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Today we are talking about two big retirement planning trends that died this year. If you're retired or you're planning on retirement, you are not gonna wanna miss this one. All that more on today's episode of The Retire One Show.

Hello and welcome to The Retire Once Show the show designed to help you get to retirement, but most importantly, stay retired. I'm your host Johnathan Rankin. I am the founder and CEO of Theorem Wealth Management, and I am joined as always by my lovely co-host. Hi, I'm Melissa Rankin. Thank you so much for joining us.

We are happy that you are here. I hope everybody had a great Halloween. I mean, we did definitely for, we did. We, we. Full, full picture of exactly what it means to trick or treat with little kids who do not know when they're actually tired. No. And should stop eating candy, but so that was, that was interesting.

On the, on the positive side, we have a ton of candy that we get to eat. Yeah. I mean, I don't know. I think they may have ruined candy for me. Yeah. That, that may be true. But, uh, but we're not here to talk about Halloween. We are here to talk about retirement trends that died this year. But before we get into that, what do we want people to do?

Mo we want you to subscribe. We never want you to miss an episode. Not at all. Don't miss an episode. Whether you're listening to us on Apple, Spotify, or you're watching us on YouTube, hit that subscribe button. Join this retirement community we are building. So let's dive right. . So with that, let's start with the first retirement trend that died in 2022, investing without managing risk.

What do you mean by that? We think about investing over the past couple years, it's been a lot different than what we've seen this year. Obviously we were in a long extended bull market since 2009, and it seemed like every time there was any risk in the market, the Fed was there to bail us out. I mean, you think about end of 2018, market fell by almost 20%.

And the Fed came and bailed us out 20. The white night. The white night, 2020. Uh, once again obviously we had the correction with the pandemic, uh, you know, brief recession there. And what'd the fed do? Swooped in white knighted it. So we've had this long period where risk assets were doing extremely well.

And, you know, it makes, it makes it hard to realize that you start having to, you gotta plan for risk at some point. Absolutely. I mean, it makes sense. When the market gets hot, I feel like everybody, young, old, retiring, not whatever. Everybody gets the fear of missing out. I mean, that's the whole reason that acronym was created.

Whatever it is. If fomo. Is that what they call it? Yeah, that is what they call it. That's how young I am. . If people feel like they aren't performing in line with the market, then they feel like they're underperforming. So of course nobody wants to miss out on anything. No, and when you look at the s and p 500, a lot of investors will base their will use that as their benchmark.

They'll say, Well, if I'm not invest in performing up to the s and p 500, I'm underperforming. Well, if you're retired in a balanced portfolio, Why are you comparing, why are you comparing your performance to an all stock index? I mean, the s sp five hundreds, it's 500 stocks. The, the reality is your portfolio probably looks a lot different than that.

I kind of equate it to, uh, if you looked at Tom Brady running today, you can't compare Tom Brady in his forties doing a 40 time against some rookie running back right outta. They're in different positions, decades of age apart. They're just in different places in life. Yes, he's going through a lot of personal stuff.

That is true. That is, You're absolutely right about that. So yeah, he's not gonna run as fast as someone that's fresh outta college. Just like if you're retired and you're investing in a balanced portfolio. In a good market, your portfolios shouldn't be at the same rate of return as the s and p or the nasdaq.

It's, you're comparing apples and oranges. Here's a, here's a perfect example of what I mean. Now, if you look at this chart, this chart shows Kathy Woods Arc Innovation etf. This is one of the most popular ETFs over the pandemic investing period. You know, from 2020. This, the inflows into this fund were tremendous, and we're comparing that to Warren Buffet's, Berkshire.

So from the beginning of 2020 through the middle of 2021, of course you would most likely want the performance of that ARC Innovation etf. I mean, you would've been up 145% Berkshire Hathaway, you're up 21%. You know, it's, you're still positive. But you look at that and you go, Why would I ever invest in, you know, Warren Buffet's company?

Well, I think that it's because most investors say that they want the type of ride that Berkshire had. I mean, when they see things. Arc it, it gets hard to maintain that investment discipline. I mean, overall it does. And then when you fast forward to looking at the performance as of today, you look at the head and you go, Well, Berkshire is outperforming arc by 50%.

You know, if you would invested in Berkshire HA from January 1st, 2020 through today, you would be up over 31%. However, if you invested in Arc, you would've rode that roller coaster up, put your hands in the air at the top and rode that bad boy all the way down, screaming all the way down. I'm sure. Just like a true roller coaster.

That's right. So that is that. That makes it very difficult as someone who's retired to maintain that discipline because it is hard when you. Different investments doing that. You know, and most people don't understand or really even know what it's like to put together an asset allocation because go back for the past, you know, 13 years, bond rates were near zero or you know, around one or 2%.

So you weren't getting anything, investing in bonds, nothing to write home about. Yeah. You weren't get, there was no income there. So you, to get any income or growth, you'd have to expand your asset allocation to a level of, you know, 60, 70% in. So you're taking on more risk, and I don't think most people understand what their true risk tolerance is.

You only find that out during markets like this, which is a good point. So what are some things that you wanna avoid in, I don't know, any given market cycle. So I think in any market cycle, whether it's a bull market or bear market, you don't wanna be too concentrated. You don't wanna be too concentrated in the, in the holdings that you've.

Or even in the type of investments, you know, in a bull market, you don't wanna be too concentrated in just a few investments in the stock market, and you don't wanna be overly concentrated in the stock market in general. Same thing with a bear market. You wanna be overallocated to cash. Yeah. Having cash on the sidelines is great, but at some point we always say on this channel, the market's going to be higher than where it is today.

When is that gonna happen? Gosh, I, I wish I had my crystal ball ready. I mean, that's, we don't know. We can, we can shake the, uh, that magic eight ball and ask that and maybe that outlook not so good . That's right. I, I believe that most people are not truly diversified even when they think they are. And that's because nobody likes seeing things in their portfolio they hate.

And if you love everything in your portfolio at any time, you're not well divers. Because you love everything. Because you love everything. It means everything's doing well. There's going to be periods where you know you want certain asset classes to do well and other ones aren't going to do so well at that timeframe, and that's when you rebalance and you buy the ones that weren't doing well, and you sell off some of the ones that were, and that's creating that automatic rebalancing that you could do over time.

But if you love or hate all of your portfolio at the same time, you are not diversified. So what else can people do? Well, one thing they can do is they can avoid investing with emotions, and that's to be said in up markets and down markets. You know, it's okay to shift your asset allocation slightly and you can overweight and underweight different asset classes, but dramatic swings in your asset allocation.

If you go from. 40% stocks to 80% or 90, or even a hundred. Those dramatic swings are typically led by emotion. They're not led by, you know, any sort of logic. It's usually, I don't wanna miss out on what's going on or inter fomo. Inter fomo or right now I just don't wanna lose. Let's just kind of that fear of running out.

So I don't want to have my retirement assets. Fo row. There you go. I like that . Yeah, we, we don't want either the FOMO or the for row to take hold, . So those are two things that I would say avoid in any market cycle. Our team can actually help walk you through that. So there's a link in the description below where you can actually plug in your own numbers and see how funded you are to your retirement.

And that's gonna be based on today's market. You know, you can put in what the value of your assets are today and it's gonna show you how funded. But then after that, we're gonna spend some time and we're going to help you understand your true risk tolerance, help you build that as allocation that fits your specific goals.

There's not a one size fits all when it comes to investing for retirement, unfortunately. That's true. Now that we've gone over what the first trend is, that died in 2022, let's talk about the second one, the 4% rule. Yeah, this has been, I've seen this on headlines all over the place. The 4% rule is dead.

You gotta rethink the 4% rule. You know, there's, uh, there's so much going on right now. I think any time that the market goes through periods like this, people always start questioning these old school thought processes of investing. Before we debunk it a little too much, I just wanna refresh on what the 4% role is.

It's where you should withdraw 4% from your portfolio next year. Do it again, plus adjust for inflation. David Blanchett, the head of retirement research at P G I M, he actually says that it's really difficult to put into words how awful this year's been. If a client walks into your office, you can't just say 4%.

You shouldn't anyway, but you can't, I guess. Yeah, you, you never just, If someone walked into our doors and. 4%. 4% for you, For you, for you. There's the, there's no, let's just put a sign on the door. 4%. 4%. Hello. You're welcome. Welcome to 4% Wealth Management. . No, there is, you know, it is a very challenging time.

You've got portfolios dropping and, and you look at the 60 40 portfolio, you know, that famous, you know, retirement portfolio of that balanced portfolio as of October 31st was down 17.9%, which is one of the worst years it's had on. And guess what? We still have two months to go. Yeah. So we don't know. Who knows if it gets any better than that.

And then you got the other side of it. So you're taking out 4% if that's what you're following, and that's based on your portfolio value. But then you're also adjusting for inflation. So now you've got portfolio values down inflation higher. And if you lived by that rule, now you're having to take out a much bigger chunk than just 4%.

All thing's already outta whack. It is on depressed asset values. I like that. Out of whack. She puts it the right way. , uh, when you look at the actual origin of this, that 4% rule, so it was William Banging that came up with this. He was the author that, you know, came up with a concept back in the nineties.

He was, he said in that paper it is appropriate to advise the client to accept a stock allocation as close to 75% as possible, and in no cases less than 50%. Uh, but the reality is that was in the nineties. Stocks were doing fantastic in the nineties when he wrote this. In today's market, you know, as I mentioned, the 60 40 portfolio is just getting blown up this year.

You know, that 4% rule just no longer applies. What are people suggesting then? Well, Morningstar did a study that found a safe withdrawal rate to be 3.3%, and that's really what people want to know. They wanna know, how much can I withdraw every year without running outta money? So they found 3.3%. And then Schwab actually did a recent, similar study that showed the safe withdrawal as a range, and they looked to that range from 3.4% to 4.1.

Now they base that range on the confidence level and your asset allocation. So we'll look at, uh, the asset allocation part of it first, and you see this chart. This chart shows what a sustainable withdrawal rate would be for a given portfolio. Now they're starting with a million dollars and they're having retirement lasting 30 years.

And withdrawals, obviously, they have to grow by inflation at a constant 2.47. , and this shows the best 10% and the worst 10% outcomes. And as you could see, if you are in a moderate portfolio, they're showing a 4.1% sustainable withdrawal rate adjusted for that inflation. And yeah, there are going to be times, because this is at a 75% confidence level, that there's 25% of the times you're not gonna have any money left over, but 75% of the time, and at the most you can have over $3 million.

So that sounds a lot better. It does sound a lot better. Now let's look at the confidence level side of it. You know, the confidence level. This is the number of times the portfolio ended with a balance greater than zero. So let me think about it this way. Are you saying that a 90% confidence level, if you looked at a thousand scenarios using varying returns for stocks and bonds, that 900 of the hypothetical portfolios.

Would have money left. That's right. Uh, anywhere between 1 cent and, you know, a lot more than what you initially invested. This isn't hopefully a lot more than 1 cent, but it's, it's giving you that, you know, if you have any money left over in that 90% that you want that confidence where. You didn't run out.

Now I would imagine that if somebody had $10 left in their account, they're going to feel like they ran out. Uh, but it is showing that you were positive. You didn't have that, uh, that worry of running out. Now as you could see in this chart, you want base your draw rate on your time horizon asked allocation and your target confidence level.

And so what this looks at is if you want a 90% confidence level and you expect that your retirement is going to be going to last 30, And you're a moderate investor, that means that your target withdrawal rate would be 3.4% to create that long term sustainability. However, if you felt like retirement's only gonna last 10 years, which hopefully it lasts a little longer for most people, but if that was your time horizon and you invested conservatively, you could take out 9.6% per year.

And it really ranges between how long you're going to need the money. How confident you want to be and what that ass allocation is. If the 4% role is actually dead, then what is the safe withdrawal rate? Well, as we talked about before, there is no one size fits all. There's not. That's where we get the range.

Yeah. That's where not everybody's walking into the office saying 4% for you and for you and for you. And everybody get We are not Oprah giving out withdrawal rates. New car for you. New car for you there. Yeah, it is. The 4% rule is supposed to be a guide. This is not a retirement plan. And that's, I think what people, they took it a little too far.

They thought, Well, I'll just live off the 4% rule and I that that's, I don't have to do any retirement planning. I take 4%. Very simple people like simplicity until a year, like this year until it doesn't work for you. Yeah, and that's the problem is that, you know, the 4% rule does apply as a general rule of thumb and a guide.

But people are learning the hard way this year. They're learning that there's more to retirement plan than just rules of thumb. And you know, what we believe in is you've gotta put together that detailed retirement plan that is based on you, your goals, your life, everything about you that's personal to you.

It's not about what. Is good for the general populace. It's good, what's good for you, and update that plan consistently. That's what we believe in. So start with that link. Uh, that's where you can see where you stand today based on your goals and what's going on in the market today. And then we're gonna set up some time where we can start building out your specific retirement plan.

Your target ass allocation help you understand your risk tolerance and base everything on your specific retirement. So, uh, with that, before we get outta here, what do we want people to do? Mel, we want you to subscribe. We want you to come along every single episode. We never want you to miss one, and I promise.

If, uh, if it's anybody reaching out to you after you fill that out, it'll be Melissa. Cuz I know most people want to talk to her as opposed to me, So I'm at least funnier. I mean, you know. Oh, that's debatable. But, uh, with that, I am Johnathan Rankin. And I'm Melissa Rankin. Thank you so much for joining us.