I'm starting to think I enjoy collecting these FINRA series licenses for fun or something.
I did it with the Series 3 Commodities Futures exam a few years back.
I studied for months, got the license, then immediately took a job at a financial tech startup building rules based trading technology (no pork bellies there).
But hey, at least now I know how to calculate crack spreads :)
This time around I got the Series 65 (Uniform Investment Advisor), but watch as I gravitate straight back to trading. I can't, though - I'm bound and determined to actually put this one to use as intended!
Studying for the 65 did, however, get me thinking a lot about something that I already spend an inordinate amount of time pondering: retirement.
Now, as I’ve recently learned, I must disclaim before I present forth anything that could be even remotely construed as investment advice that THIS IS NOT INVESTMENT ADVICE! I am not an advisor and what I write is general information for educational purposes only.
Now that that's out of the way...
I’ve had multiple people ask me retirement questions of late, so I’m going to cover some of them below as they might be useful to others.
What I want to do is give an overview that someone can read for ideas before they meet with their (registered) investment advisor/rep (preferably a fiduciary) so they have a better understanding of what's being discussed in the meeting.
One of my friends mentioned she wants to talk with an investment advisor, but not before she reads up on the investment concepts they might discuss. This way, she can go into the meeting feeling educated and understanding what the advisor is talking about with her. This made sense to me, and I'd imagine others must feel the same way (investment jargon can be intimidating if you're unfamiliar with the industry!).
Seemingly common retirement issues that have come up in conversation:
1) Most people underestimate (or don’t even get around to thinking about) how much they will need in retirement to maintain their desired lifestyle.
What most people don't realize is that they will need a lot more in retirement than they think. With people living longer today and potentially experiencing unforeseen medical expenses (or any expenses, for that matter) later in life, they end up needing a heftier amount than they thought to maintain their desired style of living, feel secure, and not worry about money.
To put it into perspective, a million dollars might seem like a lot now, but in retirement terms, it really isn’t that much. Especially if you’re someone like me who loves organic vegan snacks! We are living in a world where an affinity for organic blueberries has become more expensive than certain illicit habits.
Retirement planning might not seem fun and amusing to think about now, but like running and eating kale are good for your physical health, early retirement planning is essential for long-term financial health.
2) When predicting how long they will live, most people undershoot.
“You can be young without money, but you can’t be old without it.”
- Tennessee Williams
Being young and poor can be endearing, but old and impoverished? Not a fun place to be.
No matter how spiritualized or selfless people try to believe it is, poverty sucks.
Maslow's hierarchy of human needs lists security, employment, and resources as foundations that need to be met in order to happily achieve the higher levels of love, freedom, and of course, the all-important self-actualization.
If you're constantly worried about meeting your basic human needs, you won't be able to get to the good stuff. So plan ahead to make sure you have enough resources in the second half of your life.
Most people undershoot how long they will live, which puts them in jeopardy of outliving their money.
For me, aside from it being great that I live a long time, the thought of outliving my money is a scary one. So, I just try to over estimate by using Jeanne Calment, oldest human documented with her 122-year lifespan, as a benchmark and assume I’ll live to 120.
It’s a win/win. Worst case, I have more than enough money for my entire life and can eventually donate it or pass it on to loved ones.
(Fun fact: Calment attributes drinking Port wine every day and eating two pounds of chocolate a week to her longevity.)
With our amazingly rapid advancements in life sciences and technology, human lifespans will just keep on increasing.
As pensions continue their exodus and the employee-controlled 401(k) is now a company’s retirement modus operandi, it’s especially important to take responsibility for your long-term financial health. It can be an uncomfortable mind exercise to force yourself to think about planning this stuff, but believe me, it is imperative.
3) I’ve been hearing a lot of “the market is in the tank/ I’m scared to even look at my investments/retirement portfolio, etc.” relating to 2018’s equity market performance.
Because I was just in Nashville this weekend, here's one from country musician Chris Jansen’s Fix a Drink:
“I turn on FOX news and then CNN
But it's the same dang thing all over again
The world's in the toilet and the market's in the tank
Well I can't fix that, no
But I can fix a drink”
The news usually always says the sky is falling, everything is a disaster, and the market is crashing or about to crash. But, if you can just tune out the noise, it is a lot less stressful.
Yes, in 2018 the S&P 500 did sustain a near ~20% drop. It was a bumpy ride, but as of today (February 1, 2019) it's up 14% off it's previous low.
The point is, it’ll recover. Maybe not in the next few days or weeks, and maybe not before sustaining another 40% drop (knock on wood that isn’t the case) but the US equity market will recover and over the long term, will continue to grow.
I used to not believe in buy and hold investing and wrote an entire dissertation explaining why on my blog awhile back. Now that I’m a bit more ~*enlightened*~, my views have changed.
I believe in buy and hold for a portion of a portfolio IF the position is in a diversified broad market ETF rather than a single stock. I view my speculative trading as a totally different animal than my safe, low risk, long-term investment portfolio. One is fun and exciting and something I do because I genuinely enjoy it, the other is where the majority of my finances are kept safe.
My long-term buy and hold positions are in broad market ETFs.
To quote commodity trader Jesse Livermore –
“It never was my thinking that made the big money for me. It always was my sitting.”
Just hang tight.
But, this does bring me to my next retirement thought…
4) MAKE SURE YOUR PORTFOLIO IS NOT TOO RISKY!!
I sound like the fun police here, but for real, as much of an impulsive gunslinger as I am in 98% of my life choices and actions, when it comes to investing, I am very safe and cautious.
My current favorite breakdown is Ray Dalio's All-Weather portfolio (and this is his recipe, not mine).
30% in U.S. stocks
40% in Long-term U.S. Treasury Bonds
15% in Intermediate-Term U.S. Treasury Bonds
7.50% in Gold
7.50% in broad Commodity basket
I like this model portfolio because it is on the less aggressive side with only 30% equities, it's diversified, and pretty risk averse.
A huge part of investment and financial planning is based on one's individual goals and personal factors, so there really is no one size fits all portfolio. Age and when an investor plans to retire are big pieces of the allocation consideration pie. But, I like this model portfolio for inspo (especially because a billionaire trader came up with it).
I also always consider the old “take 100 and subtract your age” where your age should be the percent of your portfolio allocated into equities, and the remainder should be in fixed income. This is very general, but it is a good reminder to think about how risk (equities) should be reduced the closer you get to retirement. The younger you are, the more time you have to recover from a drop.
One thing I hear that surprises me is how aggressively some near-retirement age individuals have their portfolios set. I don’t like the thought of people that are close to retirement losing half their assets due to an equity market crash. So it is smart to speak with your financial advisor to ensure your risk exposure is controlled.
5) Quick asset allocation 101 (as it relates to retirement)
There are so many investment options available today, here are a few basic, common ones to get started with that will likely come up in retirement discussions with investment professionals:
Treasury fixed income investments
Like those mentioned in the sample portfolio above, these are U.S. government fixed income investments.
Short term: Treasury bills (T-bills) - short maturity of less than a year.
Intermediate term: Treasury note - one to 10 year maturity.
Long term: Treasury bond (T-bond) - more than a 10 year maturity.
Generally speaking, the longer the maturity, the higher the interest rate payment to the security holder (I could explain how all that works and go on and on here with yield to maturity calcs, bond market pricing etc. but I’ll spare you).
The most important thing to remember with treasury fixed income is (for the most part) there isn't risk of default since they are backed by “the full faith of the US government” (I know people say "oh with Trump etc. etc." but if we get to a point where the US government is defaulting on your fixed income investments there will be a lot more to worry about than that).
The "risk" is mostly interest rate risk (you buy a bond with interest rate A, then interest rates go up and newly issued bonds pay investors more, but you're stuck with a lower rate on bond A, the market price of your bond goes down, etc.). Also, inflation can put long-term bonds at risk (Treasury Inflation Protected Securities, or TIPS, can offer protection against this).
This is why the T-bill is considered "risk free" in the investment industry as it has a short maturity.
Exchange Traded Funds (ETFs)
I learned about ETFs very early on in my career and have always loved them, mostly because they allow you to invest with built in diversification and gain exposure to assets you might not normally find yourself involved with directly.
In theory, investing in a broad market ETF (such as SPY or VOO) is less risky than investing in just a single stock since there is a lower likelihood of volatility in a diversified ETF.
This comes down to the risk market ETFs are exposed to, which is systematic, or overall market risk that can't be remedied by diversification. Individual securities such as a single stock are subject to unsystematic risk; that is, threats that one business or industry might face that can be diversified away.
When you speak with your advisor, talk about the benefits of your equity exposure being in broad market ETFs.
Also, because ETFs are passively managed, they're cheaper than mutual funds. Most fund managers can't beat the market consistently long-term anyway so you're better off putting your money in a low expense ETF.
A REIT is a real estate investment trust and these allow you to gain exposure to real estate. You can do REITs directly or a REIT ETF. I like REIT ETFs to start with to gain exposure to real estate (like the Razzle Dazzle bird, ETFs are always a good choice for the non committals looking to just "dip their toe in").
I thought these were totally boring at first until I learned about the indexed annuities, which are a very cool concept.
In short, they allow the annuitant to capture some (or all, in some cases) of the upside of the market’s returns when it's performing well, while avoiding the downside. The participation rate is usually capped, so for example, if the market returns 10% and your annuity has an 80% cap, you'd get 8% of the gains.
When and if the market has negative returns, the annuitant avoids them and has either a minimum rate of return (usually low, like ~2%) or no return.
I’ve heard the insurance companies do this by using options trading as the magic behind the curtain, but I don’t know for sure.
Makes sense, though.
There are also fixed annuities where an annuitant pays a specified amount to receive a tax-deferred payout for either a set period of time or for life.
Retirement Planning: the Sooner the Better
I know this was a ton of info, but it's super important because a lot of people don't think about retirement enough early on.
I think to some extent, personal finances are kind of a mess for a lot of people because society considers money to be a "taboo" topic to discuss (along with things like how people handle monogamy, pay disparities between women and men, and all that other stuff).
Because people don't talk about their personal finances openly, there isn't much transparency on wtf they are even supposed to be doing. Since I spent my whole career working with money as the product, I just see it as the commodity it is and can talk about it easily so I like to spread the insights and tell it like it is :)
Hope this is helpful!