Financial Fortitude in Retirement: A Message from B&H Wealth Strategies

Does B&H Wealth Strategies Offer Strategies For Reducing Financial Risk During Retirement?

Join us as we journey through the vital strategies to secure your financial future in these uncertain times. We’ll dissect the ever-evolving landscape of retirement planning, emphasizing the imperative need to mitigate risk in a world of rising inflation and dynamic markets. With insights driven by experience and innovation, we explore essential strategies such as diversification and cutting-edge options hedging designed to safeguard your hard-earned wealth.

You’ll gain clarity on how to balance growth with safety, understanding that an aggressive approach to investments may still hold value even as you near retirement. Whether you're young and building your portfolio or transitioning to the golden years of life, knowledge is your greatest asset. 

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To learn more about B&H Wealth Strategies visit:
https://www.BHRetire.com
B&H Wealth Strategies
423- 247-1152

Chapters

• 0:00 Introduction and Overview of Wealth Strategies
• 20:00 Understanding Risks and the Importance of Diversification
• 40:00 Innovative Strategies for Risk Reduction in Retirement

Transcript

Speaker 1: 0:04

Welcome to the Four Seasons Podcast brought to you by B&H Wealth Strategies, serving Northeast Tennessee and Southwest Virginia since 1966. Here we guide you through the ever-changing seasons of your financial journey, offering insights to help you grow, protect and enjoy your wealth. Ready to turn your financial dreams into reality, dare to dream. And now here's your host. President of B&H Wealth Strategies, jeff Bingham.

Speaker 2: 0:46

Retirement should be about enjoying life, not worrying about finances. B&h Wealth Strategies helps clients protect their hard-earned money while still allowing for growth. Let's dive into the smart strategies that can help make retirement stress-free. Welcome back everyone. Skip Monty here. Co-host slash producer. Back in the studio with jeff thingam jeff how's it going?

Speaker 3: 1:11

it's going great skip. How are you this morning?

Speaker 2: 1:14

I'm doing just fine. Doing just fine. It's for a friday morning. I'm doing great. So so, jeff, let's, let's get right to the meat of the episode. Does B&H Wealth Strategies offer strategies for reducing financial risk during retirement?

Speaker 3: 1:29

I think the first thing that people think about, certainly when they're thinking about investment and retirement planning, the first risk that they identify is the risk of loss. Right, you know that money loses value from a sell-off in the market, let's say, and so you know we're kind of tuned into that. We watch the news outlets, we watch CNBC or, you know, fox Business or wherever we're watching that kind of thing, we read the newspapers, so that's, you know, we're just automatically tuned into that. And then certainly that is part of risk. But it comes in a lot of other forms too, skip, and that's what most people don't pay attention to, maybe a little bit more now with the fact that we have seen inflation kind of return into our lives. Post-covid, inflation was running at 1% to 2% and that's kind of the Fed target. Rachel, if you're talking about what for inflation is at 2%, we're closer to 3% right now and we could. You're talking about what for inflation is at 2%, we're closer to three right now, and that's, you know, we could have a conversation about. Is it really higher than that? It probably is for most people's, you know, purchasing items that they need, because we carve out of that inflation risk. We carve out things such as health and energy and food. As I always say, most of my clients need all three of those and that inflation is certainly much higher than the 2.9 or wherever the stated number is right now.

Speaker 3: 2:51

But let's talk first and foremost about going back to the loss of capital, the loss of principal, the loss of watching that money go down. So the tried and true way of doing that in it, if you want to have an investment strategy, is you use diversification. You use stocks, bonds, you know real estate, various things that you can put in there, and so you win. The idea of that kind of diversification, putting in that kind of risk control, is that when one thing goes up, the other goes down and vice versa. Right thing goes up, the other goes down and vice versa. Right, you know. In other words, if you use a stock and bond analogy right there, that is, you know that the yin and yang.

Speaker 3: 3:29

If stocks go up and bonds are, you know they may not go down, but bonds are there, they're kind of the ballast in the portfolio, they generate income and they're less volatile than stocks and all of those things is true, or all those things are true as I mispronounce, excuse me, but you know, the reality is is that you know and with trying to make this too weedy, is that look at a time period like 2022 as an example, which is really when we saw inflation really returning to the marketplace. We saw the Federal Reserve begin to raise rates, and so everybody became aware of and it'd been 40 some odd years since we'd seen inflation, you know, kind of rear up and really have an impact on the economy and, most importantly, on people's pocketbooks, but also on people's portfolios. And so in 2022, as the Fed was raising rates and inflation was running, you know, at near double digits for a period of time, and you know we talked about it being transitory for a while. You heard the Fed use that term and obviously it was not. So what happened in 2022 is that the stock market lost roughly 20% of its value right, as measured by the S&P 500. But the bond mark right, which is where we have our safety net in the portfolios. Well, it went down with theory something that's been around and won a Nobel Prize back in the 50s that it went down with theory something that's been around and won a Nobel Prize back in the 50s that portfolio, if you do the arithmetic on that, that puts it down about 18.5% and that's not what people expect when they have a balanced portfolio. The stock market is down 20,. Bond market is down nearly 15, and my portfolio is off 18.5%.

Speaker 3: 5:03

How does the bond market lose value as interest rates are growing up? Because rates had been for 40 plus years, really going back into the mid-1980s. The bond market interest rates had been going steadily down. We were at double-digit interest rates. We were at double-digit inflation. We'd rather have 4% than 3%. 4% is better than 3% in the interest rate environment, but you would have to sell that bond that you own and get out of it to buy the 4%. Nobody's going to pay you for a one-for-one.

Speaker 3: 5:34

For last year, thinking about interest rates and how to control risk, I'm going to spend a lot of time on this. Perhaps this is too weedy for the pod. I hope that people will get something out of this. But last year we know rates were going up to. We're in the four and a half to 5% range right now. On market is measured by what we call the Barclays aggregate, which is kind of a mixture of high grade corporate bonds and government bonds. Was up 1.5% and that means that the price then had to go down. So if the average interest rate in that mix of assets, that vast half percent of its value right, if we're in that, so instead of it being worth a dollar, it's worth 97 and a half to 97 cents is what somebody would pay you for that, are there other alternatives then to control risk? Right, because that's what we're talking about to control risk other than bonds, and we're not suggesting that you shouldn't have bonds in a portfolio, but this is not your grandfather's bond market that you're dealing with right here anymore, as we like to say.

Speaker 3: 6:33

So what do you use? And some of the things that we use, skip, are we use something called that our portfolios have is something called options hedging, which is delivered by a group that we work with called Amptis Capital that I'll talk about maybe one of these days in a podcast. Just an amazing group of really, really smart people much smarter than I am that run this options hedging strategy. In there. You've got a deductible, like a homeowner's thing. You pay a premium for it, so it has a little bit of a cost to it, but it's when the market goes down very sharply, or as if your house has a large amount of damage. It's going to kick in and create value in a portfolio and kind of go up asymmetrically, meaning that you're doing that in a way. Now options can have a negative connotation to the listeners out there, because you hear about hedge funds and you hear about all these kind of things that are out there. This is risky stuff that they're doing. We're not trying to make money by using options. Necessarily, we're trying to hold on to money by using options. So it's completely an opposite of thinking how most people think. So it's a risk reduction strategy to hold on to money Because, again, the loss of math is merciless in a portfolio, right?

Speaker 3: 7:46

If you lose 10%, if you go down, if you have a portfolio, it loses 10% of its value. If you come back 10%, are you back to where you were when they first asked that question? And so it goes down 10 and you earn 10 on the backside of it. Are you back to where you started from? And most people, if they answer that question real quickly, will say yeah, I mean you are Go down 10, you're back 10, you should be back to zero, but you're not. Because if you lose 10% on $100,000, so I can do easy math on this, then you're back to $90,000. If you earn 10% on $90,000, you got $99,000. It takes an 11% return to get back. And that kind of math right there just runs, just continues to get worse. So if you're down 20%, it takes about 24% to get back to. Even If you're down 50%, it requires 100% return to get back to where you were. So the loss of math is merciless.

Speaker 3: 8:41

When it comes to portfolios, the way we do it is again through diversification and other ways, through the options hedging strategy that complement the bonds and complement the stocks in a portfolio. So you're not eliminating either one of those, you're not getting rid of bonds, but you're using other techniques that are in there. That my opinion and I've been doing this a long time is it is a much, much more elegant and effective and efficient way to help manage risk in a portfolio. And then there are other things, and I'll stop here and let me let you come in and fill in a little. There are a lot of other things that we can use to reduce risk in a portfolio that are out there as well. We have what we call protection and participation strategies that are out there where you can kind of have some defined outcome type of portfolios. You can kind of some loss limitation in a portfolio but you also set your upper limit.

Speaker 3: 9:30

You're not going to be able to make as much money if you have those kind of guaranteed and protections that are in there, but again very attractive ways that, uh, that most of my clients really, really like to have in their portfolio. Because, again, as you move into retirement and for most people, even before they move into retirement, nobody likes to see their money go down and down. No one, not me, not my clients, not anybody that's out there listening. But if you're going to invest and try to beat inflation over time, you're going to have to own growth assets, you're going to have to own stocks to keep up and beat inflation, to make sure that your purchasing power doesn't get eroded. So how are you going to do that? How are you going to stay engaged when you read the news and you hear, when you see sell-offs, when it comes screaming and raging at you?

Speaker 3: 10:19

You look at your 401k portfolio and it's gone down in value. It's a you know, and it's in that uncertainty, with all the noise that comes at us all the time about those things right, and they're going on, from wars to inflation, to changes of administration, all the things that go on out there. You see loss and you get uncomfortable, and that's when people make mistakes, is when portfolios go down and they start hearing all the you know we I call the noise. It's kind of or excuse me, the news is kind of noise. What is that? You got to filter that noise out and come back and say what does that mean to me specifically? What is that doing? How is my portfolio going to be affected by this? Am I built to survive? You know it's thriving markets that go up right, for sure, but it also needs to survive during stormy seasons, and there will be plenty of stormy seasons that are out there and I, like I said, in 35 years I've navigated through a lot of stormy seas for clients.

Speaker 2: 11:27

I am sure, I am sure, I'm sure Option hedging that's a new term for me, but a good one. So you mentioned, jeff, diversification playing a role in protecting assets during retirement. Does that change over time?

Speaker 3: 11:41

Yeah, and that's a great question and one that comes up all the time Again, because the idea is the younger you are and when you're adding money to a portfolio, can you be more aggressive in your portfolio, that diversification, in other words. Really, what that means in simple terms, I guess, is that you own more stocks than you do bonds. Right, you know you. Just you take more risks and so you become a you know what we would define by category would be a growth or perhaps an aggressive growth investor, and that just means that the ups and downs of the market are not going to affect you as much, because this is money for tomorrow, not for today. And then, when you've got a 401k plan or something similar that you're participating in, you're adding money to that portfolio all the time, the times that the market goes down. A lot of people want to stop buying during those times because they want to wait until it settles down to see what's going to happen. That's when you want to be buying like crazy, when you're younger, and adding money to your portfolio, because it's putting the things that you want to own on sale for you. Now, again, I can't tell you what's going to happen tomorrow, but I do know what all the yesterdays look like, and there's not been a time yet in history when the market, when it's gone down, it hadn't come back and gone back to higher highs, right. So you want to be a buyer during that category and if you've got 20, 30, 40 years in front of you, you should be a fairly aggressive investor. You got to make sure that you can stomach it, right, because the last thing you want to do is watch a market go down. You got some money invested in it in a 401k plan. It drops in value by 20 percentage points or whatnot, and so then you turn back your risk. You reduce risk in that. So there's two sides of a transaction. When there's a sale of an asset, there's got to be a buyer of it. Somebody's going to buy it from you for a lower cost than yours was yesterday. Who's going to win that transaction? Are you going to win it by selling it to that person, or is that person buying it going to win that transaction over time? Because they're getting a discounted price and it's going to go back up in the tomorrows. They're going to be there and then you're going to have to go back and get back in because you're going to look at it and say, well, I need to get back into the market. You're going to buy it back at a higher price, right? So the winner in that transaction is usually the buyer at lower cost, right?

Speaker 3: 13:47

But we are conservative and conservators in nature. I understand it from an emotional response, but from a fiduciary, from a financial perspective, it's the worst idea that you can execute really in that regard. So again, the younger you are, the more risk you can take, and then the rule of thumb is that and as you move closer to and then into retirement, what do you do? You get more conservative in your investment strategy, right? You want to really turn back the dial on that and get more and more conservative. Really, what you need to do is you have to, you should have a risk profile. You need to understand what your risk tolerance is, right, you have to understand. You know it's a one size fits one, so, but but as far as getting years old and you want to get very conservative, which a lot of people will want to do, it's kind of what we've been taught over a period of time as well. It's kind of conventional wisdom, let's say but you know, how long do you plan on being retired? In other words, how long are you going to live? If you're going to live from 65 and you're going to live through life expectancy, you've got 20 years or so.

Speaker 3: 14:57

So that money, by getting more and more conservative, taking it to the bank and trying to be really conservative, kind of have that risk-free rate of return or putting more bonds in, as we were talking about before, than you do stocks it's a way, as my dad used to say, it's a way to go broke safely, because you're just going to erode your purchasing power. It's attractive thinking about money in the bank today at, let's say, you can get four to four and a half on a CD or a money market account, something like that. We're in a little bit better than the 4% range as rates have come down a little bit out there. But again, inflation is running by, reported by the CPI number is running at 3%, and then you got taxes on top of that when you're out to pay, so that money is really backing up. You're really reducing your purchasing power.

Speaker 3: 15:43

The only way that I've seen over long periods of time is you have to have growth assets for your purchasing power to keep up, and so, therefore, you're going to have to continue to have things like stocks in your portfolio real estate. Your $4,000 a month is going to need to be $8,000. And that's at a very low, conservative inflation rate.

Speaker 3: 16:02

If inflation stays where it is kind of running right now over a longer period of time, you're going to need to double up that income purchasing power a lot sooner than that. So we tend to want to. The rule of thumb is we want to get more conservative as we move into retirement, and there's some truth in that. But to get too conservative is a way to make sure that you're just going to run out of purchasing power right. And so our job on my side of the table is the delicate balance to try to keep people, you know, to have enough growth in their portfolio but enough risk reduction in their portfolio to where they can be financially and have financial freedom throughout their retirement, but also that they can put their head on a pillow at night and sleep.

Speaker 2: 16:43

Awesome, wow. So diversification is a big part, obviously a lot to unfold and unfortunately we're out of time for this episode that I'm hoping, uh that in our next we can continue this conversation, talk about diversification, and uh would really like to talk about your four seasons gps uh tool that you guys have in the next episode, if, if, we can do that.

Speaker 3: 17:05

Yeah, and I think that's where this what we talked about right here we'll begin to kind of we'll come to light a little bit more clearly perhaps. But again I apologize to listeners out there if that was a little more weedy. I would say, you know, in some of the things that I talked about. So hopefully that was somewhat understandable, I hope.

Speaker 2: 17:23

Absolutely Well. Like I said, there's a lot to unpack, but we'll catch you in the next episode where we'll talk about that GPS tool.

Speaker 3: 17:33

Looking forward to it.

Speaker 1: 17:37

Thanks, kevin. Thanks for tuning into the Four Seasons Podcast brought to you by B&H Wealth Strategies, where your financial success is our priority. Schedule your free 20-minute consultation today by calling 423-247-1152 or by visiting bhretirecom. Take the first step toward making your financial dreams come true. Until next time, remember every season is the right season to plan for your future. Securities and registered investment advisory services offered through Silver Oak Securities Inc. Member FINRA, sipc. B&h Wealth Strategies and Silver Oak Securities Inc are not affiliated.