207 Roller Coasters & Volatility

Jason and Emilia talk about volatility and roller coasters.  They also help to explain standard deviation.

Below is the full transcript:


Announcer: Welcome back, America, to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence and freedom as you prepare for and transition through retirement. Now, here’s your host Jason Parker.

Jason:  America, welcome back to another round of Sound Retirement Radio, so glad to have you tuning in this morning. It’s my good fortune to have Emilia Bernal joining me in the studio again. Emilia, welcome back.

Emilia: Thank you, Jason. It’s good to be back.

Jason: It is good to be back. And, like always, we’ve got two ways that we like to start the morning, the first is by renewing our mind, and I have a verse here from Psalm 9:1, “I will give thanks to You, Lord, with all my heart. I will tell of all Your wonderful deeds.” Then, Emilia, you’ve got a joke to help us put a smile on our face this morning?

Emilia: Yes, and I want to thank our client for providing this joke for us today, so again, for any of our listeners ever get in touch with us, if you have a joke, please send them my way, I’ll be sure to add them.

Jason: Good joke.

Emilia: So here’s the joke today. Why didn’t the animals play cards on the ark?

Jason: I don’t know, why?

Emilia: Because Noah was sitting on the deck.

Jason: Yeah.

Emilia: Jokes are fun, even if they are really-

Jason: Kind of corny.

Emilia: … corny. Great.

Jason: It’s just one more way that I can try to embarrass my children, I think that’s the whole reason I always put on this plan, it is to try to embarrass my kids as much as possible.

Emilia: No, I think it’s fun though.

Jason: All right, so let’s jump into this, we’re on episode number 207, the title of this show is Roller Coasters and-

Emilia: Volatility.

Jason: Volatility. Yeah.

Emilia: Yeah. Why did you want to talk about roller coasters today, Jason?

Jason: I love roller coasters.

Emilia: They are fun, I do too.

Jason: No, I actually don’t want to talk about roller coasters, I do want to talk about volatility. But, as we were preparing for this show, I’m reminded, I think it was two years ago, we went to Disneyland as a family, and my daughter was so excited because we measured her to see how tall she was, and before we left, and we found out that she was tall enough that she was going to be able to ride all the rides at Disneyland. So she was so excited. We had been there before, the first time we went, she was not tall enough, so my son was tall enough to go on everything. And there was this one roller coaster in particular that she really wanted to go on, but she wasn’t tall enough.

 So this time she’s like, “Dad, I’m tall enough, I get to do.” I said, “Okay, good.” There’s California Adventure Land, and then there’s Disneyland, both at the same place. This particular roller coaster was called California Screamin’, I think they’ve since changed the name, I think it’s like The Incredibles, or something, now. Anyways, we get into this roller coaster, and this is like the biggest, fastest roller coaster they have at Disneyland. This thing’s got loops, and corkscrews, and goes like zero to 60 miles an hour, I mean, it is intense.

 We’re standing in line, we’re watching the people go, and they scream, and we get into the car, they pull that bar down to kind of strap you in, and I hear, my son and I are sitting in the front seats, and then my wife and my daughter sitting right behind us and I hear this woman say, “Are you okay, sweetie?” And I look over my shoulder, and there is Libby, and she has just got tear streaming down her face.

Emilia: Oh, gosh.

Jason: It’s like, it’s too late, and it’s too late to change. But the lady that was strapping us in recognized this, but it was at the last second, and I’m looking over my shoulder, and then all of a sudden, the thing takes off.

Emilia: Oh gosh, I thought they would got her off.

Jason: No, they kind of said, “Do you want to get off?” She said, “No.” She wanted to stay on. But you could just tell she was so afraid. The reason I wanted to talk about that, Emilia, is I have had this experience so many times with people as they’re getting ready for retirement. Many times they feel like they’re strapping into this roller coaster, this is a brand new experience, they’ve never retired before. I had a woman recently say to me, she said, “Jason, you are the third financial advisor that we’ve met with.” She said, “The first guy just kind of patted us on the back, and said, ‘Oh, you’re going to be fine.’ There was no planning done.”

 They met with another person, and this second person comes in and says, “Oh, you need to put all of your money into an annuity, not all of it, but most of it.” She said he was very cavalier, and it felt very high pressure. By the time they get into our office, they’re saying, “Geez, we just want to have a good plan.” So many people, what they say to us is, “We just want to know we’re going to be okay.”

 But unfortunately, what so many people experience is either somebody that doesn’t have the qualifications or the ability to do planning for people, so they just get a slap on the back, or a punch in the shoulder and say, “Oh, yeah, you’ll just be fine.” Or, you’ve get somebody that tries to sell you a product and put you into something that maybe you don’t want to be in, or maybe you do want to have an annuity, but you’re questioning whether or not that much of your investment portfolio should be in something like an annuity.

 I just am reminded, Emilia, that really what people, at the end of the day, they just want to know that they’re going to be okay. They just want to know that they’re going to be able to have a really good retirement. This whole thing can be really unsettling, and there are so many pieces that go into it. But we want to help people have a good plan. That’s what having a sound retirement plan is all about. Yes, you need to have investments, and insurance, and taxes, and social security claiming, and we need to be thinking about healthcare, and estate planning.

 All these other things that go into it, but the first and foremost, before you make any decisions about financial vehicles, you need to have the plan dialed in.

Emilia: Absolutely. Such great advice. I want to remind our listeners, Jason holds a monthly webinar where he’ll also be discussing a lot of the topics that we’re covering today. But the webinar is schedule for next Thursday, June 13th, at 5:30 p.m. Pacific Time and 8:30 p.m. Eastern Time. So if you’d like to go to SoundRetirementPlanning.com you can register for that webinar today.

Jason: Yeah. You know, as I think about this roller coaster too, Emilia, I am reminded of that roller coaster down at Disneyland called Space Mountain, have you ever been on the one?

Emilia: Yeah, I have been on similar ones, yes.

Jason: Okay. I found, and now that I’m in my mid-40s, that roller coasters are different for me at this phase of my life than they were when I was 18 years old. When I was 18, I could go on these roller coasters all day long, now, when I go on them, I kind of feel like a sense of motion sickness when I get off them. But especially that Space Mountain ride. You get on that thing, and you’re going up this track, and there’s these bright lights, and these swirling loop the loop things that are just messing with your vision as you’re going. Then, all of a sudden you’re in pitch black, and you’re getting jerked from one side to the next, and that’s kind of how people feel right now with this market that we’re in.

 There is so much volatility, again, one tweet, one headline comes out, and all of a sudden the market is skyrocketing up, or it’s skyrocketing down. Especially for the people that are just getting ready to retire, that can be really unsettling. Now, that kind of volatility is a good thing when you’re accumulating money. But once you retire, you really don’t want to be on this wild roller coaster anymore. At some point, you just want to step onto It’s a Small World.

Jason: You remember it’s a small world? (singing).

Emilia: (singing).

Jason: Now, people are going to hate this show forever. That song stuck in their head.

Emilia: We’re going live, singing.

Jason: We’re pretty good at that, actually.

Emilia: Yeah.

Jason: So, but really, we’re talking about volatility, and one of the best ways I’ve ever heard, there’s a term as financial advisors that we use, it’s called standard deviation, and sometimes when we use words like that, it can be confusing for people. One of the best ways I’ve heard standard deviation explained in just very simple terms, a high standard deviation means there’s a lot of volatility in the portfolio, and that’s like getting on on one of these great big roller coasters.

 A low standard deviation means that there’s a small amount of volatility, and that’s like stepping into Goofy’s ride, or It’s a Small World. Usually, when people retire, they want to step off of that big roller coaster, and they want something that’s going to just be a little bit smoother at this phase of life.

Emilia: I really like this analogy, but I can visualize it-

Jason: I’m really working it.

Emilia: No, it’s working really well, because I can imagine everything that you’re explaining. So for people that don’t understand, it’s very good visuals. So, did you have anything else you wanted to add before we move on to the next-

Jason: No.

Emilia: Part of this- … okay, so, you mentioned volatility, why is volatility so important?

Jason: It’s a great question. It’s a good thing if you’re accumulating money for retirement. Because when you’re accumulating money, you’re working, you’re dollar-cost averaging. So, every month, hopefully, people are contributing to their 401(k), or their IRA, or their Roth, or their TSP, they’re putting money in every month. When the market is going down, it’s just allowing you to buy more shares at a cheaper price. There’s that old saying, maybe you’ve heard some people say it, “What got you here won’t necessarily get you there.” Or I like the way that Albert Einstein said it, he said, “We cannot solve our problems with the same thinking we used when we created them.”

 That’s exactly what I see so many people doing. The volatility that serve them well while they were accumulating is the same risk that could really derail their financial life as they’re making this transition into retirement. Because, again, when you’re accumulating money, your greatest asset is your income. So you’re contributing every month, and you don’t really worry about the volatility. I hear so many people say to me, Emilia, they say, “Jason, when the market starts getting wobbly, I just stop opening my statements. We just keep buying more shares.”

 That works perfectly well, it’s the right attitude to have when you’re accumulating money. But all of a sudden, when things change, when the market gets volatile, and now you’re not contributing anymore, now you’re just living off of those assets. That volatility, while it served you well from an accumulation standpoint, from a dollar-cost averaging standpoint, in retirement, now you start reverse dollar-cost averaging. Now you’re potentially pulling money out of an account that’s falling in value.

 When we’re in a market like we’re in today, and if you still have a long-time horizon, I would say, “Look, just ignore the volatility, it’s just noise.” But if you’re getting ready to retire, and you’re like, “Man, this is my nest egg. How much risk? How much am I really willing to let this thing drop in the next couple of months right at the same time we’re getting ready to retire?” It’s why so many people really want to have a good plan, a good distribution strategy.

 The accumulation strategy needs to be different, you need to get off the big roller coaster of accumulation and step into the distribution roller coaster as you’re getting ready to make this transition.

Emilia: So, why do you suppose people don’t change their investments after they retire?

Jason: I think there’s a couple of reasons. Number one, the accumulation, when they’re in accumulation mode, oftentimes, they have an advisor that they’re working with, that’s helping them get to there, and so they’ve got a good relationship with that person. They look at the returns that they’ve achieved over a long period of time, and they say, “I’m happy with the returns.” That’s all they’re really thinking about. Of course, there’s a lot more to invest in than just diversification, and asset allocation, and fees, and ultimately what’s the return at the end of the day that’s driving this whole thing.

 But, I think a lot of people, they get comfortable, they have a good relationship with somebody, and they don’t necessarily, many people aren’t working with people that specialize in the distribution phase of retirement, they’re working with people in the accumulation phase. Oftentimes, when you retire, your money’s got to work different for you in retirement than it did during your accumulation years, it just makes sense, your whole life is changing, your financial life is going to change too. Don’t leave your money behind.

 If you retire, don’t let your money continue to work for you the way that it was when you were working, you still need that money working for you, it just needs to work differently for you. A lot of people will say, “Jason, we’re not trying to hit home runs anymore at this point in our life.” If they’re just hitting singles and doubles, they’re really happy. Again, just shifting out of a phase where instead of trying to pick the next greatest stock, and pick the next big winner, boy, if we could just, what I hear most people say is, “If we could just earn a few points above inflation, but not get wiped out in the bad times.” And getting back to really what they’re trying to accomplish in the first place, they just want to know that they’re going to be okay.

 So, all that other stuff doesn’t matter, people will tell you fees matter. I’m telling you, fees don’t matter. People will tell you diversification matters, I’m telling you diversification doesn’t matter. People say asset allocation matters, I’m saying it doesn’t matter. Now, that’s being a little bit ridiculous, because all of those things matter, but at the end of the day, that’s not what anybody really cares about, Emilia. What people really care about is that they’re going to be okay, and that they’re not going to be a burden to anybody, and that they’re going to be able to do the things they’ve always dreamed about doing at retirement. That’s what people really want.

Emilia: Yes. Can you share with us what are the two questions that most people have when they meet with you?

Jason: Yeah. Let’s start out with the questions that nobody ever asks. Because I get a chance to meet with people all over the country, and I’ve met with so many people on this journey into and through retirement. They never say to me, “Jason, do I have the right mutual funds? Jason, which financial tools should I be using? Jason, should I buy an annuity? Jason,” this is one they never say, “How can we pay more money in taxes?”

Emilia: That’s funny.

Jason: They never say, “Is my asset allocation right? And do I have the right diversification?” I never hear those things come out of people’s mind. That’s all financial advisor lingo. What people do say to me is they say, “Have we saved enough to retire?” Then, if they’ve already retired, they will often say, “Are we going to be okay?” That’s really what people want. Again, I think it’s easy in the financial services world to focus on the wrong thing. If you focus on the wrong thing, you might get the wrong result.

 Sometimes, what people are focusing on is rate of return. In retirement, it is not about rate of return, it’s all about cash flow. Of course, keeping the money working for you is important, but how it works for you is important. It’s one of the things that I … there’s this one slide in particular that we share when we do the webinar, that’s so powerful, Emilia, it’s so powerful in helping people understand volatility. I know we’re going to talk about it here in just a minute, but that webinar that we have coming up is on June 13th, from 5:30 p.m. Pacific Standard Time, or, if you’re one of our friends out there on the East coast, it’s at 8:30 p.m.-

Emilia: Eastern.

Jason: … Eastern Standard Time.

Emilia: Yeah. Can you give us some examples about volatility that you’re going to be presenting in your webinar?

Jason: Yes. Exactly. The idea here is that there’s two different slides we show people. Again, we want to help people understand standard deviation. Big roller coaster versus small roller coaster. Big roller coaster means lots of volatility, small roller coaster means it’s a small world, it’s a little bit of volatility, the boats kind of bump into the sides as you’re listening to that song over and over and over.

 What we do in these two scenarios is we show people, if they started with $1 million, and they started taking 5% per year out of both of these hypothetical portfolios, so $50,000 a year out of each portfolio, we don’t increase that for inflation, we just keep it a static $50,000 a year. Then, in both of those portfolios, Emilia, we show each of them, and this is going to from the year 2000 all the way through the end of 2018, we show both portfolios that have an average rate of return over that period of time of 6.91%.

 Both portfolios start with $1 million, both portfolios are taken $50,000 out, and both portfolios have the exact same average return over that period of time. The only difference is the standard deviation, the amount of volatility in the portfolio in order to achieve that return. One of those portfolios has a standard deviation of 17.92%, and the other portfolio has a standard deviation of 6.82%.

 The point of this exercise is to show people that it’s not just a wild ride at 17.92%, Mr. Toad’s Wild Ride, I remember that one too, now it’s kind of a fun, kind of scary actually. But 17.92, what we show people is it’s not just … because at the end of the day, you have the exact same average return, but as soon as you start taking withdrawals out of the portfolio, the amount of money that you have left at the end of that period of time is significantly different.

 With high volatility taking withdrawals versus low volatility if the returns are exactly the same, what you want to do is structure a portfolio in such a way that you’re really playing defense, you’re just making sure that when the bad times happen, and the bad times always come eventually, when they do, that it’s not going to hurt you, it’s not going to derail your retirement. Once we get you retired, we want to keep you retired. We don’t want you to have to go back to work in retirement, unless that’s something you want to do.

 But again, I just get back to this idea that so many people come in and they have no plan, they have a financial advisor, they have a CPA, nobody’s showing them how the numbers are all going to work. Nobody’s showing them how social security should be integrated with the cash flow plan. Nobody’s showing them how the pension, and the FERS, and the CSRS should be incorporated with the cash flow plan. Nobody’s showing them what rate of return is really needed in order to make the numbers work versus what rate of return is wanted. Nobody’s helping them understand the impact that inflation is going to have on their spending. Nobody’s helping them understand that, “Hey, you’re going to spend more money on travel the first 10 years of retirement, maybe 15 years of retirement, that expense may drop down in the future.”

 Nobody’s helping them model how the mortgage is going to get paid off. That’s really what people want. They just want to know that they’re going to be okay. That’s what having a good sound retirement plan is all about. It’s all about knowing that you’re going to be okay. It’s also about identifying if you’re not, because unfortunately, some of the conversations we have to have with people are, “I’m sorry, but if you retire, you’re going to have to make sure you die by this point, otherwise.”

 In my mid 40s, one of the things that is just boggling my mind is that I keep running, jogging, five to six days a week, but I keep on putting on weight. This is the weirdest thing I’ve ever experienced in my life. [inaudible 00:19:21] says, “Your metabolism is slowing down.” I think the issue is, maybe I’m just a couple inches too short, because if I was a couple inches taller, then I could afford to carry on these extra few pounds.

Emilia: You’re talking to a very short person, so I [inaudible 00:19:35] know how you feel, those extra pounds do

[inaudible 00:19:39]

me down when you get shorter.

Jason: I’m not becoming overweight, I’m just not tall enough.

Emilia: [crosstalk 00:19:43] shorter. They say you shrink a little as you get older.

Jason: Maybe that’s the problem, maybe I’m shrinking and my belt is getting tighter.

Emilia: Yeah. Jason, on the topic of helping our clients, you’ve also developed a budgeting, the Retirement Budget Calculator. That’s a great place for some of our listeners to start and kind of just putting the numbers together, and starting to look at whether or not they’re going to be okay.

Jason: That’s the most important number. Any financial advisor that’s really going to help you have a concrete retirement plan, if we don’t really have the spending dialed in, it’s really, really, really hard for anybody to be able to answer the question of have you saved enough? Are you going to be okay? That’s what people want to know. It’s the piece that’s not very, it’s just to attractive. I mean, budgeting, spending plan, everybody would rather focus on investments and winning, and picking the right, the next best stock, and having the highest rate of return. I mean, that’s the fun stuff in all of this, nobody wants to spend their time on the spending side.

 Actually, the spending side is the reason, if you think about it, if anybody asks you, “What’s the purpose of the money? Why do you have it?” Most people will say, “For retirement.” Then you say, “What do you mean by that?” They say, “Well, so that we can enjoy the same standard of living, and go visit the grandkids, and go on a trip, and not have to wake up at oh dark thirty anymore. It’s just really making sure your priorities

[inaudible 00:21:02]

are about what’s most important.

 The RetirementBudgetCalculator.com is a tool, software as a service, it’s a paid, one-time, we’re getting ready to change that actually. But right now it’s just a one-time fee. So if you’re listening to this show, sometime in the future it may not just be a one-time fee anymore. But right now, the way that it works is you just pay a one-time fee, people that pay the one-time fee get grandfathered in, so they won’t have to pay the subscription fee in the future. It’s $54 as a one-time cost, but we do have a coupon code available for people right now, they get 50% off.

 People have been saying to me, “Jason, why are you doing that? That’s so cheap. Why would you let people have access to this tool that’s worth a lot more than that for $27?” The reason is we only launched the calculator about a year and a half ago, we want to have as many people using it as possible, because every time people give us feedback on what they like, and what they don’t like, it helps us make the calculator better. So I’m willing to make it super cheap so that people have access to it, so that we get that feedback, because the most important thing to me is that we’re building something that’s really going to make people’s lives better. So that’s why we have it.

 If you haven’t checked it out yet, I’d encourage you to check out the Retirement Budget Calculator, especially powerful for those of you that are do-it-yourselfers.

Emilia: Yeah. So do we have time for a couple more questions?

Jason: Yes.

Emilia: Okay. I wanted to cover also, what are all of the pieces of a good retirement plan? I know you’ll be doing this in the webinar, but can you give us a little insight?

Jason: Yeah, yeah. The thing I really want to emphasize on that webinar is understanding standard deviation, understanding the roller coaster, the big roller coaster, the small roller coaster, and understanding how if you get that piece wrong, it can totally mess up your entire retirement plan. Most people don’t even know what I’m talking about. They don’t even know how much risk is in their portfolio, how much of volatility is in their portfolio. So we want to help people uncover that, so they can understand the risk. But, a good plan, again, you need to understand the spending, once you understand the spending, then we need to match up and make sure that your income matches those expenses, and that it’s going to match up for the rest of your life on an inflation adjusted basis.

 Inflation is that enemy that we all have where we know that 20 years from now, I mean, I just had this experience, I don’t know if you’ve bought orange juice recently.

Emilia: No.

Jason: But do you remember when orange juice containers used to be the same size as a milk container? Now, they’ve made these orange juice containers really skinny, and they put these great big pictures of oranges on the front, like they’re tricking us or something, but it’s obvious that it’s not the same size orange juice container it used to be, but they’re charging me more money and giving me less orange juice. That’s inflation. It’s a tricky little way that they do inflation.

 Anyways, you got to have a spending plan, you got to have cash flow. You need to have an investment strategy, that’s the reason people have saved this money, how is it going to work for you in retirement? You need to understand taxes because if you’ve saved $1 million, you might only get to spend $750,000, or $700,000, because Uncle Sam is going to get a piece of that. You need to understand healthcare, Fidelity, on a report recently said that on average, without long-term care costs, people are going to spend almost $300,000 just on healthcare needs in retirement, that’s a big bill to pay. Then, estate planning, making sure that you’re getting all of the documents right.

 Those are really all of the different pieces, Emilia. We have this webinar coming up, if people have not seen what a good retirement plan should look like, I want to encourage them to attend, but we’re out of time for this week. Thank you for being here.

Emilia: Thank you, Jason.

Announcer: Information and opinions expressed here are believed to be accurate and complete, for general information only, and should not be construed as specific tax, legal, or financial advice for any individual, and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives, or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company. Investing involves risk. Jason Parker is the president of Parker Financial, an independent fee based wealth management firm located at 9057 Washington Avenue Northwest, Silverdale, Washington. For additional information, call 1-800-514-5046 or visit us online at soundretirementplanning.com.