Retirement Income with David Blanchett

On this episode, Joe Allaria welcomes David Blanchett, Managing Director and Head of Retirement Research for PGIM DC Solutions. David is a respected voice in the financial industry and has published over 100 papers in a variety of industry and academic journals. He's also received awards for his research from the Academy of Financial Services, the CFP Board, the Financial Analysts Journal, the Financial Planning Association, the International Centre for Pension Management, the Journal of Financial Planning, and the Retirement Management Journal.

Joe and David will discuss hot topics around retirement income, including annuities, bonds, interest rates, and inflation, and steps retirees can take to improve their financial success in retirement.

To learn more about retirement planning, go to www.carsonallaria.com for additional free resources or to schedule a free 15-minute phone consultation.

To submit a listener question, visit https://www.retirementpowerhourpodcast.com/contact/ and enter the details of your question.

Disclaimer: All material discussed on this podcast is for educational purposes only and should not be construed as individual tax, legal, or investment advice. Investing involves risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results. Joe Allaria is an Investment Adviser Representative of CarsonAllaria Wealth Management, a Registered Investment Advisory firm. Information discussed on this podcast may be derived from third parties that are believed to be reliable, but CarsonAllaria Wealth Management does not control or guarantee the accuracy or timeliness of such information and disclaims all liability for damages resulting from such sources. Any references to third parties are provided as a convenience and do not constitute an endorsement.

Transcript

Speaker: 0:03

Welcome to the Retirement Power Hour Podcast, where you'll hear direct financial insights from financial planner, writer, and consultant Joe Allaria, as he and his guests uncover key wealth management strategies to help listeners invest wiser and retire better. Now, here's your host, Joe Allaria.

Joe Allaria: 0:25

Welcome, welcome, welcome to the retirement power hour. I am Joe Allaria, and this is episode six, and you are in for a great one today. I'm going to be talking today with David Blanchett about retirement income. David is the head of retirement research and a managing director for PGM DC Solutions. But David is one of the most well-known voices in the financial industry, primarily because he has published over 100 papers in a variety of industry and academic journals. And he, in his research, has even received awards from the Academy of Financial Services, the CFP Board, the Financial Analyst Journal, the Financial Planning Association, the Journal of Financial Planning. And I could go on and on and on. So I'm very excited to have David on the show today to talk about retirement income. And what are we going to talk about regarding retirement income? Well, first of all, how do you get it? What's the best way to go about approaching mapping out a plan for retirement income? And we're going to talk about the current environment with rising rates, inflation, a volatile stock market. We're also going to cover hot topics like annuities, which is a hot topic for pre-retirees and retirees. So we're going to get into all that in just a bit. But before that, I want to remind all of you listeners out there, first of all, thank you for listening. Please share the podcast with your family, friends, coworkers, or anyone that you think that this podcast would be valuable too, and we would greatly appreciate it. Also, if you wouldn't mind, go to Apple Podcasts, go to Spotify, leave us a review. That helps us increase our reach on the show and get the word out to more people about what we're doing and what we're educating about here. So if you again, if you can do that, I would greatly appreciate it. Now, something new that we're going to start on the podcast, we're going to start on this episode right here, is we're going to read listener questions, and I'm going to answer your questions right here on the show. So if you have a question that you want to get answered, just send that question in to Joe at Carsonallaria.com, or you can go to Carsonallaria.com to connect with us and get our contact information. So the first question I want to read today is I'm 58 and hoping to retire in the next few years. The bulk of my portfolio is in my 401k through work, and my husband and I have a couple smaller IRAs as well. Historically, I've used a target date fund through my 401k plan, and I feel like it's done well. But as my balance has grown to a more substantial amount, I'm wondering if I should take a different approach. Plus, with the market being down, I don't know if I should get more aggressive or get more conservative because of retirement coming up soon. Please help. Okay, well, there's a lot to unpack there, but thank you for that question. A really great question. Let me cover the first thing, which is something that I commonly see with folks coming in that are getting ready to retire, is that they have basically managed their own investments through their 401k for their entire working career, but they notice that their balance is starting to get to a place that it's never been before. They start to accumulate the most money that they've ever had in their retirement accounts, which is normal when you're getting close to retirement, and they start to get uncomfortable managing it themselves. So I would say to you, if you're not comfortable managing this and you think you might need to take a different approach, I would encourage you to pursue that and get some advice on your asset allocation, on your financial plan. The next thing that you mentioned was your target date fund, and target date funds can be very useful for younger investors, those that are in their working phase of life, especially if it's an index-style target date fund where they have index stock funds that are diversified. You've got U.S. funds, international funds. I think those can be very helpful to, again, people in their working phase, and they can do a good job for you. However, once you start to get closer to retirement, the one thing that I think target date funds can fall short on is the bond side of the portfolio. So target date funds inherently get more conservative as you get closer to retirement, which means that they add more and more bonds inside of those funds as you get closer to retirement. When you're younger, it's not that big of a deal because you don't have much allocated to bonds in those funds. But as you get older, those funds have more bonds in them. Now, the bonds in those, if it's an index target date fund, you're probably looking at index bond funds. And we just believe that there are better ways to invest in bonds. You know, in a target date fund, you don't have a lot of control over the type of bond funds, the duration, the risk, the sector. So that's where I think target aid funds can fall short. So there's an opportunity for you to improve the bond side of the portfolio. Now, as far as should you get more aggressive or more conservative, well, the the way that you should determine your asset allocation should be your own situation and your proximity to withdrawals, meaning that some investments are really designed for shorter periods of time and some are designed for longer periods of time. I don't think stocks are a great short-term investment, but I think stocks are a really good long-term investment. And the same goes for money market accounts, the opposite, I guess, that money market funds are not great long-term investments because they don't earn much interest, but yet they're they're great short-term investments, in my opinion. So I know it's tempting when things are going on in the market and you feel like this should be a great time for me to time the market and go from a 60-40 portfolio to an 80-20 or a conservative to an aggressive, but you really want to avoid trying to time the market because the truth is we just don't know how the market's going to react in the short run. And the most important thing is that you have investments set up according to your own financial plan, which means that you have investments that are set up to meet your future cash needs, your withdrawal needs in the short-term, mid-term, long term. Now, it's never a bad time to review your portfolio. So if you haven't looked at it in a while and you want to take a look now, maybe with the help of an advisor, you find out, hey, I've been too conservative for a while, and now would be a good time to get more aggressive. Not so much because the market's down, but just because you're reviewing your situation and you found out, well, there might not be a need for me to own as much bonds or as much cash. So we really try to avoid timing the market, jumping in and out, getting more aggressive, more conservative if we can. So thank you for that question. Again, if you have a question, send it in, Joe at Carsonallaria.com, and I'd love to answer it. Now, with that, I am excited to get into my interview with David Blanchett, managing director and head of retirement research for PGM DC Solutions. David and I are talking about retirement income. I know you're gonna enjoy this interview. Here it is. David, thank you so much for joining.

David Blanchett: 7:37

Thanks for having me.

Joe Allaria: 7:39

Now you're all over the financial industry. I I've followed your work previously with Morningstar, now head of retirement research at PGM. And I'm gonna I want to ask you a little bit more about that. But um, I'm so honored that you that you came on to our podcast. So I want to thank you for for joining us again. Sure. So, David, first off, yeah, tell me a little bit about your your background. I know you were again at Morningstar for quite a while. You've moved to PGem. Could you just tell the listeners a little bit about what exactly you do at PGM and your journey to sort of get where you are?

David Blanchett: 8:11

Yeah. So I mean, if we go like way back two decades ago, I used to be a financial planner. I mean, I used to, I sold life insurance for three years. I kind of um my my bad joke is I've I've been kind of climbing the ivory tower for two decades. Um I really I've always enjoyed helping people. Um, I guess I just kind of do it more now at scale. Well, maybe I used to kind of focus on more the individual conversations. Um, I got started kind of working in the DC space, a defined contribution like 401k um about two decades ago, and I've just kind of been more engaged in that. And um, for those listeners that know about 401k plans, you know, someone has to kind of run the plan, has to provide investments and options. And so I've kind of been going that track now for the last two decades. So um I was with Morningstar for about a decade. Um my title there was head of retirement research. I worked um in the investment management group focused on DC plans. Um now I work for PGM, uh, which is an investment manager uh focused on DC plans, and uh my title is head of retirement research. So it's a relatively similar job uh as I had before. Um it's just a different set of responsibilities, a different company, different opportunities, and all that. So um I'm really focused on creating research and strategies to help folks in lots of different ways.

Joe Allaria: 9:26

Yeah, so you're coming out yourself with research studies on things that affect normal everyday retirees. And as I told you, many of our listeners and many of our clients are the next door millionaire type of people, where I consider them, you know, quote, normal people, although they they're still probably in the top, what, 1%? You you'd probably have a better idea than I do on that. But you know, there's just people that have done a very, very good job saving, and much of their money is maybe in a 401k or was in a 401k. And they they don't they don't have five mansions all over the country and 10 million dollars. I mean, these these things that we're dealing with now in the market, um, one one issue that that doesn't go their way could really have a big impact on them. So that leads me to my my first question for you. So with rising rates, inflation, volatility in the stock market, bonds just being down, having I think the worst start to any year in the history, what should retirees keep in mind given this this current environment?

David Blanchett: 10:25

Yeah, I mean, 2022 has been an absolute hot mess. I mean, you've got yeah, you've got bonds down, stocks down, inflation up. That is not that isn't that is like the the ultimate worst trifecta. I mean, you can't pick a a worse environment, especially to retire. I think that you know, you like a few things. The first is is don't panic. Um I've done a lot of research um with Michael Finca, who's a professor of the American College. And you know, what we find is that older investors are the ones who are most prone to panicking when the markets kind of you know get crazy. The reason is because they're worried about it, has a direct impact if the portfolio is down on their perceived retirement enjoyment and consumption, right? So they're saying I can't do all this stuff now. And you know, the funny thing is is you'd think it'd be younger investors that would be more prone to kind of trading decisions, but I think that for the younger person, they're like, ah, like what is retirement? I I'm gonna I'm gonna keep going. So I think I think to me, the most important thing is just not to kind of is not to make um a knee-jerk decision to kind of you know have a plan in place and ensure that you just don't say, Oh my gosh, the market's down, I'm gonna go to cash. Because what tends to happen is when people go to cash and they get conservative, they tend to lock in those losses and they miss the rally. So just make sure you have a plan and you're not reacting to the volatility without a plan to adjust as things move forward.

Joe Allaria: 11:44

That's like music to my ears, hearing you say, you know, don't panic, have a plan. We did a whole episode, episode two, why you shouldn't worry about retirement if you have a plan. So don't worry about it, but but have a plan. That's super important. And we hang our hat on that here, getting a plan in place and sticking to it. And that leads me to the next the next question, which is about withdrawals. And you know, when we do a retirement plan, we sort of assume that people are just going to uh take a set amount of withdrawals in any environment because we really want them to be able to do that, uh, but that's not always the case. And I know you have some research out on this. So, what have you found in your research about being variable with your withdrawals versus fixed withdrawals?

David Blanchett: 12:31

Yeah, I mean, I think that that there's an obvious difference out there in terms of what uh is easy to model and what people actually do. I mean, retirement is like this incredibly stochastic, dynamic process where all these things happen that you could never possibly imagine before retirement. And people are gonna make adjustments over time, right? And I think that the idea behind adjusting what you spend in retirement is is very it makes a lot of sense, right? I think that everyone's different, right? The ability to adjust spending varies by retiree. Some retirees have to have X amount per year, others need more or less, whatever. I think the key is when you think about yourself as a retiree and you ask yourself, well, you know, how comfortable am I adjusting my spending level if I need to? And the more comfortable you are making those adjustments, the more you can spend from your portfolio. Um there are like rules of thumb that exist in our industry. There's this thing called the 4% rule. Um it's kind of it's kind of misnamed. Really, all it says is you need 25 times your initial income goal when you retire. And that's not bad guidance, okay? Um, but you could actually, you can only need maybe, maybe 15 times if you're like super flexible. You're like, hey, I want to go on these cruises because I'm gonna be a younger retiree. But if but let's say that you're the opposite, you're like, you know what, I cannot afford to cut back. I have to have this every year plus inflation, or I'm gonna be really angry. Well, your number could be like 30 times or more. So I think the key is understanding how flexible you are, and that really will drive what that withdrawal rate or amount would be.

Joe Allaria: 14:02

Yeah, I think that's why rules of thumb can be, you know, it can be good, but can be bad because everybody's different. And um, so we never we never start there. It starts with the individualized customized plan, and that tells us what's best for for that person.

David Blanchett: 14:18

Well, so like one it's like one thing, like the one thing people get really upset about four percent, they're like, oh, it's like 3.4 and it's like 4.5, but other other people that are prominent out there have said it's eight percent. Okay, I'm not gonna name names, but they're like there's a prominent, a prominent financial voice in the industry that has suggested eight percent is a safe withdrawal rate, and it is not like that is like that is like crazy crazy. I mean, again, like if you're like crazy flexible, you can do it. But so people get all up in arms about like, oh, is it 3.7 or is it five, whatever. Like that. I think the key, the key for me is that like, you know, people need a lot more than they might expect when they retire, but it needs to be personalized based upon your individual facts and certain.

Joe Allaria: 14:58

Yeah, and things are out of our control. Again, like in 2020, uh, we had many conversations with clients that said they had a bunch of extra money in their checking account, savings account, because that they couldn't spend the money. They they wanted to travel but but didn't. And who would have been able to forecast that? So we like to draft plans where people can assume that they can, you know, at least maintain the level they want, which includes all the extras in the travel. But some people want to retire a little bit sooner and maybe they're more borderline. And that's a great question to ask and a great thing for them to think about. Can I be variable? Am I willing to cut back if the environment is you know not an ideal environment? And right now, inflation is probably the one of the biggest things. I I got gas on the way to work this morning, and uh I looked at the the meter about three times once it was done pumping. I paid over 80, 81. I have a you know, four-door sedan. Um, it was just mind-blowing. And so everyone's feeling it. You know, we're hearing about it all all over the place, especially in our industry. So, in your experience, how how do certain um guaranteed income products in our space address inflation? Or how can how can retirees address the concern of inflation?

David Blanchett: 16:17

Yeah, so I mean there's there's there's a a lot to unpack there. So, first, inflation is measured different ways. Um technically it's measured these things called the consumer price index. Um, there's the CPIW, which is how Social Security is linked, your benefits increase in retirement. There's the CPIU, which was a it's a more common definition of inflation. There's the CPIE. Well, the only point is that is that there's lots lots of different ways to cut that cake. And a lot of the the big drivers of inflation, especially over the last year or so, don't necessarily directly relate to retirees. I actually did a piece last week in the Wall Street Journal that actually made this exact point. Like, you need to understand what your inflation rate is before you get super concerned about you know the fact that the airline prices are up 50%. Okay, like that might not affect you at all. It might really affect you. And so inflation is a very actual, very personal thing. And it also gets to flexibility. So, like if airline prices are up a ton, if used car prices and new cars are up a ton, can you not do those things? Like if you have the flexible saying, hey, you know, I can wait to buy a car, it won't affect you as much. Like like medical inflation is always only up about two or three percent over the last year, not a big deal. Okay, however, right, you know, if we have persistent long-term inflation, that can can almost devastate a financial plan that doesn't somehow explicitly incorporate inflation into it. Now, there's kind of good news and bad news there in terms of guaranteed income. The really good news is the best place to get guaranteed income right now, and there's almost always is delaying claiming social security retirement benefits. Um listeners know this, but like delay claiming social security, um, it doesn't change based upon market interest rates. So, like if interest rates are super low, which is what they've been versus historical long-term averages, it's like a really, really good deal. Even if they go up, it's still like a really good deal because it's tax advantaged, there's survivor benefits, all this great stuff. So, to me, the place to get guaranteed income is social security, and it's also linked to to inflation.

Joe Allaria: 18:17

But I want my money now, David. I know you do.

David Blanchett: 18:20

I know you know, and one thing that that that kind of breaks my heart about a lot of these, like there's all these break-even calculators that exist. You can go and figure out you gotta live. Okay, well, here's the thing. I always make this point about social security. Okay, if you if you delay claiming to say age 70 and you die, your kids get all your stuff, okay? They could have gotten more stuff, right, but they get all your stuff. So the the the the kids, everyone is like in in spectacular shape, okay. The real risk when it comes to retirement for most individuals who kind of actively use the services of a financial advisor are what if I live to age 110 and I deplete all of my resources and then have to you have to use money from my kids to live off of. So I'm not you know, I always say, like, you know, I worry that these breakeven calculators kind of paint the wrong message because okay, you have to live to age 80. But the problem is is the downside of passing away early really isn't that bad for most retirees. It's living a long time and the implications of that on possibly, you know, your children or your loved ones who will then have to be responsible for providing for you.

Joe Allaria: 19:24

Yeah, that's something that we do, and we get some strange looks at times, but we'll run every financial plan for the most part to age 100. And most a lot of people look and say, I'll never live that long. But you know, you you don't know that. You know, you're 60, 65 years old, you could easily live to age 100. And that is the worst case scenario in the financial world, is that you live a long time. It's it's maybe great for your life, hopefully have a good quality of life, but it's the the worst case financially. On the flip side, you know, if you pass away tomorrow, well, financially, hey, you didn't run out of money, you were fine. So it's sort of an upside-down world in that sense. But you're right, living a long time that is the most expensive thing. And inflation is a big factor. And I and I want to talk about, I think you referenced it the piece you had in the Wall Street Journal, how consumers can can deal with inflation and maybe even benefit from inflation if that's possible.

David Blanchett: 20:22

Well, I mean, so I think inflation just just it just changes, you know, uh your perspective on things. I mean, things do cost more, you know, you can explicitly hedge inflation through delay claiming social security, right? Um, you can get a pretty good coverage through buying certain investments. I mean, one thing that you know, so I am I am a proponent of of guaranteed income. Um I'm gonna use the A-word annuity. Um looking at like higher quality products, but a really important point right now is there is not a single product that exists today that explicitly is linked to inflation in retirement. And so, you know, you can you can add on these things called cost of moving adjustments where it's a fixed 2%. Well, let's just say we have inflation that's like eight percent a year for like five years. I think that's unlikely, but but there's no way that you can you can hedge against that technically using you know a guaranteed income from other other insurers. I don't know that that retirees need that, but if you are worried about inflation, if you are exposed to it, you know, delay claiming Social Security is the way to go right now, but you also might think more about using you know investments to do that at least intermediate hedge versus buying a nominal annuity because of the impacts of that longer term.

Joe Allaria: 21:33

Yeah, the the retirement income puzzle that so many people have a hard time figuring out, which is why we exist as a firm, is to help people with that. But it's the question of do I invest in stocks and bonds? Do I use what you said, annuities? Do I delay Social Security? It's all these foreign questions that no one's ever heard or had to deal with before. And it and it's tough because there's, in my opinion, I don't think there's one right answer. Right. And that's maybe not a what most advisors say, because I think most on the annuity end of the spectrum would say everybody needs an annuity, right? Well, maybe I would say maybe, maybe not. You know, maybe someone has a pension, maybe they have two pensions, maybe they have all the, you know, two pensions and social security and have more in guaranteed income than they're ever going to need. I don't think that person needs an annuity, but then you have the person over here that has everything in a 401k, no pension. And so Social Security maybe is maybe is all they have in terms of guaranteed lifetime income. And maybe they have a high amount of living expenses too. So when you talk about you know high amount of withdrawals, high reliance on non-guaranteed sources, then we start to think about okay, well, an annuity might be a good fit. Also has to do with your risk tolerance as well. But you know, in terms of annuities, you've got so many different types, and I've tried to educate and I really appreciate your research on the topic of annuities, because I would say we're for them in the right instance, like I mentioned. But you did a piece in advisor perspectives that explored light annuities, and in that you you talked about seven retirement income strategies, which included uh no annuities, delaying social security, immediate annuities, guaranteed lifetime withdrawal benefit annuities, deferred income annuities. Can you talk a little bit, just real briefly? I know it's it's hard to probably condense it down, but what did you find to be the top strategy in your research and for retirement income out of those seven that you looked at?

David Blanchett: 23:27

Well, I mean, to delay claiming social security, like it is the layup. And the thing is, and I actually didn't even fully um incorporate all the benefits because I don't incorporate like the tax aspect to it, the survivor benefits to it, the the explicit inflation heads there. So I mean, like, I mean, it is like today unbeatable. Now, to be fair, you know, like the payout structure could change if interest rates keep rising, that it's marginal benefit over other strategies declines, but still, like I just I'm I'm amazed at how many advisors don't actively recommend that as just a starting point for retirees, just because it is such a good deal versus everything else out there right now.

Joe Allaria: 24:05

Right. So interesting. Yeah, you don't hear that reinforce enough, I don't think, on social security. We talk about it, but there is a huge psychological factor, and it's it's that, well, I don't want to dip into my money and wait for Social Security, which is not my money, which hey, is it even gonna be there? I don't know. Do you follow the Social Security, you know, state of the Yeah, you I mean you have to.

David Blanchett: 24:29

So I think that the notion, like it'll definitely always be around, right? There's like, I mean, it's it's a it's a social security system to ensure that our our grandparents and elder Americans are not destitute, right? So it's not going anywhere. Right. Um, there is a trust fund that's becoming depleted, even if it becomes fully depleted, um, it would result in a benefit cut about 25%. But I mean, here's the thing I think the odds of them cutting existing retiree benefits is approximately zero. Um, older folks vote. Um, no one wants, I don't want my great grandfather who's 96 years old, to have less money to live off. Like that's just not a way that we Americans are going to take care of each other. I think it's highly likely that that younger Americans will experience um smaller benefits. I think that they could raise easily like the tax rate on benefits. I think there are there are ways that you can make the system solvent, but it it will not it will not fall on the shoulders of older Americans. It'll fall on the shoulders of younger Americans. That's how they've always done it in the past. And so, you know, I wouldn't, you know, if you're probably past the age of 55, I just can't think it's going to really affect you because it's not the way they've instituted changes in the past.

Joe Allaria: 25:36

Boy, you it sounds like I'm hearing an echo from uh other shows where we've talked about social security because I've said the same thing. I mean, the the chances of a 25% cut, and that would be across the board, the chances of that cutting grandpa and grandma's social security when that's all they have, there's just there's too many people that that's all they have coming in, and it's not that much already. And the chances that they're gonna cut that more, I don't think are like you said, they're probably about zero percent, but that it's not going away. I'm still gonna be paying it for a very long time. So the people that are retiring will get to enjoy that. And I agree with you. I think delaying is good. You got to look at your health, and that's that's a big consideration.

David Blanchett: 26:18

Even even the thing is like, even if you're like crazy unhealthy, it can make sense to delay if you are the unhealthy and your spouse can get a higher benefit, right? So I think that there's a lot of things that aren't intuitive. And in the grand, like to me, in like the grand scheme of things, like most if you are working with a financial advisor, so that means you're on average much wealthier, much healthy than the average American, you should likely be delayed claiming to age 70, assuming that you can't. Like, you know, there are going to be exceptions to that rule, but by and large, like that should be the default if you have any kind of means to fund retirement. Awesome.

Joe Allaria: 26:52

Fair enough. You know, I want to talk about annuities and guaranteed income a little bit more because it seems like in the past, annuities have had a very negative connotation, maybe due to fees, due to lack of education, or you know, how they not knowing how they work, the lack of transparency in sales practices and such. Do you think that's still the case today where people have a negative connotation or annuities have a negative reputation? Is that is that still the case in 2022?

David Blanchett: 27:20

Oh, heck yeah. There was a dateline special on annuities, and it wasn't Chris Hansen popping out, but you know there's a dateline special, things are going wrong. I think I mean, for better or for worse, you know, an annuity is is a product, right? And and that that product annuity has changed radically from when it was introduced, say, 2,000 years ago. Now it means like so many different things. And for better or for worse, a lot of the individuals that that recommend or sell these products aren't fiduciaries. They don't have to do what's in the client's best interest. And so what you often see, not always, is is a lot of a lot of products, a lot of situations where it just really isn't in the client's best interest to do that. Now, I think that is changing, right? I think that we see more advisors, more planners actively considering them because in the past they weren't necessarily products designed for, you know, like fee-only advisors or low commission products. There's a lot more of those today. And so, you know, one point I always make is I totally get that there's a lot of bad products out there, but like for advisors, you know, you know, advisors pick among like 25,000 mutual funds and investments. And I I can guarantee you, well, not guarantee you, but I'm pretty confident that when they build a portfolio, they pick really good investments on average. So I like I always make the point like I feel like an advisor should be able to figure out what could potentially help and what couldn't, because that's what they're paid to do. So again, like right now with inflation, things going on, like I'm not suggesting that that every every retiree needs them. I think a lot could, but you should be able to figure out certain clients you know that could make sense for certain products just based upon that evolving landscape.

Joe Allaria: 28:54

Yeah, and I I I'd love to dive into which we're not today, but I'd love to dive into the work you've done with annuities in 401ks and all that, because that's sort of a new landscape. But just in general, when what do you think makes a good annuity for a retiree or a pre-retiree? How should they evaluate that if they're shopping?

David Blanchett: 29:14

Yeah, so I an important point, like when I'm you know, when I think about annuities, like I I almost always pick the lens of them as a product to create protected lifetime income. Um, in reality, though, most annuities that are sold are more accumulation focused, right? So when I when I when I'm using the A-word, I'm focused on their more traditional approach or benefit, which is which is lifetime income. Right. I think that you know, like where they can make sense, and this also applies to Social Security, is just ensuring that you know it how much money do you need to have guaranteed or protected no matter how long you live? And I think that that that is an important starting place. You know, like what is your threshold where if you have less than this, you're gonna be in a deep world of hurt? And I think that that you know, you're gonna get part of that from Social Security. Maybe you have a Private pension, a DV plan, something else. And then if you don't, if if all those you know bases don't cover what you need, I think you can look out in the market. And there are very simple products. There are what are called deferred income annuities, there are single premium annuities, there are other, there are lots of different products out there. Um, the key is is figuring out, you know, for whatever reason, which one makes the most sense for your situation.

Joe Allaria: 30:21

Yeah, I think understanding the fees, understanding how the product works and what it's really designed to do. Yep. If I had to guess, the biggest complaints about annuities, it would be, it would be fees, and then people that don't understand the lack of liquidity around some of the types of annuities where they they purchase it and they don't realize, well, if I I want to take all my money back out, that now I have to pay a penalty. Or, you know, and I just I didn't understand how the growth worked because I heard someone on the radio saying that, oh, your annuities can grow with the SP 500 with no downside risk. Well, that's that's not true. That that's that's totally not true, and not a complete statement. And I think that's a problem. I'm I'm I'm sharing my own opinion because I think annuities can be a good tool. But like you said, when they're sold for accumulation, that's where the complexity, I think, comes in because you've got all these index products that people don't understand how the indexes work. But you know, on the other end, there are annuities that provide guaranteed lifetime income, and you could you could get a deferred income annuity, an immediate annuity, uh, an index annuity with with an income writer. And that income writer could have just simple guarantees embedded, and it's really not that complicated to figure out, but yeah, you could also go the other end and get really complex. So you can't say anything is really like a bad investment type, an annuity. You can't say annuities are bad. Yeah, it's like saying, like you said, mutual funds are are they good or are they bad? You can't say that. There's so there's way too many different types and varieties, but you got to find that right fit for you of fees and and benefits.

David Blanchett: 31:56

I think that annuities are are kind of an easy whipping boy because there are maybe maybe there's more bad annuities than bad mutual funds. I I don't know, but there there is there is often less or more complexity, less transparency. And so you just you often end up in situations where someone was sold a product that really wasn't what was best for them. But again, that doesn't mean that they're all bad, just that that one that person was sold was bad.

Joe Allaria: 32:20

Yeah, exactly. Um, and and you were quoted in a CNBC article recently about rising rates and how it might be a good thing for annuity buyers. So I was wondering if you could talk just a little bit about that.

David Blanchett: 32:32

Yeah, I mean, so I mean the thing is rising rates are, you know, if you if you had your money in cash, you can now earn more money on your cash. And I actually have a you know, I have a checking account that's not paying 1%. It's been paying nothing forever, right? So I mean, rising rates aren't necessarily a bad thing for anything that that's tied to them. So, you know, you know, if you buy a bond right now, the the the coupon is higher than what it was three months ago. If you buy an annuity that's linked to any kind of like market rate, it's up. And so I think that that yes, like, you know, yes, bonds are down, but you know, there's an inverse relationship between bond returns and bond yields. And so it's true that that you probably have lost money on your bond funds over the last three months, but the good news is going forward, you're gonna you're gonna make that back slowly over time in theory, based off the higher yields today.

Joe Allaria: 33:20

Right. Yeah, and that was actually that was actually my next next question was about bonds. We've seen bonds get really beat up. And you said, yeah, over time you can catch back up as higher yields persist for longer periods of time, that that helps. But at PGM, I mean, you guys you do a lot of different things, but you know, you're known pretty well for fixed income. So what is your long-term view of bonds? Do you have major concerns about that? Or is it like you said, is it just a matter of time before things catch back up?

David Blanchett: 33:49

Well, I mean, I think you know, everyone, everyone's gonna have different perspectives on this. I mean, I have been relatively shocked at how quickly the yields increased over say the last three months. Um, yeah, it's hard to say if this is permanent. Um, there's you know, different reasons why they could actually go up more or go down, but I still think that bonds are an essential part of uh an individual's portfolio. Um, I I said that back when they're yielding one percent. I think that no matter what you do, you have to have this safe asset. And I think that, you know, for a lot of folks, maybe you have like riskier bonds, but I think having that kind of like relatively low to intermediate duration, high quality bond exposure is just so important because they do well typically when you need them the most when markets are down. Now, today is obviously an anomaly. Um, but I think that the bonds, you know, people were like, oh, fixed income's dead when yields were only at like one percent on, you know. No, like like they serve an important part of a portfolio. Now, you know, if you can only make one percent on fixed income, maybe it changes how much you allocate to them, how you invest, how you spend. But you know, we don't get to choose what markets return. We can't choose what dividend yields are, what markets do. Uh we but it doesn't change the need to have a diversified portfolio.

Joe Allaria: 35:04

Yeah, that's that's refreshing to hear to hear you say that. We say that all the time, that bonds are an essential part of a portfolio. And we talk about a bucketing approach where there's I don't know how many bunches of of bucketing approaches out there, and we've got our own variety of that. But what I tell clients is that every investment is really designed for a specific period of time. You know, there's there's again, there's no bad investment. Your checking account, David, that you mentioned, that's not a bad investment. That's a bad long-term investment. It's a great short-term investment because it's liquid, it's it's safe, you earn a little bit, but that's not not really your main concern. So, bonds, you know, we we like to use them in that sort of the midterm bucket where you've got some different layers of you know, really safe bonds, maybe some intermediate to earn a little bit more than that checking account. But boy, that 30 minutes went very fast. Um, I could talk with you all day, David, but I just want to thank you again for coming on and sharing your insights. I know that our listeners are going to enjoy listening to this interview. Is there anything if you could leave our listeners with one thing today, given the environment, given they might be a little anxious with inflation and interest rates, anything you want to leave them before we call it a day here?

David Blanchett: 36:15

Yeah, I mean, I don't want to give you more work, but I think it's it's good that they regularly check in with you now more than ever. I think that now is now is when the value of advice is probably the highest, is ensuring that, you know, you know, because things could change. The markets could go down 30%, interest rates could go up, inflation could be high. It might require adjustments, and the sooner you can address them with a solid plan, the better. So I mean, you know, change is just the nature of life, and I wouldn't I wouldn't fear it. And and the faster that you can address it with a professional, the better off you're gonna be over the long term to create those expectations. So I would say that you know, it might you might be afraid to call right now give it things, but it really is the best thing to do just to make sure that you know that it because things happen and you want to make sure that your that your current plan is the right one that's gonna last you 20 or 30 or 50, how many ever years. The longer it takes you to address any kind of pain points, the the more painful it might be.

Joe Allaria: 37:06

Yeah, you took the words right out of my mouth. If you're listening out there, call us, we're happy to help. We do a free retirement analysis for those within five to ten years of retirement, and no better time to do it than than right now. David, thank you again. Appreciate your time. Thank you very much a million times. I enjoyed it, and I hope we can do this again sometime in the future. We'll keep following your work at PGM and uh best of luck to you. All right. For everyone else that's watching, listening, thank you for tuning in. Make sure and check us out on Apple, Spotify. Uh, you can listen to the podcast or watch us on YouTube. You can go to our website, Carsonalaria.com, and check out more resources there. With that, I want to again thank David. Thank you for listening, and we'll catch you next time on the Retirement Power Hour Podcast. Take care.

Speaker: 37:53

Thank you for listening to the Retirement Power Hour Podcast. All material discussed on this podcast is for educational purposes only and should not be construed as individual tax, legal, or investment advice. Investing involves risk of loss, and investors should be prepared to bear potential losses. Past performance may not be indicative of future results. Joe Allaria is an investment advisor representative of Carson Allaria Wealth Management, a registered investment advisory firm. Information discussed on this podcast may be derived from third parties that are believed to be reliable. But Carson Allaria Wealth Management does not control or guarantee the accuracy or timeliness of such information and disclaims all liability for damages resulting from such sources. Any references to third parties are provided as a convenience and do not constitute an endorsement.