Real Retirement Disruptors

By Dean Barber

April 1, 2021

Real Retirement Disruptors

Key Points – Real Retirement Disruptors:

  • What are some retirement disruptors?
  • Considering becoming a single taxpayer
  • Planning Social Security 
  • Long-term care and managing risk
  • Stock market as a retirement disruptor
  • Healthcare as a retirement disruptor
  • 25 minute read | 39 minutes to listen

When you head into retirement, it’s supposed to be the time of your life. The time where you’re supposed to sit back and enjoy the fruits of your labor. A time when your money can go to work for you. Unfortunately, there are many disruptors out there in your retirement. Join Dean Barber and Bud Kasper as they talk about real retirement disruptors and how to avoid them.

Complimentary Consultation

Download Retirement Plan Checklist

Video: Why You Should Never Be Sold Insurance

Article/Show: What Should I Invest My Money In?

Article/Show: Top 10 Risks in Retirement

Real Retirement Disruptors

Happy Easter

Dean Barber: Thanks so much for joining us here on America’s Wealth Management show. I’m your host Dean Barber along with Bud Kasper. Well, Bud, Happy Easter.

Bud Kasper: Happy Easter. Yeah, is that bunny jumping around in your front yard?

Dean Barber: Yes. Well, that bunny. There are several of them.

Bud Kasper: Is that right?

Dean Barber: Yeah.

Bud Kasper: So you’re raising bunnies now. Okay.

Dean Barber: They run wild. Well, I hope everybody out there has a beautiful weekend with their families and enjoys the spirit of the Easter weekend here.

We want to talk about today is the idea that there are many things out there that we don’t necessarily consider as individuals heading into retirement. Those are things that can disrupt our retirement. 

Real Retirement Disruptors

So we want to address some of those things today just to kind of get people’s wheels turning a little bit and think about, okay, have I covered all of these bases? And do I have a game plan if one of these disruptors comes around? Do I know exactly what I’m going to do?

Bud Kasper: Right.

Dean Barber: Of course, we created years ago our Retirement Plan Checklist, and that Retirement Plan Checklist was designed to ask the individual heading into retirement, “Have you thought of everything, addressed everything, is your plan complete?” So, I would encourage you to click here to get a copy of that Retirement Plan Checklist.

Take a look at it and go through all the questions and see if you can answer yes to all the questions. And if you can’t, then obviously there’s work that needs to be done. And so, but let’s spend a little bit of time today talking about some of these disruptors.

Bud Kasper: Yeah, and let me add to that. I would guess, and I don’t know factually, that that is probably the most asked for of all the pieces that we’ve written on financial matters. Wouldn’t you?

Dean Barber: Oh 100%, yeah. Yeah, by far.

Bud Kasper: Yeah, that and taxes, you know?

What Are Some Retirement Disruptors?

Dean Barber: Yeah. Well, and taxes is one of the disruptors in retirement.

Bud Kasper: Yeah, it sure is or can be for sure.

Dean Barber: Well, most people, until they start getting Social Security, don’t understand how Social Security is taxed, and they don’t know that it’s possible to have $80,0000, $90,000, $100,000 of income coming into your bank account every month or every year. 

I’m sorry, every month, that would be something, wouldn’t it. And when we do that, Bud, we can do that and get that income and not cause Social Security to be taxed if we do it right because Social Security by itself is a tax-free source of income unless you disqualify yourself.

Bud Kasper: Yeah. That’s one of the things that when we’re having our first meetings with clients and we mentioned some of the things that factor into a good financial plan, that’s one thing for sure because people don’t understand taxation in retirement. 

They understand it while they’re working. And it’s pretty simple, the W2 income, from that perspective. But in retirement, lots of things change.

Taxes are a Retirement Disruptor

Dean Barber: They do. And so let’s kind of hit that one first, Bud. So a couple of things on taxes in retirement. So you can control taxes in your retirement, unlike during your working lifetime.

Now, if you’ve done an excellent job of putting together what we call a tax-diversified portfolio, meaning that you’ve got some money in a taxable account, you’ve got some money in a tax-deferred account, like an IRA or 401(k). You have some money in a tax-free account, like a Roth IRA or a Roth 401k, then you can start to take income. 

And if you take the right amounts from the right buckets, you can reduce your tax burden substantially over time. And you can control how much of that Social Security becomes taxable by taking out of the right buckets.

Example: Pension Versus Lump Sum

Bud Kasper: Yeah. We had a visit with a prospect that came in just last week, and in the course of our meeting, we were looking at pension versus taking a lump sum. 

Now, it’s not an easy question because people need to understand what the give-up is. If I take a lump sum, okay, then I have complete control of my money. If I take a pension, it’s a steady check coming into my account every month.

It was right around a $2 million case that we were working on. So, when we went through the process, the person was so incredibly shocked because there were so many things that they didn’t understand in the thinking process about what would be the right decision for them.

Dean Barber: Right. Well, Bud, that what you’re talking about right there is why we have spent the last two decades entirely focused on working with people that are near retirement or in retirement.

Especially in that transition phase, there are so many questions that need to be asked and answered to ensure that you get it all done right.

Tax Brackets in Retirement and the Single-Tax Payer

So back to taxes for just a minute. I want to throw this out there. And a lot of people don’t think about this. So when we look at things, to get into the 24% tax bracket for a married filing joint couple, they have to have income in excess of $172,751. They don’t get into the 24% tax bracket as a married couple until $172,751.

Dean Barber: However, if one spouse passes away, you’re going to get into that 24% tax bracket at just $86,376.

Bud Kasper: Wow.

Dean Barber: So that single taxpayer, the surviving spouse, is unlikely that the income will drop in half. The surviving spouse will be thrown into a higher tax bracket when their spouse passes away.

Bud Kasper: And so it’s a double penalty?

Dean Barber: Right. And then they lose a portion of the Social Security. So a disruptor, there is a domino effect. A premature death causes higher taxes and less Social Security to come in.

You Need to Understand These Retirement Disruptors

Dean Barber: Look, you guys, everybody is listening right now. You need to understand what these disruptors are. You need to make sure that you’ve got your ducks in a row when it comes to retirement.

I encourage you to get a copy of our Retirement Plan Checklist and schedule a complimentary consultation.

You can have a visit with a CERTIFIED FINANCIAL PLANNER™. You can either have them call you, and you can visit by phone. We can do a virtual meeting, or we’re happy to meet you in the office and in any of our locations. Click here to schedule your complimentary consultation.

It’s Hard Enough to Lose a Spouse

Bud Kasper: The things that we’re talking about here are so critical in many ways. I mean, think about what you just said, a premature death. Not only are you sad due to losing your partner, but you’re penalized by the government too.

Dean Barber: Yeah. Bud, you and I have been around long enough that we’ve had this happen with multiple clients of ours. I’ll never forget kind of one of the things that made me feel good was a client who had passed away, and the wife was in. 

She looked me in the eye, and she says, “Dean …” She says, “I so appreciate the fact that I can just spend this time grieving because I know that everything from a financial standpoint we’ve already thought through, and it’s taken care of.”

Bud Kasper: What an incredible statement.

Consider Social Security When Losing a Spouse

Dean Barber: We’re talking about things that could disrupt your retirement. And as we ended that last segment, Bud, we spoke a bit of a premature death affecting the surviving spouse. 

Not just in an emotional way, but there’s a loss of income because, typically, both spouses are getting Social Security. Then the lower Social Security goes away when the first spouse dies. But also, that surviving spouse could jump up into a higher tax bracket.

Bud Kasper: Yeah, it’s a terrible thing. I don’t know who conceived such a result when someone is grieving over the loss of their, in most cases, spouses.

Dean Barber: The question, though, is, during your planning process, have you considered that? Have you looked at what happens if there’s a premature death?

Bud Kasper: Yeah. The way I look at it is the government is saying, “Look, I want as much money out of you as I had when your spouse was alive. So we’re going to get as close as we can with that.”

Dean Barber: Or more.

Bud Kasper: Yeah, or more in this case. Yeah. So, it’s crazy.

What About Long-Term Care?

Dean Barber: So along with the premature death could be a long-term care stay. 

Most people don’t come out of a long-term care facility. They don’t come home. They normally pass away in the long-term care facility. That’s the last stage of life.

Bud Kasper: Right.

Dean Barber: Right? So could you have the potential disruptor of one spouse needing long-term care, the other spouse still wanting to live as normal of a life as they possibly could. Then the spouse that’s in the long-term care facility after maybe a year or two or three or four, they pass away. So the lower Social Security goes away. 

You have the higher taxes on the surviving spouse, and you have eaten up several hundred thousand dollars of assets that could then drastically affect the surviving spouse’s ability to live the life that they want.

Making Judgment Calls

Bud Kasper: You know, statistically speaking, when you think about that and people are trying to budget themselves in retirement, they’re saying, “Well, I don’t want to have to pay a long-term care policy on both of us.”

If you’re making a statistical judgment in terms of who the survivor would be, then maybe you cover long-term care on that person with the probability that they would be the ones who are going to survive.

Rather than draining all the retirement money when they’re in the facility, we take care of that through that insurance policy.

Dean Barber: We have a couple of things that people need to, I think, pay attention to here. But we did a video here recently on Why You Should Never Be Sold Insurance. Just click here to watch that video with Bud and me. But this is a scenario, Bud, where people often are sold an insurance policy.

Bud Kasper: Right.

Managing Retirement Disruptors

Dean Barber: Right? Now we know that risks are real. We understand that the potential risk of a long-term health care stay or the potential risk of premature death is a real risk. 

We need to address those things and manage them through the financial planning process. So using our Guided Retirement System™, we’re going to run the scenario first that says, “This is the fairy tale retirement. Nothing goes wrong. Everything is great.”

Bud Kasper: No disruptions.

Dean Barber: You live to normal life expectancies, et cetera. Maybe you live beyond normal life expectancies. We never have an increase in tax rates, never have a premature death, and never have a long-term health care stay.

Bud Kasper: The stock market grows every year.

Test Your Plan for Retirement Disruptors

Dean Barber: So, that’s our kind of the fairy tale retirement. We know that that’s not going to be a reality, but we start with that baseline in mind. Then we go in and say, “Okay, what are the possible things that can disrupt it?”

So we’ll throw in a potential for a long-term health care stay and then a premature death. What we can see at that point is what the real risk to the surviving spouse and the ultimate beneficiaries is? 

If we see that that risk is something that you, as our client, are not comfortable with, then we address it, and we say, “Okay. So we’ve got two choices. We can either self-insure that risk, or we can transfer that risk to an insurance company.”

But we only want to transfer the risk to the insurance company that we need to transfer to the insurance company because we could self-insure. Right?

Bud Kasper: Right.

Here Comes the Insurance Salesperson

Dean Barber: So in this case, the insurance salespeople are going to come in, and they’re going to go, “Oh, my gosh. Can you imagine this risk is this and this and this? Look, for only $5,000 a year, we can make sure you’re taken care of on long-term care. And by the way, we can do the same thing for your spouse. Oh, the premiums, they don’t go up.”

Well, guess what? They do. People who have long-term care insurance see double-digit increases in their insurance premiums right now, and it’s not good.

Bud Kasper: Yeah. Same thing with life insurance. How many cases have you run across, Dean, where a person has a life insurance policy, but when you look at the plan and the amount of money they’d saved in their 401(k), IRAs, Roth IRAs, et cetera, there wasn’t a need to keep paying premiums for that insurance? So, therefore, a judgment needs to be made.

Understand How to Measure Your Risk Management

Dean Barber: Exactly. So you can go on both sides of that. Either they ignored the risk and said, “I’m not going to have insurance.” Or they have an insurance policy that they’re paying a premium on that they don’t need to pay that premium anymore. 

Understanding how to measure those things is critical. And that’s part of what our Guided Retirement System™ does.

Bud Kasper: Yeah. I want to add to that. You know we’re not saying that you don’t need insurance. We’re saying that only get the right insurance for the right need, or what could possibly disrupt your plan. 

If insurance is the answer to offset what that pain could be, then well, certainly we should address it. And by the way, that’s what part of the comprehensive financial planning is that we’ve established inside the Guided Retirement System™.

Example: What if You Had a Ford Taurus?

Dean Barber: Right. And here’s, I guess, the way you could think about this, Bud. If you had a Ford Taurus, okay, and your insurance agent wanted to have you insure a Mercedes-Benz, you’re going to go, “Well, you’re crazy. All I’ve got is a Ford Taurus. Why would I pay the premiums to insure a Mercedes-Benz?” Okay?

As crazy as that sounds, we see that happening when people are sold insurance. When you don’t understand how to understand and measure the risks, and you’re sitting in front of someone who sells insurance, you will be sold something that may not be what you need. 

So cover only the risk that you need to cover. Don’t spend another dollar in premiums more than what you need to because think about it. Nobody buys any insurance thinking to themselves, “Okay, I got my insurance. I can’t wait to file my first claim.”

No, you don’t do that. You buy insurance, hoping that you never have to file a claim. The insurance company hopes you never have to file a claim. Right?

Bud Kasper: Exactly. They don’t want to payout.

Dean Barber: They want to collect the premiums.

Insurance as a Financial Planning Tool

Bud Kasper: Yeah. And I’ve had some serious issues with that subject, Dean. I can name probably two or three, instantaneously, people that bought insurance policies by well-known companies, and they put a lot of money in, and I’m just going to throw out a number. Have $150,000 worth of cash value inside that contract. 

Guess what? They can’t get it out unless they borrow out of the policy to do it. It was a savings vehicle. But there are issues associated with the distribution of that money that now penalizes them and many times handcuffs them to the policy.

Dean Barber: Yeah, if you put money into an insurance policy like that, it should be to transfer risk and increase the amount of wealth that transfers to the next generation. But you and I have seen it many, many times. I don’t ever like to think of it as this is a place where we’re going to start getting income from because you’re right. You do have to borrow it.

Bud Kasper: Yeah, but it’s sold that way in quite a few cases.

Dean Barber: Right.

Bud Kasper: Yeah.

Auto Insurance as an Example

Dean Barber: Well, I’ll use your car insurance agent coming to you and say, “Well, you’re paying a hundred bucks a month for your car insurance. We’ll give you the same coverage, but we want you to pay $500 a month. We’re going to take that difference, and we’re going to invest it, and the insurance company will make 9-10%, something like that. We’re going to pay you 3%. And if you ever want your money, we’ll let you borrow it from us.”

Bud Kasper: Yeah. I’ll state it a different way. If insurance is the only thing you sell, it’s no different from a carpenter with one tool, a hammer. Everything looks like a nail.

Dig Deeper

Dean Barber: All right. Look, there’s a lot of disruptors out there. We’ve been talking about why you should never be sold insurance. We also put a video together on this, which you can find here.

There’s also a recent show that we did called the Top 10 Risks in Retirement. Lots of educational materials out there in our Insights section. Also, the ability for you to get a complimentary consultation. 

That complimentary consultation can happen through a phone call, through a web meeting, or in person.

So click here to schedule a complimentary consultation so that you can make sure that you’ve covered all of your bases and you’ve thought through every single thing when it comes to your retirement.

So some other things that might disrupt your retirement could be a crazy stock market. It could be a crazy Congress raising taxes. There are all kinds of things. 

Stock Market a Retirement Disruptor?

Dean Barber: And today, Bud, we are talking about disruptors in retirement, and a lot of times when people think about disruptors in retirement, the first thing they go to is a bear market, lousy stock market, bad investment choices. 

Bud Kasper: Right.

Dean Barber: So let’s address it. 

Bud Kasper: Sure.

Looking at the 2020 COVID-19 Market as an Example

Dean Barber: Now, first of all, you and I both know that when you have a stock market decline, especially like, let’s go back to last year when COVID-19 hit, nobody could have predicted that.

Bud Kasper: Right. 

Dean Barber: So people freaked out. A lot of people freaked out, so if-

Bud Kasper: What did we have? A 35% peak-to-trough drop in a matter of five weeks?

How Do You Mitigate Market Risk?

Dean Barber: Yeah. Yeah. It was a short period. It scared people

And yet, what did we do? 

We said, “Okay, we have constructed our client’s portfolios so that we understand from a historical perspective in the event of a bear market, what’s the historical worst-case scenario been?”

We educate our clients on what that is and is that comfortable? Can we live with that? And if that’s not comfortable, well, let’s back off the risk, right? So we want to get that portfolio to what I call the Goldilocks portfolio, the one that’s just right for you.

And no one portfolio is suitable for everybody out there. That doesn’t exist. Now there are firms out there that I will tell you that have the same portfolio for every single client. Right?

Bud Kasper: Right.

Dean Barber: I’m not going to name names, but you know who I’m talking about.

Bud Kasper: Exactly. Yes, I do—one of my pet peeves.

Market Risk is Ever-Present 

Dean Barber: Yeah. So, the market risk is ever-present, and it’s real. Okay? But we also know that on the other side of that is inflation risk. Now inflation has been relatively benign for the last; let’s call it 15 years. We haven’t had significant inflation.

Bud Kasper: At all.

Dean Barber: Okay? Except in healthcare. Okay, there is another disruptor. 

Bud Kasper: Yeah.

Healthcare Can Be a Retirement Disruptor 

Dean Barber: In retirement, healthcare.

Bud Kasper: 6.8% that we use in the plan.

Dean Barber: Yeah. So, so when we think about, why would we invest in the stock market in retirement? Well, the first question is today, what else are you going to do? 

Bud Kasper: Yeah. What are your options?

Dean Barber: I’m going to go out and buy a 10-year Treasury at 1.65%. 

Bud Kasper: I don’t think so.

Dean Barber: Right? That’s not going to get me. Inflation’s running even higher than that. 

Bud Kasper: Money market can’t get you half a percent. 

Dean Barber: Right.

Bud Kasper: So these aren’t any greater than more than three quarters.

Dean Barber: Right.

Bud Kasper: And you got to commit for ten years to get that.

Dean Barber: And you got a dividend yield on the S&P 500 somewhere in the 1.5% range. So you can get almost as much yield on the S&P 500 as you get on the 10-year Treasury.

Bud Kasper: But not without downside risk.

Putting it to the Test 

Dean Barber: Well, but think about it though, Bud. If you say, “All I’m going to do is clip that coupon and live on that dividend on the S&P 500, and that’s all. That’s my income.” Over time we know that equities will increase in value.

Bud Kasper: True. 

Dean Barber: But that’s not a strategy.

Bud Kasper: It’s kind of a default.

What Should You Invest Your Money In?

Dean Barber: Yeah. So, we’ve done shows on how you should invest your money and in retirement. I think we’ve got one, What Should I Invest My In, that we did here on America’s Wealth Management Show, oh maybe a couple of months ago as the markets started heating up and peaked out and, and we thought, “well, let’s do a show about that.” 

So if you want to go back and listen to that, that would be a good one for you to listen to. And of course, you go to find America’s Wealth Management Show on your favorite podcast app, and you can hear that. 

Construct the Portfolio with the Right Balance for Your Goals

But my point here, Bud, is you need to construct a portfolio that’s just right for you. So how do we do that? Let’s back up. We got to control this risk. We know that it’s real.

Bud Kasper: Mm-hmm (affirmative).

How Much Income Do You Need in Retirement?

Dean Barber: If we go through using our Guided Retirement System™, we can identify the return rate to get all the income you want and leave the legacy you want.

Bud Kasper: Right.

Dean Barber: Right? We call that your retirement index. That’s your return. That’s what you need to achieve to get there. So let’s say that that number is four and a half. If you get 4.5%, you can do everything you want to do, and you can leave the legacy you wish to. Right? 

Now, the question is, how do I get a 4.5% return with the very least amount of risk possible? Then, we start constructing a portfolio. If your number is six that you need to average, how do we build a portfolio that an average 6% return with the least risk?

Bud Kasper: Right. And knowing that for every higher number that you consider, there’s more risk going into that portfolio. And there’s no way around that. That’s just the way it is.

Looking at the 60/40 Portfolio

Dean Barber: Right. I mean, if you take a 60/40 stock to bond portfolio, which a lot of people say, well, that’s the optimum mix, right? 60/40. Well, if all you did, if all you did was use SPY, which is an ETF that mirrors the S&P 500, and AGG, which is an ETF that mirrors the bond aggregate. 

Can Your 60/40 Withstand a Large Drop?

If that’s all you did, and then you rebalanced once a year so that you keep that 60/40 mix, what do you think the worst peak-to-trough drop would have been with that 60/40 mix over the last 20 years?

Bud Kasper: I don’t know what that number is.

Dean Barber: 38%.

Bud Kasper: Okay.

Dean Barber: Okay? Now ask yourself the question; is 38% peak-to-trough drop enough, or is it too much? 

Can you handle it? Can your plan handle it?

Bud Kasper: And the answer, most likely is, not. You know, that’s too much. It’s just crazy.

Dean Barber: That’s a big peak-to-trough drop, and what happened there, Bud. 

Bud Kasper: So much for 60/40.

Hello, Great Recession

Dean Barber: Yeah. Well, but that’s that, but that’s the peak-to-trough drop. Right? And guess when that happened? Financial crisis. 

Bud Kasper: 2008.

Dean Barber: Yep. That was it. And, and so that kind of took a lot of people off guard, right? I mean, even a lot of the target date funds back in that period were down, you know, 30 plus percent.

Bud Kasper: It sure was and surprised the dickens out of people that that happened. But when you think about that, here’s something else to consider if you look at the stock market alone and the fact that it was down 38.5% in 2008. Why do we keep going back to that? Because everybody remembers it. Remember the phrase, “my 401 turned into 201?”

Dean Barber: Yeah.

Bud Kasper: When you looked at that, the following year, the market recovers and was up 23%, but we were down 38%. We have not recovered.

Dean Barber: Right.

It Can Take Time to Recoup Losses 

Bud Kasper: So you’ll look at the following year, and the market was up 12%, guess what? You’re still shy of breaking even. So we go to the next year and what’d did the market do? It was flat, no return. 

And so we go to the following year, and that’s when you finally broke even. So I’m talking about four years of recovery from the drop: that’s severe, Dean. Those things need to be understood.

Emotional Decision Making 

Dean Barber: Right. So what happens there? What happens there is our psyche takes over. Our emotions take over. And the two most powerful emotions in the human body are fear- 

Bud Kasper: Fear and grief.

Dean Barber: …and grief. Absolutely. Right? You got the fear that you’re going to lose money, right? 

I get the fear that we’re going to have that next Financial Crisis or the next Dot Com Bubble. And there’s been a lot of talk about what the market looks like today, and it looks like 1999. Quite honestly, parts of it look like 1999, but parts don’t even resemble 1999.

Planning Can Help Mitigate Risks

So, the point is to construct your portfolio the right way. Again, what we do is we use our Guided Retirement System™. Using that system, we’re going to look through every single possible way that you can get income, maximizing Social Security, reducing taxes. 

We’re going to come up with what is your Goldilocks portfolio? And then we’re going to show you, here’s how we would construct that portfolio to get you that desired return with the least amount of risk possible. Understand more by checking out the Retirement Plan Checklist and click here to schedule a complimentary consultation. We’re able to meet through a web meeting, via phone, or in-person.

Okay. So we’ve covered a lot of risks and disruptors. We didn’t get to interest rate risk, Bud, and that is on many people’s minds right now. And many people think with all of the printing of money that inflation is coming back with a vengeance, which could cause interest rates to rise and harm bondholders. 

The Low Interest Rate Environment

So we’ve been talking about this ultra-low interest rate environment, which was spurred by The Great Recession when interest rates dropped to near zero. We did get a 10-year treasury up around 3%, maybe a little north of 3% before the COVID crisis and all the things that went on there, but we went for a long, long period with low interest rates. 

Now we have the 10-year Treasury that jumped up to 1.77% now, and it began the year at 1%. And the 10-year Treasury is rising without the Fed increasing interest rates. And yet, the Fed has committed to leaving interest rates unchanged until 2022. Right?

Bud Kasper:  And they are committed, meaning they’re staying with that act.

Fear of Looming Inflation

Dean Barber: Right. So there is this fear that inflation is coming, and that’s causing the 10-year Treasury yield to rise. That fear of inflation and the 10-year Treasury yield rising has kind of rattled the stock markets in the last month or so. You’ve seen them all over the place. Some good days, some bad days.

Bud Kasper: But you know what? That happens a lot when you are at the higher end of the historical range of stocks.

Dean Barber: Priced earnings ratio.

Bud Kasper: Exactly. Yeah. It is not surprising that things would be a little bit jittery because what are people looking for? Bargains. And we don’t have a lot of bargains when the market is at all-time highs, and that’s what we’re experiencing.

Stimulus Packages and Inflation

Dean Barber: Well, and so the thought process is all of this money has flooded into our system in the way of stimulus packages since COVID-19 began. And the fear is that all of that money will cause inflation to get out of control.

Bud Kasper: There’s a reason for you to have that fear.

Dean Barber: Right. However, let’s talk about what causes inflation. What causes inflation is too much money chasing too few goods. 

Example: The Housing Market and Inflation

So a perfect example of that is the housing market right now. Right now, the millennial generation is starting their home-buying years. They want out of the apartments, and they want to begin having families and get out to the suburbs. They want to buy a house. 

Well, my daughter bought a house several years ago, but she wants to move further out, and she looks and looks and looks and looks. And by the time she sees a house, even if it’s the first day, it becomes a bidding war.

Bud Kasper: Yeah. And so much of it’s cash-oriented.

Dean Barber: Yeah. There is a lot of cash, but there’s a lot of them just got their pre-qualifications, and they’re ready to go. So she’s having a hard time. So what’s that do? That creates a sellers’ market, and that seller can continue to jack up the prices. 

That’s the true sense of inflation, too many dollars chasing too few goods. You got a low inventory of houses, and you’ve got a whole bunch of people that want to buy them.

Inflation and the Overall Economy

But if we look at the broad economy, Bud. What we have to look at is something called money velocity. Money velocity is simply defined as how many times per year does a dollar change hands? 

So what we want to do here is we have to ask ourselves the question, is this risk of inflation real? Or is it just perceived at this point?

Money Velocity Historically and Today

So if we look at money velocity, I’m just going to go back to 1959. Money was changing hands at a rate of 1.773 times per year. Money was changing hands in 1997, where it peaked, at 2.192 times per year. 

Now that tells you, we got the 60s, 70s, 80s, and more inflation back then. Well, look at what happened to the velocity of money. It increased pretty substantially over that period. Today, money velocity is at 1.134. So money velocity has declined by almost 50% since it peaked in 1997.

Bud Kasper: Let’s talk about that in terms that people will understand because we’re throwing a lot of math out here, and that is demographics. What causes velocity to increase or decrease? 

Money Velocity and COVID-19 

It’s the amount of spending that’s going on in the economy. Right now, because of COVID, for a lot of the reasoning with that, we’ve seen that velocity number come down substantially.

Dean Barber: So pre-COVID, we were sitting at 1.463. so since COVID, we’ve gone from 1.463 times per year to 1.134 times per year. So we’ve seen a pretty good decline, about a 30% decline in money velocity since COVID. 

The Baby Boomers

The thing is, though, Bud, if you think about who has the money to spend right now, it’s people in their 50s, 60s, 70s, right there. But if you think about what happens when you turn 50 and many things happen, but you start thinking about this reality that your amount of time you’re going to work is now limited. 

You can begin to see the end of those workdays coming. And this sense of panic sets in and says, “Okay, I got to get my debt all paid off. And I got to save as much money as possible because I don’t want to work forever.”

Well, our Baby Boomers have been in that environment now, Bud, for about, I’d say, 20 years, a little over 20 years. Cause the front end of the Baby Boom generation is now 73, 74 this year.

Bud Kasper: I think it’s 75.

Dean Barber: Okay. So if they start that at 55, that’s 20 years. If they started at 50, it’s 25 years. So we go back to when money velocity peaked. And that was 23 years ago. And it’s been steadily falling ever since because that huge generation began to pay off debt and save for retirement. 

More Economic Activity = More Money Velocity

The number of people that are in their peak spending years is way down right now. If the economy comes roaring back and people do start spending, the people who can get out and travel and do the things that they want to do, that money velocity will pick back up.

The Fed is Keeping Watch

There is some threat of inflation, but I also believe that the Federal Reserve has a good pulse on what’s happening with inflation. They look at it very, very closely, and they’re going to do what they need to do to control it. 

The Federal Reserve, right now, doesn’t see inflation being an issue for the next two or three years. Yet, the 10-year Treasury yield tells us something different, and it’s causing havoc in the bond market.

Bud Kasper: I think that people’s issues at this point is, “Wait, we’re at an all-time high.” 

This market hasn’t corrected other than the COVID correction. And can you call that a legitimate correction? Obviously, it happened. My point, though, it was because of the disease, not because of anything economically speaking. 

Hoping for an Economic Revival

As we move forward, we hope to see the economy revive. Go back to where it was pre-COVID and judge whether the market is overvalued at these levels. Then proceed from there. 

There’s a lot on our plate right now to understand where the direction of this is going to be. I understand many people going in and saying specifically. I’m don’t believe this market’s going to have the ability to continue to move forward with this without having some bear market or a steep correction.

Understand What Your Money Needs to Do

Dean Barber: It goes back to what we talked about before. You’ve got to understand what your money needs to do. 

Once you understand what your money needs to do, using our Guided Retirement System™, we can design that Goldilocks portfolio that is just right for you. That plan can help you achieve the rate of return you need to accomplish with the least amount of risk possible. 

Schedule a complimentary consultation here. A CFP® will either sit down with you by phone, a web meeting, or in-person. While you’re out there, go ahead and get some of the educational material. There’s a ton of out there in our Insights section.

There are More Retirement Disruptors Out There

All right, Bud. Well, there’s a lot of things that can disrupt retirement. We didn’t talk about them all. 

We appreciate you joining us here on America’s Wealth Management Show. Hopefully, you learned something today. Stick around and make sure and get out and listen to America’s Wealth Management Show on your favorite podcast app. I’m Dean Barber, along with Bud Kasper. We’ll be back next week. Same time, same place.

Schedule Complimentary Consultation

Select the office you would like to meet with. We can meet in-person, by virtual meeting, or by phone. Then it’s just two simple steps to schedule a time for your Complimentary Consultation.

Lenexa Office Lee’s Summit Office North Kansas City Office

Investment advisory services offered through Modern Wealth Management, Inc., an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.