Retirement Planning in a Volatile Time

Obviously there's a lot of things going on. As I said, we are dealing with topics of information such as inflation. Okay. Jerome Powell has been speaking often and related to trying to bring interest rates down to 2%. That's having an influence on people's minds. We also talk about the looming recession. People are talking about, does the market already have that built into where the levels are right now? Are we going to be having a soft landing? Again, it raises question marks for people as far as their own portfolios. We also take it to account geopolitical impacts. We're talking about starting with Ukraine and Russia. Well, we know that that is impacting global food supply as well as global energy supply and how does that impact what's going on here domestically and globally. We also talk about, in essence, the reopening of China from COVID supply chain issues related to that.

And the last thing that's really more current is as we're recording this, is our domestic political scene. We just had news yesterday about, we're talking about the debt ceiling and the divide of Congress, where is that going to shake out? So Marc, Michele, these are a lot of things that people are thinking about, our clients and just people across the world are concerned about. It's a lot of different things to consider, but let's try to talk about. And Michele, let's start with you. With all of these factors potentially affecting the economy in different manners, there's obvious and warranted concern for people. So how does does that impact us, the individual who's kind of nearing retirement?
Michele Martin:It's a very challenging time, Larry, and particularly when you think about the fact that we have come off of over a decade plus of very low inflation. So these are shocks to us as we start going to the grocery store and looking at the cost of doing things that we've normally done where we really haven't seen much pricing pressure for a very long time. It also speaks to the fact that we start to think of what a new norm looks like and the markets have been incredibly strong over the last three to five years to a point where that has been almost an extreme in terms of the type of returns that we become accustomed too. So a big part of this is how we begin to adjust to what Federal Reserve is doing to normalize price increases and to begin to get things under control.

And even though it is somewhat painful to see higher interest rates, it also is a positive and a silver lining for people that are savers and nearing retirement because we are going to see for the first time again, in a decade, interest rates that are rewarding fixed income investors, people that have bank accounts, we're going to be getting closer to a normalized return in the bond market. It will not be unusual for us anymore to see 4 and 5% returns. And that really helps us, for those of us people that are planning and thinking about what retirement looks like, that becomes a real ballast to create income in a portfolio and to reduce volatility as we go forward. I think the other thing that's really important, Larry, is that for anyone, not only those entering retirement, but particularly if you have a plan for retirement, is that you've actually done the work, created a plan and understand what your parameters look like.

What is your risk tolerance? How much risk can you or are you willing to take? And it's really important to pay attention to that, to work with your advisor and to actually stick with that over many market cycles. Retirement is a long journey, hopefully for everyone. And so you're planning for the long term. This is not something that is going to start and end in 12 or 24 months. You may be coming in when the market's down, but you have a very long time horizon in which your investments and your portfolio is going to work on your behalf.
LS:Those are great points, Michele. And I would say what you're referring to is basically when you build a game plan, obviously we need to be monitoring it as your world evolves, but also they need to have somebody who is an emotional circuit breaker because what you're talking about it's very easy in times like these to think about diverting from your game plan. And that's usually counterintuitive to the success of your long-term game plan. So we want to make sure that people, cautionary tales, these are not times to panic. Sometimes it even creates times for opportunity for us.
MM:I was just joking with someone in our office yesterday about that and I told him, I said, this is a time of opportunity for everyone that's still investing. Market valuations are down significantly from where they were a year ago, and we all know the adage that you buy when the market is down. So dollar cost averaging over time, taking the emotion out of it, those are all key factors in being a prudent and creating a sustainable portfolio to carry you through.
LS:Absolutely. And it's uncomfortable, Michele, right? It's really uncomfortable to be having, we've had conversations with clients back in 2008 when that recession, the great recession transpired, and those clients who had liquidity, it was a time that it's hard for them to feel it at the moment. But those are the ones worth handling this now that we got them involved in the market at that point in time. Uncomfortable, but sometimes again, our emotions get the best of us and we're got to make sure we divorce ourself from those emotions to make sure we're making more prudent decisions.
MM:Absolutely. And one other point that I would make on that, Larry, is that really also speaks to the importance of risk management and diversification in your portfolio. And that is the piece of being prudent and maybe not swinging for the fences, but having a diversified portfolio that is going to carry you through various different market cycles. That also, as we talked about, takes the emotion out. You know that you have a plan and you can stick with it, and over time markets tend to perform in a manner that is very consistent, but it's through market cycles, not through months and not through years.
LS:Terrific. Thanks, Michele. Marc, I'm going to piggyback off of something that Michele just said. She brought up a point of diversification. So what can people do that is actually in their control? Because we know that all of the factors we mentioned, those are not in our control. What can we do that's in their control to help them mitigate some of this volatility that we're facing?
Marc Scudillo:Sure. And we all wish that we could control all those different factors. We wish we could control the markets, but we know we can't control that. And when you're developing a prudent game plan and investment strategy, there are certain things that are in everyone's control. So people can look at their game plan, can look at their strategies and say, well, I can control certain elements of my spending, that is within our control. And understanding your needs versus your wants as it comes to your budget and your spending along the way. You could also control some of your timing of particular events. If we're nearing retirement, we're scheduling out as far as when we'd like to retire. Well, that is a timing event. It's dependent upon you as to quite often as to when you would like to retire or even when you're looking at those spending of your needs versus wants. That's a timing event.

When would you like to make that second home purchase or go on that family trip? Well, there's pertinent times that you should be reflecting back of your plan to see, well, now might be a good opportunity to do that. Michele had mentioned we were working through a number of years of positive rates of returns that the markets had cooperated along the way there. And quite often a good plan will give you the ability to say, remember when you said you wanted to take that family trip? Things are doing really well right now. Now is an opportune time for you to do that. The market has cooperated for you to do that. Let's do that. When we're having more challenging and the market volatility, well maybe that's a timing event that we might want to wait until the market recoups. Well, it again depends upon the particular person's situation. But we also have the ability to control our risks.

So we speak to prudent planning, diversification and so on. And that means different things to different people and it means different things based upon how to affect their actual financial plan. So understanding what the risk parameters are that's going to help you maximize the efficiency, maximize the opportunity for you to achieve your goals in all market situations. That's what a good plan will enable you to do and understand. And lastly, to control is your legacy. You could control how much assets you're looking to leave behind for your heirs. There is some control that you have over that factor.
LS:Marc, these are great points. And I would say that obviously these are customized because every individual has a different stomach for volatility. They also have different needs and different wants. So it's really making sure you are sitting down and really from get-go, trying to understand from an individual standpoint what's important to you? Why is it important to you? And then you start, like you said, start to build the plan around that because it's not a one size fits all situation. Everybody responds differently these types of times. Everybody has different, what you call, needs and wants. So you have to make sure that you are taking the time when building that game plan to think about it precisely. And longterm, midterm, short-term, what are the goals that need to be met? What are these portfolios? What is your game plan looking to accomplish?
Ms:That's correct. Life is about trade-offs along the way there. And as we're going through those various trade-offs, understanding your plan and having that clear vision of what you're looking to get out of your money, out of your wealth. By having that, it makes your decisions a lot easier over time, especially when there's points in time of different struggles when the market might not be cooperating. When you have that clearer vision, it helps to make sure that you're also able to say, I could still meet my objectives. I could still meet my purpose of what my wealth is for even when the market is down. That's what a prudent plan will give you the flexibility and understanding. And we call that clarity of understanding your choices to make you feel confident in the decisions of moving forward according to your plan. Because at the end of the day, you really need to control it. It's your money. And so you need to have control of what's going on in your wealth.
LS:And that's huge, Marc, because again, that goes back to our mental state. If you are looking at all those things and you have that clarity, confidence, and control, that's a sleep at night factor for us because we understand these other variables are going to work themselves out at some point in time, whether it be positive and negative. But we have to again, come down into our own household and find out what can these things impact? What can I do on my own to make sure I'm mitigating my volatility?

So Michele, you used the word diversification. It's a very loosely used word. So what can we say to people that... What does it actually mean? How important is it that in an economy that we're facing today to make sure we have that? And maybe if you could touch on some things that may be alternative ideas that people might be able to take away that maybe they could think about to help mitigate and or add more diversification to their portfolios.
MM:Sure. Happy to speak to that Larry. So I think one of the things that we've been reading about a strategic approach to diversification is 60% stock, 40% bond portfolio. This has been a highly unusual time where both the stock market has been in correction mode and the value of your bonds on a book value has declined because interest rates have increased so significantly. Usually bonds buffer the stock market and reduce the volatility overall. So you look at your portfolio as a whole, you can't look at each investment that's in it individually. You want to think about it as a whole picture. But one of the things that we've approached very successfully is to think about what are some areas that we can invest in that provide protection from inflation? Because inflation has been the story over the last really 12 to 18 months.

We saw it coming with both the monetary and the fiscal stimulus that came out of COVID. And so we have over the past couple years implemented alternatives, actually liquid alternatives in our portfolio. Meaning things like commodities, we have a basket of very diversified commodities. You spoke about what's going on in Ukraine with food and energy, that's a commodity. So having that type of buffer that is a hedge against inflation has been very helpful. There's also things that you can do to put some downside protection on your stock portfolio. We've done that as well. And lastly, real estate has been an area of the market where there's steady cash flow and it's been a very... Aside from office space, multi-family, industrial real estate has done incredibly well. So those are just some examples of things that you can put in a portfolio to hedge against inflation.

Your home is actually potentially a hedge against inflation because as we've seen prices run, people are seeing more value in their personal real estate as well. So that's one way when there's been some people that have said, is the 60, 40 scenario dead and gone? Well last year it was. So by putting in these areas of alternatives, it has helped portfolios to not only be as volatile, but it's increased the income that the portfolios have generated. And so if you're nearing retirement, we bring it back to that everything is dependent upon what your needs are at that particular time. Marc talked about having control in your wealth plan. It's also to mirror and match your investment strategies along with that so that it's working with you so that you have the income and or growth to make sure that you're meeting your goals and your needs over time.

What we're going to see probably going forward, and you touched on it as well in your opening comments is will we have a soft landing and what's going to happen? Will the Federal Reserve continue to increase interest rates if we don't see inflation start to come down? Those are factors that will definitely play a part in what that investment strategy is going to look like. If we start to see a soft landing, we may pull back on the alternatives and go back to a more traditional income producing portfolio with more bond exposure because it's a very low risk income producing asset.
LS:Terrific. Marc, anything you want to add to that for moment?
Ms:Yes. So when we're looking at that and designing the diversification of the portfolio along the way and matching it up, as Michele said to the game plan, when we look at that, it also begs the questions that we also want clients to feel confident in that the game plan that is appropriate for them at the individual level. And so what do I mean by that? Investors come and they have different thoughts, beliefs, attributes as to when it comes to their investment strategies and we help them understand what that is because we do promise them the markets will go up. We also promise them the markets will go down. And what our goal is to make sure that we're still meeting and making sure that they're going to be okay in both scenarios and that they'll also be able to stick with the appropriate game plans that Michele is laying out there that we're looking at it from their best interest.

And so for some clients, really their goal and their desire when it comes to their investments is seeking to have that performance factor within their portfolio trying to outperform the market over a full market cycle, which is fine, but we have to help them understand exactly what the pros and cons of that is along the way. There are other clients that are looking at saying that they really are seeking to maximize their protection, protecting their nest egg. And again, there's other pros and cons associated with that. And last, there's others that are looking at it from more of a cost or a tax mitigation perspective. All of these types of attributes and beliefs enables us to customize the portfolio based upon the client so that they're still able to reach their goals no matter what their investment attribute is, but to make them feel more comfortable, have them feel more confident that the portfolio is being designed really based upon what they're most comfortable in the ways, in the manners that they could get the diversification and still accomplish all of their goals along the way.
MM:Larry, I would just add to what Marc is saying, and he mentioned tax efficiency and tax efficiency is an incredibly important thought process, particularly to people who are high earners, own a business, are still very high wage earners. And so the after tax return is really critical and as we customize portfolios and adjust to market conditions, we pay a lot of attention to the tax awareness and making sure that we are understanding what's happening in your business or in the rest of your picture. Because there are things potentially from a planning perspective and actually just tactical investment management that we can make adjustments that are really beneficial to you over a long time tax horizon, and also even immediate tax loss harvesting. This past year has been incredibly important, the tax loss harvesting that we've done this year will give us much more flexibility in years to come for many of our clients.
LS:So Michele, one of the lessons we should learn is the fact that it's not a set it and forget it type of situation, obviously a game plan that's being built for someone, it needs to be actively managed with the ability to course correct along the way and adjust to all the things that we've been talking about related to changes of the economic environment, the market itself. I have a question for both of you and you either one, you can answer. It's related to retirement planning. And so we talking, we talked about some of the investment side, okay? My question is, would you say that, quote unquote, "the retirement plan" is just about investment management or would you want to contribute potentially there's other factors that we should have people be considering to put them in the best position for achieving whatever their desired lifestyle might look like. What do you think?
Ms:So Larry, you bring up a good point. When you're looking at retirement planning as an individual looking to say, I'm preparing for my next stage of life, most people focus on, well what does that mean purely to my investments, I'm going to retire at age 65, and what does that mean to my investments? And so there's a lot more that should go into that conversation as to retirement plan. It's not a point in time date that wants to be, that we should be setting. It's a date that's accompanied by what do we want that retirement to look like? What are going to be our vision, and what is going to be our purpose of going forward in our next phase of life? What are the things that we're going to enjoy? Retirement planning should involve all the things that you had worked so hard for.

List them out, understand them, really get a deeper dive vision, like I said, as to what we need to have that money do for us. That makes it a lot easier when we're looking at the investment strategies because now we could sift through, there's lots of different investments that are out there. There's not one thing that's appropriate for every individual. We need to sift through all of that internal noise of the choices that are out there and really find those investment strategies and vehicles that are going to be most important for that individual. So it's not just about the rate of return, but it's about how do you maximize your wealth along the way. And part of that wealth is the caring and the understanding of looking out for the benefit of yourself, your family, and others along the way so that you can maximize what it's doing for you and everyone else along the way.
LS:Terrific. Thanks, Marc. Michele, you had some thoughts?
MM:I would just add to that I think that as Marc said, it's about you've been saving your entire life, you've been working really hard. And one of the things that I find to be most challenging for people is when you've been accumulating your entire life, it becomes really difficult to turn the switch and say, okay, I'm going to spend this down. And so a big part of what we do in talking to clients is to actually allow that retirement plan to be a roadmap, to give you permission to do the things that you really want to do. And I find that that is probably one of the very rewarding things that I do in my role is someone will say, well, my financial advisor told me I really should go on this trip or I can buy this second house and it's actually changed our life.

Those are things that are really powerful and that's about achieving goals and having things set up in a way that allows you to give yourself permission to really take advantage of what your stated goals are for you and your family, and really to expand on that. And as Marc said, it can change over time and it likely will. We go through different phases in our retirement and a lot of people really focus on, right in their early retirement years, what are we going to do? It's the go-go years. We're going to travel, we're going to do a lot more. So your spend might be a bit greater earlier on and you may focus on legacy as you advance in your retirement years and are really more confident that you have the funds available to achieve your legacy goals. So it is still dynamic. Like Marc said, it doesn't begin and end at 65.
Ms:And to add to that, we're going to have markets like this again. Markets, like we said, they're going to go up and down. We're going to have factors that are geopolitical, economic, world events that take place. It's happened and it will happen again. And so when we are designing the appropriate plan, really the goal is so that it's able to really enable the client, enable the investor, enable the family to know that there's a path to navigate through all of the potential risks and opportunities in accomplishing one's really goal in life and maximizing the wealth according to what those goals are and what's most important to them. And when a prudent plan is set up in that manner, the client could then have that peace of mind to be able to sleep at night knowing that they're in it. There's things that are going to change over time, but we're going to make adjustments. They should be making adjustments along the way that are appropriate for their future success.
LS:That's terrific. That's it for today. I think we're running out of time and behalf of... I wanted to thank of course Michele and Marc for joining us today. Thank you for the insights and the input. I think we learned a lot, and there's a lot to take into account for our planning, retirement planning. Michele even said there's also a mentality change from when you're going to your life of accumulation, then all of a sudden that income stops and now you're in distribution phase. It's a whole different thought process and you got to make sure that you are planning for the, yes, could be another 30 to 40 years of lifestyle needs that you require, that you have to adapt and adjust to. So again, thank you to Michele and Marc and we thank everybody for joining us today.

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