Is Mailbox Money Always A Good Thing?

Sep 11, 2021 | Financial Planning, Lifestyle, Retirement, Tax

On this podcast, Karl Eggerss explains why too much fixed income can be a detriment to an overall financial plan.

Hey everybody, welcome to the podcast. This is, Creating Richer Lives, and the website is creatingricherlives.com. Our telephone number, 210-526-0057. This is your first time, welcome aboard. Where have you been? We have a ton of podcasts on our website. We’ve been doing this for a long time, covering all sorts of subjects that we think will help you in your financial situation from beginners to very sophisticated techniques. And we do estate planning, financial planning, just all sorts of things on the podcast. We talk about the markets, I bring on guests from time to time. I really like to mix it up. And I like to, again, try to bring you what I see from day to day when I talk to clients and have interactions, and try to bring maybe those conversations to you guys so you know what others are thinking, or what’s hot in the news and try to, at least, cut it off in the sense that if a bunch of people are asking me, for example, about cryptocurrencies, then I’ll probably do a podcast about it very, very shortly.

I do try to ebb and flow and pivot with this podcast. And coming into it, I never really have anything written down. I try to, again, take what’s happened during the week and bring it to you guys. And so on this episode, we’re going to talk about two main things. Number one, where the market is. We have, I think, the longest losing streak for the markets since February, but also I met a couple of people this week that both were trying to solve an income problem in retirement. I don’t mean problem, meaning they didn’t have enough, it was the way they were doing it. They have enough assets to retire and they’re going to have a comfortable retirement, but there’s some technique involved. There’s some finesse involved. And so I wanted to bring you that because it could help you when you’re thinking about Social Security, and should I get an annuity for income? And do I take a pension or a lump-sum rollover? Those types of decisions can really impact your overall net worth.

We will do that in just a minute, but first, the stock market. Well, every single sector in the S&P sectors were down on Friday and they were also down for the week. And so everything was red across the board. I don’t remember seeing that in quite a while in 2021, especially, I mean, it’s been a pretty low volatility years you know. Now the volatility index is actually back up above 20 and it was the big winner on the week. The volatility index was up 11 and a half percent on Friday, but it was up 28% during the week. It’s back above 20. What does that mean? Well, not a whole bunch right now, but again, we need to continue to watch that because it’s been a very calm year. We haven’t had a lot of big corrections. We’re certainly do.

Corrections don’t mean that it’s the end of the bull market, but it seems like we’re in this pause pattern. Everybody’s waiting to see what happens with all sorts of things. And they have enough stocks, so they’re pausing. That’s what it feels like to me. But some of the big winners this week where the volatility index, as I mentioned, uranium. Uranium’s on a huge run. You may be thinking, well, what’s the deal with that? Well, there’s an ETF for uranium, there’s uranium stocks.I’ve been watching that. But uranium really since, and this is only going back to August 20th. We’re talking just a handful of trading days ago, is up over 50% and was up 10% on the week. Natural gas up about 6% this week. On the flip side of what we saw, on the negative Bitcoin, a crypto crash midweek.

And so we the Grayscale Bitcoin Trust (GBTC), was down about 10%. The gold miners were down. The cannabis stocks were down, silver was down, real estate was down. So pretty negative across the board. If you look at the major indices, what we saw as the Dow Jones finishing down about 2%, the Standard and Poor’s almost 2%, even the QQQ, the biggest Nasdaq-100 stocks down 1% as well. And interest rates on the week rose a bit. Where are we in the big picture? Well, as I mentioned, we’ve had this nice steady uptrend for most of 2021. And really, in the last, I would say, this week, we’ve seen some trends, if you’re one that watches technical indicators, if you look at moving averages and you look at the markets and draw charts, which I love to do, it’s just what I like to do.

I don’t think that’s the only game in town. I think we clearly have to look at the fundamentals, the economics, interest rates. And we try to do all of that at Covenant to come up with our investment thesis for our clients and our model portfolios, and then tailor them to each client, their particular needs and situation. But as we look at the Dow Jones, it looks like it’s clearly rolled over. Now, what we don’t know is when it rolls over, does that mean it’s over, the trends done, we’re heading down? Not necessarily. It’s just a lot of people see that, it’s a self fulfilling prophecy, right? When they break, I’m not the only one that sees it. So how far down do we go? We don’t know. What we can do is monitor in the long-term the big picture, what’s the supply demand look like? And we’ve had some churning in the last few months, and you’ve probably noticed it in your portfolios pretty much, regardless, of how you manage your portfolio.

If you have somebody managing it, it’s just, there’s been a lot of churning. A lot of, I would say, moving from one sector to the other, but not a lot of overall movement, we’ve grind a little higher. But the Dow Jones at this point where, at least, we’re closed on Friday is back where it was now, essentially, back in may. Okay. We’re looking at about four months of sideways. Now, again, it’s churned higher, but now just in the last week, it’s given up some of those gains. And so, we’re just not making material gains at this point. And I think the reason why, and I mentioned this on an earlier interview, and you can always go to creatingricherlives.com on their free resources and you’ll see various TV appearances, I might do a radio interviews, and I talked about stagflation.

And some of you may be thinking that, some of you may be reading about it. Some of you may say, what is it? Some of you may remember it from decades past. But essentially, it’s when things are going up in price called inflation, we all know what that is. But at the same time that the economy is slowing. That is stagflation, because you’re going to get inflation when the economy’s doing well. But what happens when the economy’s not doing well, or it’s slowing down, at the same time, prices are rising? And that’s the concern. It’s the concern because we have to grow. But if things are costing more, then all of a sudden, that’s a bad scenario. Now there’s major stagflation, minor stagflation. I’m not really calling for major stagflation. We just believe it’s going to feel like that perhaps over the next few months.

And I think you’re seeing that. Anybody I talk to says, “Boy, these prices sure are going up. Everything’s more expensive.” And over my career, everybody always says that even when things aren’t really going up in price. But generally, we want things to go up in price. We want some inflation. That sounds weird, but we do need that. But if things are going up in price at a little faster pace. Now we’ve been saying on the podcast for many months that this V-shape recovery, the supply issues are going to make it feel like the 1970s for a while, where inflation is just crazy, but it would taper off a little bit. And we still believe that. But inflation will be higher, we believe, over the next few months than what you’ve been used to over the last few years.

It’s more important than ever to make sure your portfolio is going to keep up with inflation at the very least, and hopefully, beat inflation. Okay. And so I think we’re in this holding pattern right now. And for some of you who have a ton of cash, you can still cherry pick your areas. It doesn’t mean we wouldn’t be buying certain things, but somebody just going into the deep end of the market right now, you may want to just put things on pause a little bit, watch what’s going on. Okay? But here’s the thing, the reason I bring up the stagflation comments is because, again, it’s more important than ever that your portfolio keep up with inflation. Now, how do you do that? Well, there’s lots of ways to do that. Number one is stocks, the equity markets, whether it’s via mutual funds or exchange traded funds or individual equities. That is one way.

Now, there’s certain stocks that may be doing better than others, but stocks beat inflation over the long-term. We know that. Real estate beats inflation over the longterm. Inflation, when it’s picking up, bonds tend to have trouble with that. And you saw a little bit of interest rate bumpiness this week, but for the most part, they’re still pretty low, but if they start to rise, it is a domino for other things. Because it’s important to own real assets and commodities and stocks and real estate and things like that, you have to be careful about how much fixed income or predictable income that you have in your life. And here’s what I want to talk about. I literally had two conversations this week, in-person with a couple of people that were entering into retirement and what they were doing was, “Hey, my income’s dropping because I was working and now I’m not. And because it’s dropping, I need to replace that income as quickly as possible from any vehicle I can.”

The natural tendency is to go grab Social Security as quickly as possible. Grab the pension at work instead of the lump-sum rollover. Go do all those things out, whatever income you can get, take your portfolio, make it income generating. And now my expenses are covered by my income. I’m going to be good to go. The problem is the more you do that, over time, your income is not going to keep up with inflation. For example, the gentleman I talked to said, “I have a pension.” I said, “Does have any inflation adjustment associated with it?” “No, what I get today per month is what I’m going to get for years and years and years.”

And he’s 65. Well, his costs are going to keep going up, but his pension won’t. You can imagine one line of income is not going to go up as fast as the expenses, even if he’s doing the same thing 20 years from now, in terms of his daily life and his expenses, they’re going to go up in price. And that gap has to be filled with your savings. Your nest egg, what you’ve saved your whole life. And so the important thing you should be doing is having a plan before you go into retirement. You look at all your options. If you are married to a teacher, or if you are a teacher, especially, let’s say the Teacher Retirement System of Texas, jumped familiar with, you’ve got a lot of options when you retire.

Do you want a lump-sum? Do you want a pension? Do you want a partial? Do you want your spouse to have a certain percentage if something were to happen to you? There’s tons of different decisions and you can’t make that decision in a vacuum. You can’t say, “Well, I just want the highest income possible,” because that may not be the best scenario for your particular financial situation. And so what you have to do is create a financial plan, and some people say as, financial plan, isn’t it just trying to predict the future? No. The financial planning process, while sometimes can be elementary, it gets more sophisticated when you’re trying to find out certain answers to certain decisions. Like, should I take a pension? Should I take a lump-sum roll over? When should I take Social Security? What are my tax brackets going to look like in the future based on certain income?

See, you can make certain decisions in isolation sometimes, but until you put them all together in a plan where they play off of each other, then you’re just guessing. But when you put them all together, then it starts making sense. For example, if a couple, one retires and one still working, the tendency is for them to go get Social Security to replace their income that they just lost. But they may not need that, they have big savings. One spouse is still working. Defer the Social Security may be the best decision because they still have income to cover their expenses. Defer the Social Security, let it go up to 8% per year and then take it. Now, is that right for every situation? No. But again, what I’m trying to point out to you is don’t just try to fill up the mailbox with mailbox money, just to feel good that I’ve got an income. I feel comfortable.

It depends on the type of income you’re getting. For example, instead of having that pension, what if it was, hypothetically, a basket of dividend stocks that not only paid you the same income, but actually the income goes up each year because companies tend to raise their dividends? Versus fixed income like a pension or a bond. That’s the problem, is if you’re going to get income, what type of income are you going to get? But you can always take income from your portfolio. Now, let’s fast forward a little bit and say, what if you’ve already made that decision? You’ve got all these income producing things. You’re on Social Security. You took the pension at work. Okay. Maybe you purchased an annuity way back in the day and some insurance salesman sold you something and you’re stuck in it and you get income from it now.

You’ve got all these fixed income things and you feel pretty good because you know what your monthly income looks like. Here’s the thing, think about that as a bond, even if they’re not bonds, picture it as a bond, it will free you up to go and take your nest egg, your investment portfolio, and invest it perhaps a little more aggressively towards the stock market, towards equities, for growth to beat inflation. Because if you take all that into consideration, now you have some stocks and some bonds. Don’t just look at your investment portfolio, look at your investment portfolio in conjunction to some of your guaranteed income. And again, this is something that needs to be done. You can’t do it in your head. You got to use some system. We think we have the best system at Covenant, but use a system. And it can’t just be a calculator.

Because again, what happens is based on what decision you make your income, it’s going to affect your taxes. And that’s why you need to take in consideration your taxes when you’re making these other decisions. And you can’t really do that unless you can forecast out several years and look at those cash flows and try to match up. If you know you’re going to not have some income for a couple of years, how do I take advantage of that? Not why is it scary, but how do I take advantage of it? Should I be pulling money out of my IRA sooner rather than later? Should I be doing a Roth conversion? What about giving money away, should I be doing it this year because there’s different rules in 2021 than there might be in 2022? Should I use some trust or fund vehicle?

All those decisions are really financial planning. But the point of this conversation is, don’t necessarily try to just get mailbox money at whatever cost. There are bigger decisions. There are bigger reasons why you might not want to do that. It’s all about your overall net worth and your overall needs and what you’re trying to do in your expenses, not just what literally is coming in the mailbox or these days, what’s deposited in the account electronically every first or 15th or 31st, whatever it might be. I hope that’s helpful. I know that you may need to listen to this again, but I ran into that situation twice. And again, I understand that it’s a scary time when you’re going into retirement, am I, can I really do this? I am done working, can I really do this? Do I have enough money?

And so there’s a tendency to, where do I get the income? And sometimes that can cost you in the big picture in terms of taxes and net worth and other things. The couple I talked to, they literally said, “I feel so much better now that I’ve talked to you in your company here.” And it was because we were talking through some of these decisions. We weren’t giving them answers. We were posing things they should consider before making the decision to take the pension lump-sum, to take Social Security. When the spouse should quit her job, he just quit. When should she quit her job? They were very appreciative that now we’re going through the process of fine tuning it and optimizing it. Sometimes the issue is not, can you retire? You probably know if you can retire, you may know you have plenty of assets, but we want to optimize it.

We want you to have this big laundry list of things you want to accomplish in life and be able to do it. And if you make wrong decisions early on, right at retirement, it’s going to impact that in a negative fashion, potentially. All right guys, pretty quick podcast today, but I wanted to get this out to you. It was on my mind. I saw it, again, taking stuff from what I noticed this week in my practice and bringing it to you almost in real time, pretty much in real time. Hey, don’t forget, creatingricherlives.com is the website, and you can always give us a call at 210-526-0057. You guys take care. We’ll see you back here on the next episode.

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