Retirement Answers

Jacob: 00:01

That's why all the planning work is needed and necessary and done. It gives you a peace of mind knowing that, yes, we're gonna actually expect bad times to come. And whenever those things happen and those bad times arrive, good news, we've got a plan in place. We have the structure in place to combat those things and survive those things and not have to panic. Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions.

Jacob: 00:27

If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place. Hey there, my name is Jacob Duke, and each week I'll be walking through different tips and strategies to help you succeed in retirement. So let's go ahead and get started with today's show. Hey everyone, and welcome back to another episode of Retirement Answers. This is Jacob Duke as always.

Jacob: 00:49

Wanted to take just a minute to thank you so much for tuning into the show and being an active listener. And also thank you so much for those of you who have been sending me emails, asking questions. I love that part of this so much, as it's a way I can just educate you and help give you better ideas around how you can succeed in retirement. So if you have not yet sent in a question and you have one, feel free to do so at jacobretirementanswers dot net, and that's how you can email me, and I'd be happy to give you a response and just have a conversation around your different questions. Also, if you enjoy the show and you found it really helpful, go ahead and give it a rating and review there on the platform that you listen to your podcasts and share it with a friend if they might find it helpful as well.

Jacob: 01:31

So by the title of today's episode, I'm sure you have a bunch of questions, but today I wanted to talk about the question of, are you ready for the next recession? Now, I wanted to make sure that I start off by saying that this is not a doom and gloom episode. That is not the purpose of this. I'm not trying to be fear mongering or anything of that nature. That is not the purpose.

Jacob: 01:52

The purpose of this episode is to say, if slash when something like that happens, like a recession, will you be prepared for it? The reason I wanted to talk about this is because most of the time people are reactive whenever, bad times come financially or different market events happen. We're typically reactive as humans as opposed to being proactive and planning for and almost expecting those different events to happen. So that's what we're gonna be talking about today, but I just wanted to make sure that I said upfront, this is not a prediction episode. I'm not predicting any sort of market recession or anything like that, nor do I want you to be scared of them.

Jacob: 02:27

In fact, I want you to leave this episode hopeful in the fact that you have a plan, or if you don't already, hey, you need to get one put together, but you can leave here hopeful understanding, hey, there is a way to overcome all the different fears that come from a market recession that could happen in the future. So the whole premise and purpose of this episode is to say, how can we be proactive and create a plan instead of being reactive during those tough times that we know will come? And also, since this is a retirement podcast, I wanted to kind of put it in the framework of, you know, a lot of people have fears around when they retire because the question in the back of their mind is gonna be, well, what if I retire and then immediately a recession comes, does that affect me? How bad does that affect me? And the question arises, well, can I even stay retired?

Jacob: 03:10

So retirement is scary because of the question, well, what if I retire as soon as something's bad starts to happen? So for example, some of you who retired in 2020, and then as soon as 2020 got kicked off that first quarter of the year, the overall stock market is down 33% in a matter of about thirty days. That's a tough spot to be, right? So those fears are realistic. So we wanna make sure that we cover those and address those appropriately because that is what holds a lot of people back from retiring.

Jacob: 03:39

And this is what's called sequence of return risk. So, whenever you think about, hey, when are my returns in my accounts happening, good or bad? Well, if you actually retire today and the market goes down 20%, your success rate in retirement is gonna be a lot lower than if you have a really good run for the first two years of your retirement. And then perhaps you have a recession at that point. So that's called sequence of returns and there is a risk there.

Jacob: 04:03

But whenever we think about how we plan for those potential sequence of returns, that's whenever we can say, Hey, I know that bad times might come, but because of my plan, I know that I can withstand those tough times and also grow and flourish through them. So before we jump into some of the things that I think you can do and plan for in terms of being ready for the next recession, I wanted to make sure that I covered first, like why is this conversation even important? Well, it's because stock market returns are lumpy. So the average stock market return overall across the whole globe and in The US over a thirty year kind of rolling period is around 10%, give or take one or 2% there. So it could be anywhere from nine to 11%, somewhere in that range.

Jacob: 04:46

But only 18% of the time does the annual return fall between 515%. So we see that the average is about 10%, but that does not mean that that's what you're gonna get every single year. So what you're actually seeing and feeling in the stock market is that returns are fairly lumpy, meaning a lot of good things happen at one time and a lot of bad things happen at one time. And rarely do we get returns that are right around the average. So here are some stats that might be actually really comforting for you.

Jacob: 05:15

So since 1926, The US stock market has experienced positive returns 56% of the time on a daily basis. They've experienced positive returns 63 of the time on a monthly basis, 75% of the time on a yearly basis, 88% of the time on a five year rolling basis. And then 95% of the time on a ten year basis has The US stock market been positive. And then over a twenty year rolling period, since 1926, The US stock market has had a positive return 100% of the time over a twenty year rolling period. Now, what does that tell us?

Jacob: 05:52

Well, number one, if you look back at what happens any given day, well, 56% of the time, so greater than a fifty fifty chance, you're gonna have a positive day in the stock market. And over time, we've seen here based on this data is that you actually increase your percentages of a positive return as you go farther and farther out into the future. So that tells us that time is a really big component in terms of your success. So the longer that we can have an investment horizon, then that means that we will likely be positive or experience positive returns over that period at a higher percentage than if we invested only for one day. Now I get it.

Jacob: 06:31

As someone who's thinking about retirement or in that retirement kind of window of time, you're thinking to yourself, well, I really don't have a lot of time before I retire. So how do I make this all work? And that's not incorrect, but whenever you think about your investment time horizon, that's a little bit different from your retirement date. Right? So a lot of the time we confuse our retirement date with our investment horizon and that's not accurate.

Jacob: 06:56

It feels that way, but it's not entirely accurate. So let's say you retire at 65, well, does that mean that you need to stop investing at 65? Absolutely not, right? You've gotta have your money invested in growing and accumulating and dividends and interests and building for you over the rest of your lifetime. So that whenever you get to 85, 90, 95, you've still got assets to live on and use, that have been growing and beating inflation for you.

Jacob: 07:21

So your retirement date is not the end of your investment time horizon. In fact, kind of the way I like to preach this is it's just the start of something new, which could be upwards of thirty, thirty five years long. And so we've got to invest for that amount of time. Now, when we think about it that way, hopefully that gives you a bigger understanding and kind of comforts you a little bit because you're saying I don't have to have all of it figured out right now today, as soon as I retire, I don't have to have all my investments in cash or bonds or stocks or whatever's most comfortable for you. That's not what you actually have to figure out.

Jacob: 07:51

What you have to figure out as you enter retirement is, how am I gonna produce income for myself in the first two years? How am I gonna produce income for myself in the first five years, ten years, twenty years, thirty years, and so forth. And so whenever you start to think about it kind of in tranches of time, you can begin to build out a plan that's actually reflective of what you need. So that doesn't mean you go all bonds, all cash, or even all stocks. It's probably gonna be somewhere in the middle because of when you might need your money.

Jacob: 08:17

So that's why we're having this conversation around, are you ready for the next recession? Because stock market returns are lumpy. Anything can happen on any given day, but over time, we've seen that as you have a longer investment time horizon, that's whenever your returns are likely gonna be positive. So all of that leads to what can you do to be ready for the next recession? Well, the first thing that comes to mind for me is that you need a plan, right?

Jacob: 08:43

We've got to have a plan in place because if we don't have a plan now while things are going well, whenever things start going poorly, we will react very badly. We will make decisions that are not good for our overall long term financial health, our overall long term plans. We will start making choices because of the emotion that comes into play, which emotion is the driving factor for underperformance in the stock market. Because whenever you start to look at all the data on why people underperform the stock market or have lackluster returns, it's because they're behaving incorrectly. They're making the wrong decisions at the wrong times.

Jacob: 09:18

And most of the time that's because they don't have a plan in place on what to do whenever those times come. So step number one and point number one is you have to have a plan for what you're gonna do, if anything, whenever a recession comes. Now, what I also mean by have a plan is you have a plan in place currently, like right now today, so that whenever a recession does come, you don't have to panic. So what does that actually mean? Well, if you're a listener of the show, you've heard me talk about this before, but I like to build out a three bucket retirement plan.

Jacob: 09:47

Now, if you're in retirement already or you are preparing for retirement, you can use this to your advantage. So what is a three bucket retirement plan? If you wanna get the full details on that, go back and listen to my previous episodes I've done there. But just a really quick recap, we wanna have money in certain investment types based on when we need to use that money to live on. So I like to have one to two years worth of money in cash that we can use to live on, early on in retirement.

Jacob: 10:12

Bucket number two is that we wanna have three to five years of living expenses in bonds, treasuries, CDs, money markets, things that are gonna produce a little bit more interest, but they're not the stock market. And then anything that we would need five years, six years beyond, that's bucket number three, and that can be invested in the stock market. Now, why would we invest in the stock market? Well, because we have to continue beating inflation. Like I said earlier, whenever we think about how long retirement could be for you, we've got to invest appropriately because we have to have money to live on whenever we get to 85 and 90, right?

Jacob: 10:43

So at that point, we've got to make sure that we have a bucket of money for each time period. So that's how we wanna make sure we're planning for our income needs in retirement. So what does this do in the event of a recession? Well, number one is whenever you have a recession come, just know that whenever a recession comes, that bucket number one is not gonna be affected very much by that because it's sitting in cash. Remember?

Jacob: 11:05

So whenever these bad times might come, that's the bucket of money we can pull from to continue living the same lifestyle. And in the meantime, bucket number three, which is your stock portion of your portfolio is gonna be going down because the market has gone down, but because you don't need that money for five years, remember we have five years worth of income at least in cash, bonds, treasuries, and CDs. That means that we can allow that our bucket number three, the stock portion of your allocation, we can allow that to go down with the market and not have to sell at that low point. We can allow that to go down and then also come back up when it actually starts going back up. So this goes back to the sequence of return risk that I mentioned earlier.

Jacob: 11:44

We wanna make sure that we can cover our short term needs during bad market cycles. And to do that, we wanna make sure that we've got cash set aside in order to meet our income needs during those time periods. So so that's number one. You've gotta have a plan for what you're gonna do whenever the market does not cooperate. You've gotta make sure that you don't panic sell because one of the worst things you can do as a retiree or as an investor in general, is to sell your stocks whenever they've gone down in value.

Jacob: 12:11

Because now you've locked in a loss forever. And the only way to actually make that money back up is to invest again, but invest at a lower price so that now you can recoup what you've already lost. So that's number one. You've gotta have a plan for what you're gonna do and the action steps you're gonna take whenever markets do not cooperate. And having a three bucket kind of retirement plan, income plan approach allows you to see that on paper and understand, hey, here's what we're gonna do whenever bad times come.

Jacob: 12:39

And we know that those are gonna come. That's why we built the plan in the first place. And because we're prepared for it, we're not gonna act on those negative emotions as we otherwise would if we had not had this plan in place. Another way to be prepared for a recession and kind of eliminate some of the risks that come with that is within each of those three different buckets that I've already mentioned in terms of your retirement income plan, how much risk are you taking and are you taking too much risk? So for example, in your stock bucket, which is five years and beyond, that's how soon you would need that money.

Jacob: 13:10

How are you investing that money? Are you investing in individual stocks? Do you have overexposure or too much exposure to one particular company? Maybe you worked for one particular company most of your career and you received a bunch of stock options or just a bunch of stock comp, that means that you might have too much exposure to that particular company, even though you might love it, it might be a great company, but it could present issues from an investment return standpoint that you otherwise might want to diversify away from as you're in retirement. So in general, do you lack diversification amongst your stock holdings, but also do you lack diversification amongst your fixed income or bond holdings?

Jacob: 13:48

That's also a risk as well. And on top of that, I see this quite often. Whenever people get to retirement, their natural instinct and their default is to get really conservative because they need their money to live on, right? But that's, remember, why we build out that three bucket retirement plan. So a question here is, you know, in terms of risks that you might be taking overall in your allocation, are you being too conservative?

Jacob: 14:09

Do you have too much cash on hand? Do you have too much invested in bonds and not enough in stocks or things that might grow for you long term? So being too conservative is a risk. Whenever we think about the longevity of your funds and the risk that comes up whenever you start to think about what if I outlive my money? We've got to invest correctly for both now and the future.

Jacob: 14:29

Another point I wanted to make to you really quickly is that we have to change our perspective and the way that we think about negative things that might happen in life. And so I wanna give you a little bit of data here, but according to the National Science Foundation, 80% of our thoughts are negative every single day and 95% of our thoughts are repetitive. So if you think about that, if 80% of our thoughts are negative, and then we're repeating those thoughts over and over and over again to ourselves, we're telling ourselves that only bad things are gonna happen. So this might be the hardest work of all the things that I've talked about is actually changing your perspective and kind of your outlook on life. Something that I like to live by is that optimism is the only realism because the world is so negative, there's so many bad things that are happening in our world, and so if we live in that constantly, we're gonna be hopeless.

Jacob: 15:18

And so we have to be optimistic in how we think and approach life because that's the only way that we can actually enjoy and live a fulfilling life. So how do we actually change our perspective and accomplish this? Well, that's why we do all of the planning on the front end. That's why we say, hey, here's how we do things whenever things are going really well. Here's how we adjust and make changes when things are going poorly, or maybe we don't make any adjustments if we have that plan in place already.

Jacob: 15:43

Here's how we change and adjust things if your life changes, if your health changes. That's why all the planning work is needed and necessary and done. It gives you a peace of mind knowing that, yes, we're gonna actually expect bad times to come. And whenever those things happen and those bad times arrive, good news, we've got a plan in place. We have the structure in place to combat those things and survive those things and not have to panic.

Jacob: 16:07

So changing your expectations is very important because you're no longer gonna be caught off guard whenever those bad times come. In some sense, you're almost expecting them to happen. So always enjoy the good times, yes, but don't be fooled. Bad times will come, but here's the good news. We're gonna be ready for those every time that they come because we have a plan in place.

Jacob: 16:27

So what is my encouragement for you today? It's that you do not have to panic. And that should be a relief to you because you don't have to sell all of your stock at one time because the market went down 20% or you don't have to sit on cash the rest of your life because of your uncertainty around things going on in the world or just where we stand economically. My encouragement for you is this, go ahead and break the mold like you can be different. Retirement doesn't have to be painful.

Jacob: 16:51

It doesn't have to be scary or you don't have to live in fear for the rest of your life. Retirement is meant for enjoying and not worrying about your money every single day. This is the power of planning. So that's why I love what I do. I love making plans.

Jacob: 17:04

I love helping people feel the peace that is possible with them when it comes to retirement. So that's my encouragement for you today. Number one, you gotta have a plan in place so that you know what to do when those times come and you don't have to panic whenever they come because you're not prepared. So being proactive instead of reactive. Also, we wanna make sure that we've got a plan for how we're investing.

Jacob: 17:22

Are we taking too much risk in how we're investing your assets? And then also, how do we change our mindset and kind of our perspective on life, but then also what we really expect to happen? Because we know that all of these bad things will happen at some point, it's just a matter of when, But while things are good, how about we enjoy those, and when the bad times come, we can just say to ourselves, hey, look, I expected this, we're prepared for it, therefore I can continue to sleep at night and enjoy life the way I wanna enjoy life. So if you don't have a plan in place, or this is just thought provoking for you, and you have maybe you have questions about this, feel free to reach out to me at jacobretirementanswers dot net. And as I mentioned before, many of you are doing this and I'm super appreciative and thankful that I get to answer your questions and I'll be doing some shows here in the future around some of the questions that I've received, but just go ahead and shoot me an email there, and that's how you can connect with me and I can give you some different thoughts around, some questions you might have.

Jacob: 18:15

So, thank you so much for tuning into this week's episode of Retirement Answers. I really appreciate you being here. If you found it helpful, go ahead and share it with a friend. Thanks so much, and I look forward to talking with you again really soon. Hey, it's Jacob again, and I wanted to extend a quick offer to you.

Jacob: 18:31

If you have a question and you would like to have it answered here on the show, please email me at jacobretirementanswers dot net, And I'd love to answer that question for you right here on the show. Also, wanted to remind you that nothing discussed in today's episode is meant to be financial, legal or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.