m sitting there and I’m seeing all these hikers on top of the mountain who they’ve done something successfully, even though they had different levels of preparedness to get there.
[00:04:41] Of course, more preparedness, it requires more research, more time, probably more money to buy that stuff. But it also provides a higher probability of Summoning the mountains, for sure. It probably provides a more straightforward path to getting to the top of the mountain. And it also provides the mental confidence of knowing that you are prepared, that you are ready for this hike that lies before you.
[00:05:02] Now, less preparedness is certainly easier up front. But is it easy in the long run? Probably not. This is where we should invoke Benjamin Franklin’s quote. Maybe my second favorite Benjamin Franklin quote. A stitch in time saves nine. That idea rhymes with the concept of hard choices, easy life. Easy choices, hard life.
[00:05:23] Where do you want to fall on the spectrum of preparedness? That’s a question I’d ask and it’s totally your call. There’s no correct answer in general. but only a correct answer for you. You’ll hopefully reach the summit either way, but your preparedness, it provides some flexibility in how easy or how hard that journey will be.
[00:05:40] In my experience, running the best interest and working professionally in financial planning, retirement preparedness works the same exact way. And I received a perfect example via email from a blog reader, John. John wrote in, he said, Hey, Jesse, my wife and I are 56 and 58 years old respectively. We’re on the verge of retirement.
[00:05:57] I hope, I hope. We have about 2 million in traditional accounts, 500, 000 in Roth accounts, about 400, 000 in taxable accounts. 95 percent of that money is invested in diversified stocks. We’ll both receive significant social security benefits. We live within our means and last year our total outflow of money was just shy of 100, 000.
[00:06:15] Do you think we’re ready to retire? Can we chat with you about retirement readiness? So this came from John and his wife, Eva, and some quick math that I did. So John and Eva, they had 2. 9 million in assets to support a 90, 000 annual lifestyle. They’d be at less than a 3 percent withdrawal rate, and that isn’t even accounting from their very healthy social security 2.
[00:06:35] They’re probably going to withdraw less than 1 percent of their assets in retirement. Now, do John and Eva need professional help? I don’t see how they do. If we think about this as, as climbing a mountain, they’re definitely going to reach the top, but could John and Eva benefit in some way from some sort of financial professionals help?
[00:06:52] I’m sure they could. And this is where we get back to that whole preparedness topic. It’s like my adventure in the Dix range in the Adirondacks. I conquered the mountains. I didn’t need to be more prepared, but I could have been, and I probably should have been. And I should have done a few things differently that day to make the day more manageable, less tiring, to eliminate the probability of failure, or certainly just to eliminate some of the discomfort along the way.
[00:07:17] Now, many of us, especially the people who are Listening to the best interest podcast, right? You have essentially self selected yourselves because you’re interested in personal finance and investing, and you’re taking this interest into your own hands, right? You’re a DIY or you’re a do it yourselfer. You want to be in control.
[00:07:33] You probably are pretty good at what you’re doing right now, right? You have a good handle on your financial plan. You probably don’t need intervention, but it might help one or two of you to get on the phone with an hourly financial planner and figure out what’s going on to get that little extra tip here or there.
[00:07:49] Or as I’ve alluded to a year before, right? I don’t provide hourly financial planning in my own practice. I tend to work with people who are much further out on the spectrum as far as DIY stuff and DIY financial planning. I tend to work with people who have zero interest at all in the kind of things that we talk about here.
[00:08:06] You might know some of them, right? Some people who. They need the help, and they have no idea where to go to, and they need someone holding their hand for everything when it comes to their financial plan, retirement plan. All shapes and sizes, right? It’s a spectrum. I find it hard to imagine a scenario where John and Iba live some sort of failed financial retirement regardless of any professional advice.
[00:08:27] They’re on course to summit the mountain, but still many critical financial questions come to my mind for them. For example, uh, they plan on retiring before age 59 and a half. So what’s their plan for funding those intervening years? They have a lot of different options, but I’m curious what their plan is.
[00:08:42] For 99 percent of people on the verge of retirement, like John and Eva are, I would say that their portfolio, which is 95 percent in stocks, is likely inappropriate. In general, I’m wondering how John and Eva plan on balancing withdrawals from their Roth accounts, right, where there’s no more tax consequence, with their traditional accounts, which are fully taxable as income, and their taxable accounts, which will have some capital gains in there.
[00:09:05] Now, done poorly, they’ll leak some money to taxes in some unnecessary ways. Again, it’s not going to prevent them from retiring successfully. But it will be an inefficiency that working with some sort of financial planner would help them with. Are they sure that waiting until 67 years old is the optimal social security move for both of them?
[00:09:23] It usually isn’t. We’ve talked about that before. There’s usually some combination of one partner collects early, another partner collects late. What is their health care plan before Medicare? A very important question. Do they have any significant financial goals beyond just living their normal lifestyle?
[00:09:39] Are they prepared to fund those goals? Do they want to leave a certain amount of money to their heirs? Do they want to have a building named after them at the college campus for their alumni? You know, that kind of thing. Are they prepared for that? And there’s many more, you know, there are a lot of puzzle pieces to retirement and many different ways to arrange those puzzle pieces.
[00:09:54] I’m sure John and Eva have some answers, some semblance of answers to those questions. But my experience with similar families is that their answers are rarely optimized. So while it’s terrific that they’re better off than most people, as I alluded to now three or four times, I’m sure they’re not going to fail in their retirement.
[00:10:12] There’s still a lot of room for optimization and therefore room for dollars saved and dollars earned. If they were hikers, they’d be in peak physical shape with plenty of water. I can’t see them failing to get up the mountain. But did they bring their map and compass just in case? Are they aware that those cotton underpants are going to get very uncomfortable over the course of the day?
[00:10:29] Are they aware that the trailhead parking lot is by reservation only? Their hiking day might be more annoying than it needed to be. And who wants that? So, is preparedness worth it? So just as I mentioned earlier here in this episode, I went back to John and Eva and I asked them, where do you want to fall on the spectrum of preparedness?
[00:10:47] It’s totally your call. There’s no right answer in general, but only right answer for you. Now, based on John’s email to me, I have plenty of questions for them. I think they could use a sanity check or maybe even more for their retirement preparedness. But of course, that preparedness, it costs time and money and energy.
[00:11:05] And do they, do John and Eva, want to incur those costs to get even more prepared than they already are? Will they see enough benefit from those costs? Uh, are they beyond the point of diminishing returns? Will paying those costs simply help them feel more confident, get them more sleep at night, and is that worth it?
[00:11:21] Perhaps they’re ready to hit the trail as is, perhaps they’re ready to retire today as is, but they might have more annoyances along the way than needed. So again, that’s the whole idea between is reaching the summit good enough? If you finish your hike, great, but were you kind of uncomfortable along the way?
[00:11:38] Were you tired? Were you overly sweaty? Did you not quite have enough water? I bet a lot of you might fall into that boat. These are good questions to ask yourselves. And if you need a little bit of help along the way, there’s probably an hourly or a project based fee only financial planner out there who can help you.
[00:11:55] If you need a lot of help, if you want someone holding your hand the whole time, if someone you know wants someone holding their hand the whole time, there’s also going to be a fee only financial planner out there for you. That’s more that second boat. That’s more of where I tend to focus. Either way, I just think that this is an interesting idea and a good thing for all of us to be thinking about as we approach our own retirements.
[00:12:18] Here’s a quick ad and then we’ll get back to the show. Every week I send a quick free email to thousands of readers that shares three simple things. One, my podcasts. Two, the best financial content of the week from all over the internet. And three, A financial chart that explains some important concept in the news that week.
[00:12:38] It’s a great primer to boost your financial know how.
[00:12:41] Ah, but Jesse, I don’t want another email.
[00:12:44] Jesse: Well, this might not be for you, but I do hear you, which is why I make it very short, sweet, and full of only the essentials. A whopping 66 percent of subscribers read my email at least once a month. They’re enjoying it, and maybe you will too.
[00:12:59] You can subscribe for free. On the homepage at best interest dot blog. Again, that’s a free no strings attached subscription at best interest dot blog. So with that, I want to welcome on Rob Berger here onto the best interest podcast. It’s real honor having Rob here. As I mentioned before, Rob is a contributing editor for Forbes advisor.
[00:13:18] He’s the host of the financial freedom show and the author of retire before mom and dad. And among his many other accolades, I think Rob has perhaps the single best YouTube channel out there for retirement planning education. So here is Rob Berger.
[00:13:37] Well, Rob, thank you for joining us today on the Best Interest Podcast. And as the listeners heard in my intro, you haven’t heard the intro yet, but as they heard, I really love tuning into your retirement planning content on YouTube. And I think many of the listeners, if they aren’t familiar with you, will find that interesting as well.
[00:13:54] And I wanted to start today with a juicy retirement plan. planning question that came from one of your recent videos. So what exactly, Rob, is the retirement income death spiral? Sounds pretty scary.
[00:14:06] Rob: Yeah, it does, doesn’t it? First of all, Jesse, thanks for having me. Uh, I’m a big fan of yours. I appreciate you inviting me onto your podcast.
[00:14:12] That video came from an article that a guy named Sandbridge, if I’ve got his name right, wrote. But the concept is kind of simple. We all want to know how much can we spend in retirement without running out of money. And of course, that’s a difficult question to answer in the best of circumstances, right?
[00:14:28] Because we don’t know how long we’re going to live. We don’t know what the stock market’s going to do. We don’t know what our health is going to be like, inflation. But there are rules of thumb. We can certainly talk about them. The 4 percent rule is probably the most well known. But there’s many, many more of ways to figure out that question as best we can.
[00:14:43] As Sandage realized, though, he did some research. He said, you know, in those circumstances where people run out of money, We might mistakenly think that the decline in their portfolio was sort of gradual. Got lower and lower because maybe inflation, they had to take out more to keep up. The stock market was going down and sort of gradually they just ran out of money.
[00:15:03] What he says is that’s not actually how it works in many cases. What can happen is you kind of gradually run out of money and maybe even for a fairly long period of time, think 15 to 20 years in retirement. But then what happens is, this is the death spiral part of this whole thing, is you can then, you might lose half your portfolio in 15 years, let’s say, but you can lose the rest of it in five.
[00:15:25] You know, a lot of it just comes down to bad luck. When did you retire and what was the market going to do after that in inflation? You can enter, again, what he calls the death spiral. And you can run out of money very, very, very quickly in retirement. That’s
[00:15:38] Jesse: what it is. So there’s some tipping point in there.
[00:15:41] I mean, is there any underlying mechanics behind the tipping point, whether it’s just increased withdrawals combined with poor market returns, combined with principal value just isn’t high enough anymore?
[00:15:53] Rob: Well, I mean, that’s effectively what happens. A big component is inflation. And if you think about it, to me, inflation is far more dangerous than a bear market.
[00:16:02] You know, you go back to like 2000 to 2002 when the tech bubble burst, or the Great Recession, what, 07, 08, 09. Those were very bad market times. But we recovered. As long as you stayed in the market, even for retirees, because you’re not spending your whole portfolio. You may be spending three or four percent a year.
[00:16:20] So most of it’s still invested. If you just stay the course, you were fine. Inflation, though, is cumulative. You know, I’ve talked to people this year who say, Boy, inflation is terrible. My first reaction to that was, well, I don’t know. It’s only around 3%. I mean, it’s higher than the Fed wants, but I wouldn’t call that terrible.
[00:16:37] And their response to that is, well, have you been to the grocery store lately? Have you been to Chick fil A? I mean, it’s outrageous. And it hit me. The point is, yeah, inflation today is really not that bad, but it’s 3 percent on top of prices that are really high because of the 9 percent inflation a couple of years ago and the 8 and 7 percent inflation.
[00:16:56] And that gets built into the foundation of prices. And unless we have deflation, which occasionally we do, but that’s not normal, it’s sort of built in to all future prices going forward. And that’s certainly true in retirement. So anyway, yeah, all of those things can cause this problem. Now I will say, and he has something he calls the momentum ratio.
[00:17:17] I find it a little convoluted, but it’s a way to try to figure out, are you heading towards this death spiral? It’s basically taking. Any increases in your portfolio and comparing that to any losses in your portfolio, just looking at the total balance and comparing it to your starting point and taking a ratio of that.
[00:17:34] And when the losses exceed the gains, you’re in trouble. Basically what he says, and I can give you a link to the article if you want it. You know, I think there’s a practical side to this. I’ve yet to meet someone who says, yeah, I retired 12 years ago, I started at 4%, I’ve adjusted for inflation every year, and that’s exactly what I spend every year.
[00:17:52] I never look at my portfolio balance, that doesn’t matter anymore, you know, and people just don’t live that way. We evaluate every year. The market’s bad, inflation’s high, we cut back. The death spiral is interesting. It’s something to give some serious thought to. It’s really just another way of looking at sequence, what’s called sequence of returns risk.
[00:18:10] But as a practical matter, I’m not sure very many retirees are going to be calculating their momentum ratio. Although, by the way, I have some that do, so, you’re an engineer or were an engineer, so maybe that’s what you’re going to calculate. I don’t know. I made you into English, so
[00:18:24] Jesse: I’m not going to calculate it.
[00:18:25] Momentum is appealing to me, but I’m not sure. I’ll have to look at that paper that you cited, and then I’ll look up the momentum ratio for myself. That is interesting, the whole sequence of returns risk, and I never really thought about this until you brought it up, which is, there’s almost also a sequence of inflation risk.
[00:18:40] 10 percent inflation strikes once during my retirement. I’d much rather have it strike in year 40 than in year one because of that cumulative nature. And so today’s recent retirees who might have retired in 21 or 22 or 23, for them having that, what was it a year of roughly 9%, 8%, 9 percent inflation, something like that happened early on in their retirements.
[00:19:02] is not very good for them.
[00:19:04] Rob: Well, but there is some good, there is a silver lining maybe, but you’re absolutely right. I mean, if you look back, they’ve done studies back to 1871. I don’t know why that’s just because of data. That’s what they have. I, you know, nothing against 1870, but they started at 1871. And basically, depending on exactly how you measure it, the worst time to retire is the mid late sixties, 1960s, 1966, 1968.
[00:19:27] And the reason is because of the high inflation of the 70s and early 80s. But remember that lasted, you know, a decade. So it wasn’t just one bad year because of COVID and all of that. And now we’re kind of more or less doing pretty well inflation wise. It was a decade of bad numbers, but you’re right. If you do experience significant inflation, I, I don’t know that I would put the 9 percent for a year or two in there because we were, we recovered so quickly.
[00:19:52] But when you look internationally. And again, there are studies that do this. Uh, Germany, for example, there, if you look back the same time period, their safe withdrawal rate is not 4%. It’s less than 1%. And you think, well, wait a minute, Germany is a pretty strong economy. What’s going on there? And the problem is World War I, and they had hyperinflation, late teens, early And when you’ve put that into the equation, it just completely wrecks retirement.
[00:20:17] So yeah, inflation can absolutely create big issues for retirees. I’m cautiously optimistic that our one year of 9 percent or two years of high inflation in and of itself is not enough. to derail retirements. I’ll let you
[00:20:30] Jesse: know in 30 years if I’m right about that or not. When I hear people talking about the dangers of inflation when it comes to retirement planning, the two asset classes or maybe even three asset classes that I hear talked about the most, some people talk about stocks having a built in inflation protection.
[00:20:46] Some people talk about tips. I mean, inflation protection is right there in the name. And the third category is gold and or commodities in general. as having some sort of built in inflation protection. Do you have any thoughts on that or any maybe even things that you do in your own portfolio when it comes to inflation protection?
[00:21:03] So certainly, certainly
[00:21:05] Rob: stocks long term. can protect us from inflation. In the short term, stocks can get brutalized. And you look back, if we want to use 70s as an example, look at 73 and 74, terrible time. There may be a lot of reasons. We wouldn’t just say inflation, but in the short term, yeah, stocks can take a beating.
[00:21:21] And, you know, we saw that in 2022, but longer term, I think stocks can help protect us from inflation. Tips of course do as well, but they do it, as you know, in a very, very different way. And their expected returns are a lot lower. than stocks. So I own TIPS as part of my bond portfolio. I basically have about half of my bond portfolio in TIPS and half of it in regular, we call nominal bonds as my way of, that’s my admission that I have no idea where inflation or interest rates are headed.
[00:21:48] So I’m just going to hedge my bets and cover both types of bonds. But yeah, they can be part of an overall portfolio. I don’t personally invest specifically in commodities, including gold. Now, you know, I own a total U. S. market fund, among other things. And that has significant exposure to commodities through the companies it owns, right?
[00:22:08] I own international index funds, so I’m going to get everything from gold mining companies in there to oil companies to, you know, deer and company, which it’s influenced by the price of corn and, you know, other commodities. So I’m certainly getting exposure. And the argument in favor of commodities is when prices go up, price of commodities will go up.
[00:22:26] They’ll, you know, so they do have this built in inflation protection. Of course, That’s not the only factor in pricing a commodity, right? Supply and demand does play a role. If someone wants to put some small amount in gold or commodity fund, I wouldn’t say that’s a bad idea. I do think it’s generally unnecessary.
[00:22:43] Gold is a great protection against inflation, except when it’s not. If you look at the history, sometimes it is and sometimes it isn’t. And the seventies are skewed, right? Because we went off the gold standard and all that and it affected prices. My dad was in the gold business. So I remember that time very clearly.
[00:22:58] You know, if you look at portfolios, some exposure to gold actually can be a good thing if you look at history, but I’m just not a big believer. And putting direct money into, into gold or other precious metals.
[00:23:09] Jesse: Same here and, and not espousing that this is what all the listeners out there should do. I don’t own any gold, certainly not directly, but I have heard and I need to do my own due diligence.
[00:23:19] I have heard that there are some portfolio designs out there with a pretty significant gold allocation, 10, 20, 30 percent. And then there’s this retroactive backtesting to say, look at how stable this portfolio was. Look at the withdrawal rate that you can make from such a portfolio. So it’s very interesting.
[00:23:37] Anecdotally, I haven’t done my due diligence. Maybe we can pivot to one of the other pillars of retirement planning. At least for our American listeners, Social Security. People understandably have concerns about Social Security, and maybe they’ve seen a headline that Social Security is going to run out of money or something similar to that.
[00:23:56] And so my question to you, Rob, is will it really run out of money? And Because of that answer, I’m curious what level of conservatism you’re using in your plan, your financial retirement plan, or maybe what you’re suggesting that others use in their retirement plans when it comes to Social Security income assumptions.
[00:24:14] Rob: Well, that’s a great question. So first of all, it’s not going to run out of money in the way We normally think about, you know, when we run out of money, we just, you know, we, we got nothing left in the bank account, so we stopped spending. The trust fund, uh, which I know is technically rated regularly, there’s really nothing in it conceptually, but it will eventually run out of money based on a lot of assumptions and projections.
[00:24:34] But let’s assume that happens, they can still pay out the money that it takes in every month. Through payroll taxes, right? Cause it’s constantly taking in money, you know, every time, you know, we get paid from an employer, but if it had to rely just on those tax withholdings, it would not be able to pay 100 percent of the benefits.
[00:24:53] And so when that happens, and I actually did a video on it about a month ago, I’m not going to remember the exact numbers. I want to say it can pay out 87%, but that could be wrong. So it would still be able to pay out a significant percentage of what it’s paying out now. So where does that leave us though as a practical matter?
[00:25:08] So when I was still working, I mean, I do have a business, but I really consider myself retired, but when I was still working and planning for retirement. I just assumed I would get nothing from social security and it wasn’t because I actually believed I wouldn’t get anything because I don’t think social security is just going to disappear.
[00:25:26] Politically, that just doesn’t seem like a tenable option, but it just seemed like a nice conservative approach to take. Now, some listeners may say, that’s great for you, Rob. I don’t know that I have that luxury. And if I didn’t, frankly, I would probably be reasonably comfortable assuming the payouts are going to continue as they are.
[00:25:43] Because I suspect. Our politicians will eventually figure it out. There’s three ways to fix social security, tax more, spend less by perhaps raising the retirement age or some, some combination of the two, right? There’s those only, that’s it, those are the choices and something along those lines will likely happen.
[00:26:01] I do think on a more negative spectrum. We are spending more and more and more on benefits, whether it’s social security, Medicare, Medicaid, and we’re going into more and more debt. So eventually there will be a reckoning. I have no idea what that’s going to look like or when it’s going to happen, but I think it would be silly to believe that our government can continue to borrow trillions of dollars.
[00:26:25] every year and without some negative consequences.
[00:26:27] Jesse: The bill will come due. Yeah. I hear you. All right, it has to. Right. What do you say to a listener going back to the social security assumption? Now, when I hear you say, Rob, that you, for the sake of conservatism, assumed No social security benefits to you.
[00:26:42] And maybe that moved around your safe retirement age by, I don’t know, a year or two or months or something like that. But what do you say to the listener up there where maybe social security is a pretty significant part of their retirement plan? And if they assume full social security, they can retire at 55.
[00:26:59] If they assume no social security, they can’t retire till 65. Is there some sweet spot in there they should assume for now? They can do a
[00:27:08] Rob: couple of things. One, They don’t have to assume all or nothing on the social security front, right? I mean, they could look at what it would pay out assuming it went, you know, the fund got exhausted.
[00:27:17] And again, I think it was 87%, but they could check that number. And it changes every year as they do different projections. So they could assume that. The other thing, And this is actually, to me, more important is, back in the day, you worked and then you were retired. That was it. You know, you had a little going away party there at work, and you got your watch or whatever, and you were done.
[00:27:36] Today, retirement looks a lot different than that for a lot of people. Either because they go part time, they do some consulting, I have my YouTube channel that generates some income. Other people have different side hustles. I think you certainly can just go cold turkey and go from working 40 or 50 hours a week to zero.
[00:27:53] But I think more and more people are gradually moving into retirement. And I’ve personally found that to be the sweet spot you’re asking about. And, you know, you don’t have to make a lot and work, you know, you can even go less than half time and that extra income, when you put it into a retirement planning software, it really makes a big, big difference.
[00:28:15] Between that and just going cold turkey.
[00:28:17] Jesse: Here’s a quick ad and then we’ll get back to the show. Serious question. Why do podcasters constantly ask for ratings and reviews? Yes, they do help highlight our shows to new listeners. They help strangers find us on Apple Podcasts and Spotify. It’s totally true and a good reason to ask for ratings and reviews, but I have something more important, at least more important to me.
[00:28:39] I want to know if you like this stuff. I want to know if you like my podcast episodes, my monologues, my guests, the information I share with you and the stories I tell. I want to improve and make your listening more enjoyable in the process. So yeah, I would love to read your reviews. And sure, if you throw a rating in there too, that’s great.
[00:28:57] If you like what I’m doing, please share it with me. It’s such a great feeling to read your feedback. I’d love to read your review or see your rating on Apple Podcasts or Spotify. Thank you. It’s funny that when you turn on the TV, if you turn on the financial news, which maybe most of our listeners shouldn’t be doing.
[00:29:15] I try not to watch too much financial news, but invariably when I do, they’re almost always talking about individual companies, individual stocks, and stocks get a lot of the fanfare. But. Cash and bonds can also play a role in retirement portfolios, and I know you’ve had some terrific videos recently on just that topic, so I have a bit of a two part question, and the first one is, should we view cash and high grade bonds interchangeably within our portfolios?
[00:29:42] Or maybe, zooming out even further, do those assets belong in our retirement portfolios, and if so, in what kind of amounts?
[00:29:49] Rob: They’re not equivalents, first of all, in my opinion. So you have two things with, I’ll call it fixed income, which can include cash and a savings account. You have credit risk, the risk you can’t get your money back, right?
[00:30:00] So high grade bonds and cash, cash being a savings account, maybe T bills with the U. S. government, which are short term bonds. We would say there’s probably zero credit risk, or at least it’s as free from the risk of default as we’re going to get, right? But then the other issue you have is what’s called interest risk.
[00:30:15] The risk that while you’re holding this bond, Interest rates go up, but you’re stuck with this bond that’s paying a lower interest rate. So that’s where the two you’ve described are different, or at least potentially different. If you’re comparing, say, an intermediate term investment grade bond or U. S.
[00:30:33] government bond with cash, long term, at least based on history, the intermediate term bonds are going to outperform cash. Now, I know that’s not true now. Yields on cash are higher. The yield’s inverted. So that’s why everyone’s excited about cash and T bills, and I get that. But it’s not going to stay that way.
[00:30:49] It’s going to change. Again, I don’t have any idea when, but it’s going to change and long term. And actually, Bill Bingen, the father of the 4 percent rule, you know, he wrote, he wrote a lot of papers, not just the 94 paper. And he looked at this question and he’s maybe 96 or 97. And he said, look, you can hold a little bit.
[00:31:06] You can take some of your fixed income, maybe put up to 10 percent of it in cash. That won’t affect the safe withdrawal rate of 4%, at least not by much. If you go much above that, or even worse, you take some of your stocks and turn them into cash, it’s going to really affect the safe withdrawal rate. So long term, I think both are important.
[00:31:24] You’re certainly going to want cash for money, say you’re going to spend in retirement over the next year. Maybe you’re taking that in the form of dividends from your taxable account. Maybe eventually you’ve got RMDs, required minimum distributions. And so you’re probably going to have that in cash because you’re going to spend it in the next few months or, you know, what have you.
[00:31:40] For the longer term stuff, I would stick with intermediate term bonds because long term they’re going to pay higher yields. It’s not a huge difference. We know that even small percentages, when multiplied over, several decades, which is how long a retirement can be, they matter a
[00:31:56] Jesse: lot. When you say this is a simple question of clarification, intermediate term, what does intermediate mean to you?
[00:32:03] Or maybe there’s even a textbook definition out there.
[00:32:05] Rob: I don’t know if there’s an official definition. I put cash at a duration or maturity of say, no more than a year. Maybe some people might go to two years. And then from that point up to maybe 10 years, I would say is intermediate. If you look at like a Vanguard total bond fund, which is based on a Bloomberg index, it’s usually around six, I think is the average duration, around six years.
[00:32:29] And that would be a good example of an intermediate term fund. How that affects us is when interest rates go up, the value of bonds go down. Conceptually, it’s easy. Let’s imagine we own a 4 percent bond 4 percent every year and the rates go up to 6%. And you want to sell, we want to sell that bond. A buyer is going to say, wait a minute, why am I going to buy your 4 percent bond?
[00:32:49] I can get a new one for 6%. Well, to convince them to buy that bond for us, we’re going to have to lower the price. And we’re going to have to lower the price so they effectively get a 6 percent return, whatever that number would be, right? So intermediate term bonds will go down in value more than, say, a T bill if interest rates rise.
[00:33:04] They’ll go up more if interest rates go down. In any event, you know, we could go longer term and you will long term probably get a slightly higher yield. But in my view, the risk probably just isn’t worth it. At least it’s not for me. So I just Intermediate term has been the sweet spot for me. And I think it’s what Bill Bingen used in his analysis.
[00:33:25] Not that that makes it right or better, but that’s sort of the difference.
[00:33:28] Jesse: Right. And when I see, I think Wade Fowl at one point published kind of a rehashing of the 4 percent rule or did his own version of the safe withdrawal rate series. And I’m pretty sure he used intermediate US treasury bonds as well.
[00:33:40] That just seems to be the gold standard when it comes to like benchmark in retirement planning, but it’s interesting bonds or cash fixed income in general. At least when it comes to the financial independence community, I think what I’m about to say is true, which is people squint their eyes at it and say, why do I even need it?
[00:33:55] Just look at the data. Look at how much stocks outperform bonds over the long run, which is true. Stocks have always outperformed bonds over sufficiently long periods of time. But that being said, I mean, do you feel like bonds belong in the average person’s retirement portfolio or what kind of questions might you pose to your viewers or our listeners today?
[00:34:16] As to questions they should ask themselves as to whether bonds belong in their portfolio.
[00:34:21] Rob: Well, the, the big question, and this applies to a lot of different scenarios is. Whatever you’ve decided to do with your portfolio, can you stick with that no matter what? So we’ve had a really, really good run in stocks.
[00:34:33] I mean, there obviously 2022 was bad, a couple of months for Covid was bad, end of 2018 was rough. But since the Great Recession, it’s been nothing but good times. And you know, uh, it’s been a big party on Wall Street. How are you gonna feel when, when another decade, like if you look at 2000 to 2009 or 10.
[00:34:53] It was brutal. Stocks were basically flat. We had three years, bad years, and another two years were bad. Are you going to be able to stick with your 100 percent portfolio, 100 percent stock portfolio? I don’t think most people will be able to do that, particularly when you’re thinking about retirement. I think taking some of the volatility out of the portfolio is for most people, probably a good thing.
[00:35:15] Now, again, how much, what exact allocation you get, A lot of that comes down to personal preference. I mean, there might be some wrong answers at the extreme, but there’s a lot of right, uh, reasonable answers in the middle.
[00:35:26] Jesse: What you described there, that idea of what is the allocation that you can stick with through thick and thin, and P.
[00:35:32] S. the last 15 years isn’t probably the time period that you should look at to make that answer, right? But I’m assuming, Robin, and correct my assumption if I’m wrong, that you were probably invested during that 2000 to 2009 period. I was not. I was 10 to 19 during that period. I was not invested yet. So could you share with us just some of the memories that you have or some of the emotions that you might’ve felt during that period, especially during the dot com bust and then the great recession?
[00:36:01] Rob: Well, I was, you know, I was practicing law at the time and I also had started a personal finance blog back in 07. So I’d started writing about personal finance right when all the trouble hit. Maybe I’m to blame. I don’t know. I was still investing every month, 401k contributions, IRA, whatever. So in my mind, I thought I’m just, I’m getting more shares of whatever mutual fund I’m buying because the prices are going down and that what the prices are doing now, totally irrelevant to what I’m going to care about when I retire.
[00:36:34] Now, of course, once you retire, that changes, right? But at least if you’re still accumulating assets, you actually want the market to crash. You don’t want it to do what it’s doing right now. It may make you feel good because you look at your balance and you’re excited about it. And I get that. But you really want it to tank and be low for you’d love another 2000, 2002.
[00:36:53] And that’s what I focused on. Yeah, I didn’t deviate from my plan at all.
[00:36:58] Jesse: Do you remember any of the, whether it was colleagues or just people at the barbecue, what was everybody else’s calm and as rational as you were?
[00:37:05] Rob: Well, some would say I was irrational. I have a good friend. Well, I don’t see him very often now, but a good friend who got completely out of the market and he’s, he’s done very well for himself.
[00:37:14] So it’s not going to matter. But he got out of the market and he told me, and I believe it’s still true today. He goes, I’m never getting back in. I’m done. And he went and put all his money in real estate, including. A lot of properties that are not income producing, like he just bought raw land and it just sits there.
[00:37:29] Bought a couple of homes that he owns. So he put all his money in real estate, uh, and most of it not income producing, which is not something I would personally recommend. So yeah, some people just said, I can’t take it. I’ve got other family members who Got out of the market later with profound regret.
[00:37:45] And what’s interesting, by the way, I find it interesting. These are people that I, I’m very close to. We can talk about these things. Not one of them talked to me beforehand because they knew what I was going to say and they didn’t
[00:37:55] Jesse: want to hear it. But we’ll try to keep that wisdom in mind just in case something happens in the next few years, which when you look at Something
[00:38:01] Rob: bad’s
[00:38:01] Jesse: going to
[00:38:02] Rob: happen.
[00:38:02] There’s no doubt in my mind. I don’t know when, but the longer the good times last, the harder bad times when they come. And I’m not one to predict gloom and doom, but I am one that believes in reversion to the mean.
[00:38:15] Jesse: Yeah, same. And that word predict right there, there’s a great Howard Marks quote, really like reading Howard Marks writing.
[00:38:23] He goes, uh, it’s pretty simple. You can’t predict, you can prepare. And I think that’s what we all need to do, right? We, we can’t predict when the crash will come or just the, even if the simple bear market as it were, but we can prepare whether it’s mentally prepare or just put our portfolios in a place where we’re okay writing it out through thick and thin.
[00:38:41] When I think about my listeners, Rob, and potentially your viewers, and just the idea of DIY retirement preparation, or just being the person in their community, who’s pretty knowledgeable when it comes to personal finances. And they, they want to level up with some of the more complicated stuff that you and I talk about.
[00:38:57] There’s some, some commonalities there. And because you interact, I think, with many more fans than I do, your YouTube channel is huge. You might get the chance to spot more patterns of what some of these people are going through. So I’m wondering if you could share one or two of the, the most common low hanging fruit, so to speak, that you see from the people who you interact with who are pursuing financial freedom.
[00:39:20] I’m just thinking low hanging fruit, things that people see all the time and they can and they should fix it ASAP.
[00:39:26] Rob: Several come to mind. One is keeping your portfolio simple and low cost. And where I get a lot of emails from folks who hired an advisor. I mean, it’s unbelievable. Sometimes they’ve got a half a million bucks and they’re in 30 plus funds.
[00:39:42] They’re paying the advisor 1 percent or more. And the, many of the funds are expensive. And if it’s in a taxable account, there can be built in gains such that to unwind this mess, you’ve got to, you’re going to trigger a bunch of capital gains. I would say a couple of things. Keep your portfolio simple, a good portfolio, a solid, reasonable portfolio has got nothing to do with how many funds you have.
[00:40:04] You can have an, a world class portfolio with a single fund with two, three, five funds. easily. And, and by the way, I would have the same view if someone came to me and said, I just won the Powerball, I got a hundred million dollars to invest. I’d say, great, here are three funds, go crazy. That’s what you need.
[00:40:22] The second thing I’d say is in a taxable account, be super, super concerned about complexity. I mean, in a retirement account, at least you can fix it without tax consequences. In a taxable account, you can’t. The second related thing is fees matter. A 1 percent fee doesn’t seem like much. You could probably get more cash back from your credit card than 1%, but when you pull that out of your portfolio every year, the compounding effect destroys wealth.
[00:40:47] It’s not that you don’t, maybe you need help and you can get help for a flat fee, an hourly fee, but paying an advisor 1 percent is just nonsense. And I can’t tell you how many people have emailed me and eventually said, yeah, I did the math. It’s just eye opening. It’s easily cost you hundreds of thousands of dollars in your life.
[00:41:05] In some cases, seven, seven figures. That would be the second thing. I’ll just throw in one other thing is, you know, how much you save matters a lot. And small differences. matter. 500 bucks a month, a thousand bucks a month. Don’t dismiss the ability to increase that by 25. Particularly, because remember you’re automating this, right?
[00:41:25] You’re automating your 401k, maybe even with an IRA you can automate that, or into a taxable account. So, when you get that raise or whatever and pay off that car and now you’ve got some extra cash and you can throw another 100 bucks at it, over enough time, it’s going to make a huge difference. I would not be dismissive of that.
[00:41:43] Jesse: I would look
[00:41:43] Rob: for
[00:41:43] Jesse: the opportunities to do that. Absolutely. I mean, those small differences going into the investment accounts, it’s, it’s one of the few things that you can control, right? You can’t really control what the market does, but you can control what you’re spending. Hopefully over a sufficiently long period of time, you might be able to control what you’re earning.
[00:41:59] And that monthly cashflow totally is the foundation. And yet when it comes to advisors, this is a common conversation. Hourly fee, flat fee, AUM fee. Hopefully you’re working with a fiduciary who is at the very least their fees are easily explained. But asking that question of, you know, if I’m going to pay X, what am I getting for that?
[00:42:18] And I think it behooves anybody out there. You really have to justify to yourself that, you know, that it’s going to be worthwhile for you that because you’re right. Some of these fees, whether it’s 10, 000 bucks a year for planning a 1 percent or a 0. 75 percent fee, 400 an hour for a plan. It can add up, but you have to make sure you want to do your due diligence beforehand and say, this is, I’m going to get my money’s worth out of this.
[00:42:40] Otherwise, just like you said, it compounds in the wrong direction. And that’s something we want to avoid. Rob, last question for you. Now, we’ve been talking about your YouTube. You can be sure that not only will your channel be in the show notes, but even some of these videos that I got some of my questions from, we’ll throw that in the show notes if you want to hear Rob’s answers on his channel.
[00:42:59] But is that the place where people should go check you out, Rob? Is there anything else that you would point our listeners to?
[00:43:05] Rob: Other than the YouTube channel, I send out a free newsletter every Sunday morning. And you can get a link to it under every YouTube video, or just go to robberger. com forward slash newsletter.
[00:43:15] People seem to like it. I, I enjoy putting it together. It’s basically links to articles around the internet. Most of, most of it is not things that I write, but things that I find interesting related to retirement planning, investing, and then a section on just things that I find interesting, which is usually related to health, fitness, technology, other things.
[00:43:33] Yeah, but those two, YouTube channel and the newsletter.
[00:43:35] Jesse: And it’s a good read. I’m a subscriber. I open it every Sunday. Once in a while, I think maybe twice now, I’ve seen a best interest article in there, which I’m very grateful for, Rob, because I can always tell something’s going on because all of a sudden I’ll get some new subscriber emails out of nowhere, like a bunch all at once.
[00:43:51] I’ll say, okay, someone shared it. And if it’s a Sunday morning, there’s a good chance it was Rob. Rob, thank you very much. Rob Berger. YouTube star. Thank you for joining us here on the best interest podcast. Thank
[00:44:03] Rob: you, Jesse. Appreciate it.
[00:44:05] Thanks for tuning in to this episode of the best interest podcast. If you have a question for Jesse to answer on a future episode, send him an email at jesse at best interest dot blog.
[00:44:16] Again, that’s jesse at best interest dot blog. Did you enjoy the show? Subscribe, rate, and review the podcast wherever you listen. This helps others find the show and invest in knowledge themselves, and we really appreciate it. We’ll catch you on the next episode of The Best Interest Podcast.[00:44:37] The Best Interest Podcast is a personal podcast meant for education and entertainment. It should not be taken as financial advice and is not prescriptive of your financial situation.