Matt Sawyer interviews Ted Williamson to identify and explain some of the major retirement roadblocks facing baby boomers today.
Matt: Hello everyone and thank you for visiting wealthvest.com.
Today we begin a series of broadcasts designed to identify and explain some of the major retirement roadblocks facing baby boomers today. You know, the 78 million Americans who have begun to retire and will do so for many, many years to come.
Now if you know me, it’s been my assertion all along that the retirement dilemma is different this time. The situation may deteriorate before it improves, and that the most successful advisors in our industry going forward will have to truly be experts in retirement income planning, and some of the major areas that retirement income planning will focus on going forward. We will identify what some of those areas and discuss those in detail.
Now I can’t think of a better partner to talk about those important issues with than Ted Williamson. Ted’s a great personal friend. He’s got 29 years of financial services experience with several Fortune 500 companies including MetLife, Merrill Lynch and Prudential. He’s been an investment advisor and has trained investment advisors throughout his career. He’s a graduate of Bucknell University. He earned his Master’s degree from Harvard, and is in my affectionate opinion, a top gun field consultant with WealthVest Marketing.
Ted, welcome to the program.
Ted: Well, Matt thank you so much for that wonderful introduction and it’s a pleasure to be here.
Matt: Well, we are so glad to have you. Now you’re down in sunny Florida today, so what’s the weather like down there?
Ted: I’ll tell you Matt, today is almost what I call a perfect day in that we’ve got a temperature in the low to mid 80’s. We’ve got low humidity. We’ve got a wonderful azure blue sky with those white fluffy clouds. It’s kind of like an artist’s painting, but it’s the real deal man, and I’m happy to be here.
Matt: Well, anything you can do to send that north would be greatly appreciated.
Ted: I’ll see what I can do about that.
Matt: Let’s start right into this. You know, the one thing that strikes me first is that here’s a guy, Ted Williamson, with 29 years in the industry. You’ve obviously had a client or two retire over the course of that career, and you know at the beginning I said, “Things are different this time.” I know we believe that’s true.
Ted, what is different today? What are the major differences facing retirees today as opposed to, let’s say 15 years ago?
Ted: Well, Matt that is a wonderful question and I’ll tell you, the challenges today are such that we have not seen what is going on in the world today. When you look at the news, when you read the newspaper, when you speak with your neighbors, there is a plethora of challenge after challenge.
You’ve got the Euro zone crisis. You’ve got the debacle with regards to Italy and Greece. You’ve got personal real estate prices plummeting. You’ve got 1 in every 5 mortgages either in some stage of foreclosure or
2-3 months behind on their mortgage. You’ve got unemployment stagnating at around 9%. You’ve got the impasse in Washington; Congress isn’t working with the President and it’s just negative feature after negative featured items.
You couple that with a very, very low interest rate environment. As a matter of fact, the lowest we’ve seen in about 50 years, and an extremely volatile and tumultuous stock market. It makes anyone who is planning for retiring or in retirement wonder what do I do to maximize my income? It’s just a very challenging backdrop that we’re in right now. We’re seeing things that I’ve never seen before.
Matt: You know, you do look out over a global economy, and to your point; there are a lot of different things that seem to be hitting at the same time, sort of the perfect storm. Specifically though, how does that affect a retiree and some of the issues that they face. Because if you look at everything going on out in the world, that’s one piece of the puzzle, but if you also look at certain elements of the demographic, that is the baby boomers, that sort of magnifies the problems from longevity, cost, etc.
Do you agree with that, and what would you say about that?
Ted: I totally agree because I’d like to envision retirement as a three-legged stool where the legs of the stool basically represent conduits or flows of income when you’re retired. And anyone can readily identify the primary leg of that stool, as it’s been for the last 70 years plus, and that is Social Security.
Baby boomers today have a concern around whether or not Social Security is even going to be there past the year 2035 or 2037, which is what Washington right now is telling us, is basically the end of the timelines where they can project how secure Social Security might be.
In addition to that, we’re dealing with something that we never really had to deal with before with regard to longevity, and the fact that if you take a married couple, age 65, there is a 50% chance that one of them will live to be 92, and a 25% chance that one will live to be 95. So the question now remains, how do I possibly make my assets last long enough to not fall into the trap of what is a retirees worst nightmare, which is simply running out of money. No one ever wants to have to go to their children with hat in hand saying, “Please take me in.”
So that, in addition to all of the prefacing commentary that I made with regard to the challenges, is really the #1 challenge. How do I take assets that I have today and grow them with some semblance of guaranteed certainty, where at some point in the future I can then turn that into an income flow that I cannot outlive? That is really the challenge and the conundrum.
Matt: I hate to break in, but when you were out here – and I’ve seen you do this in your seminars on occasion, you’ve got some really compelling statistics about Social Security. How many people are paying into the system, and the inception of Social Security and how that’s transitioned?
I think those are really powerful numbers that clients need to hear. Can you go back through those and put the real statistics on when Social Security was developed? How many payers were in, and what’s happened throughout the course of the last 25 years?
Ted: Sure, I’d be happy to. Social Security began in 1935, and at the time, the average age of death in the country was actually 59.8. Just under 60 years of age, the average mortality. You had to be 65 to collect social security, so basically what that tells us is that the government really had no intention of providing Social Security to the masses, and what we’re seeing today is a situation where people are living longer. You’ve got a heck of a drain on Social Security, coupled with the fact that there are far less people contributing into the system Matt, than there were at the inception.
Back in 1935, for every person taking money out of the Social Security system, there were 35 contributors. In 1980, the ratio was 10 contributors to every person taking money out of the system. In 2008, the last year we got statistics, we had 2.8 people contributing to every person taking money out of the system.
The good news here, if it is good news, is we do know Social Security should be sacred and intact through the year 2035. But that is a bit of a troubling trend and it’s something that people need to focus on because what it does is it adds even great emphasis to the importance of what people need to do on a personal basis to attempt to construct what I’d like to call a very private or personal pension plan, which of course, we at WealthVest specialize in doing.
Matt: You know that’s interesting, and I think the point that you made about 1935, is in other words, the Social Security system had no real anticipation of paying anything out at that point because life expectancies we re so low, and they’ve obviously extended greatly over the past few decades.
Ted: Well, I would say that the expectation was not to have the outflow of money to the number of people who are currently receiving it, as opposed to what the landscape looked like back in 1935. So rather than having perhaps 90-85% of retirees collecting Social Security, as you do today, you might have had only 40-50% of retirees because you had to be 65 in order to collect Social Security. And in 1935, as I mentioned, the average age of death was 59.8. So you had fewer people actually collecting in 1935 relative to today, when you’ve got an average age of death for a male America of 78, and for a female, 83 to 84 years old. So the landscape has certainly changed.
Matt: There’s something else I wanted to touch on when I saw your seminar again, I was really interested in. It’s this whole concept of – was it sequence of returns that you said?
Ted: Yes, sequence of returns risk.
Matt: So I want to set that up by saying, I’ve been in the business now for about 24 years and we’ve trained and trained advisors as wholesalers and as professionals, to set up a diversified portfolio of large cap and small cap, of stocks, bonds, and cash, and looking a different risk tolerances for portfolios, using equities and equity based products to build portfolios, which typically were able to last through retirement, through the systematic withdrawal process.
As we talk about the fact that we’ve got many of these problems with the economy and the political system coupled with longevity, that isn’t a viable option anymore, and I think sometimes it takes a little bit more definition to really look at why that is, and why it’s so important that we look at different options.
Would you talk a little bit about that just so we know exactly what that means?
Ted: Sure Matt. I think the best way to illustrate the salient feature about sequence of returns risk, is to truly simply site an example. So if you have two portfolios, both starting out at $500,000; with an average rate of return over a 25 year period of say 7%, which is a reasonable expectation – a 7% average return over 25 years. Each client is taking out 5% income from that portfolio each year, which portfolio will run out of money first?
Now it sounds counterintuitive to even ask the question because the facts are the same in both portfolios. The difference though, is how those returns are sequenced and how those returns fallout. The portfolio with early negative returns as opposed to the portfolio with early positive returns is going to lose money.
The portfolio with early negative returns, especially if those negative returns are year after year for the first four or five years, will put that portfolio in such a hole that the probability of running out of money will be extreme, and most of the examples that are sited will show portfolios with negative returns in the early years running out of money somewhere around year 14 or year 15 as opposed to the portfolio with the same average return, but early positive returns and late negative returns having a significant amount of money left in the portfolio very close to the original principal.
So unless you can tell me what the returns of the market will be over the next 3, 4, of 5 years – because I need to know what those returns are going to be – you may be on very, very shaky ground trying to construct an income flow from a portfolio of equity and fixed income of the portfolio mix with the intention of trying to generate retirement income.
It’s a scenario that worked pretty well back in the eighties and nineties because at that time the S&P truly returned between 10 and 11% on average per year. But since 1999, 2000 to be specific, we have not seen those ratio returns. As a matter of fact, I have read over the last 12 years, returns reflecting the S&P for the last 12 years have been anywhere between ½ to around 1% per year on average.
That’s ½ to 1%, with many of those years, as you know, being extremely negative such as 2000 and 2001, 2008 into 2009, and just in the last year we’ve had more volatility than I’ve seen in my 29 years in the business.
So the takeaway here is it’s become next to impossible to rely on an income stream from a portfolio because of the sequence of returns risk, which is embedded from every portfolio from which income is generated.
Matt: That’s great, and thanks for sort of framing that. You know, as I watch the markets, and I’m able to do that pretty much on a daily basis; it’s not just the day-to-day volatility that we see in the market, it’s the daily, the intra-daily volatility and today is a good example of this.
The market starts out at 150 down and comes roaring back up by the end of the day. It’s just about flat today, but we’ve seen even wider stretches of volatility just within the same trading day, which again is not necessarily unique, but it’s been a feature of this market cycle, if you will, and to your point.
Do you know what the returns are going to be today and how that’s going to affect you going forward? So thanks for that.
Hey, Ted we’re trying to keep these around 15 minutes at a pop, and I know we’re coming up onto that. What I’d like to sort of end with, and again folks, this is going to be a series but we don’t want to do too much in just one; we want to be mindful of your time.
So as we talk about – I’ll say, advisors need to focus on these concepts of retirement income planning, there are a couple of different components to that.
Can you just sort of identify what those are so the folks know what we’ll be talking about in future podcasts?
Ted: Sure, I’d be happy to, Matt.
Anyone trying to position themselves as a retirement planning specialist has to realize that the objective when it comes to retirement planning is the importance of generating income that a retiree cannot outlive. We want that income to be maximized, we want it to be as risk-free as possible, and of course you want to provide this package in a low AC type of program as you possibly can to benefit the client.
Once again, this is what WealthVest specializes in and over the next two, three, or four podcasts we’ll work on that. We’ll talk about, in more detail, around helping advisors and agents envision themselves as exactly that; retirement planning specialists.
Matt: So is it fair to say that we spend a lot of our careers on the accumulation side of the equation and now we’ve got to focus on the decumulating or the unwinding of those portfolios in an environment that truly is unprecedented and may continue for quite some time.
Ted: And that’s why a trillion bucks have gone into these annuities in the last five years, Matt and I think these days we have the most wonderful solutions out there; we just have to educate our advisors and agents and tell this story to more and more people.
Matt: Well, I’ll tell you what Ted, that’s precisely what we’re going to do through this series. I know you’re extremely busy and I know you’ve got client meetings for the rest of the day so thank you so much for taking the time.
For everybody who has taken the time to listen to this podcast, I hope it’s been useful. We are going to be doing more of these and if there is ever anything that we can do, by all means hit us at Questions@wealthvest.com.
Ted, thanks so much for your time. We’ll talk to you soon.
Ted: Thank you Matt. Bye-bye.