A Hall of Fame Retirement

What’s the greatest rock and roll act of all time?

Totally depends on who you ask, doesn’t it? And the same person might even give you a different answer today than what they would have told you last week. Same problem if you tried to determine the greatest anything.

The greatest basketball player? Is it Jordan? Wilt? Kareem? Oscar Robertson? My dad at Creswell High School in the early 70s? Given those choices, I think we can all agree that it’s probably not Kareem, but you could have a healthy debate between the others.

At least with sports, you have statistics that can help guide the conversation. With music, where do you even begin the debate? What if one person’s definition of “greatest” has to do with all-time album sales, while somebody else only cares about who played the meanest lead guitar? We can’t even agree on who should be in the conversation, much less who’s actually the best.

The Rock and Roll Hall of Fame constantly deals with the challenges of this subjective discussion. Here’s part of a letter that Hall of Fame President Terry Stewart sends to fans when they write in to the Hall campaigning for their favorite artist to be inducted:

“Nomination and induction into the Hall of Fame is not about popularity, records sales, which label the group is on, or anything other than the process below. The love for, the evaluation of, and the impact of any artist are subjective questions to be answered by the nominators and the voters. Unlike baseball, football, basketball or hockey, statistics are not relevant. The entire nomination and induction process is coordinated by the Rock and Roll Hall of Fame Foundation in New York City. Individuals can be inducted in four categories: Performer, Early Influence, Non-Performer and Side-Men. The only formal criteria for the performance category is that an artist has to have had their first record 25 years ago. That said, candidates are reviewed and discussed relative to their impact on this music that we broadly call rock and roll. The innovation and influence of these artists is also critical. Gold records, number one hits, and million sellers are really not appropriate standards for evaluation.”

Great. Literally the only definitive criteria is “it has to be at least 25 years since your debut album.” That means Justin Bieber will still have to wait another 18 years. So we have that going for us, which is nice.

Other than that, it’s incredibly subjective. I especially love the phrase “this music that we broadly call rock and roll.” So we can’t agree on the best rock and roll act of all time, partly because we can’t agree on who should even be in the conversation, and partly because we can’t agree on what rock and roll actually is? Fantastic.

Too many people experience the same problem in trying to evaluate their retirement plan. With no firm criteria, how are you supposed to know if your plan is a good one?

Some people look at the wrong criteria. Others just have no criteria.

If you have no criteria, your assessment of your own financial health is going to be easily swayed by whatever stimuli you find in front of you at a given moment. The news will always make you nervous because you won’t know how the next world event is going to affect your portfolio. You’ll fall for almost every financial sales pitch you hear, because anything can be made to sound appealing when you’re rudderless and don’t have a coherent strategy. And every month you’ll open your statements and have no idea if the numbers that you’re seeing are good or bad.

If you’re using the wrong criteria, you rely on benchmarks that really have nothing to do with your overall financial health.

You might look at the year-to-date returns on your savings: “My 401k is doing great right now! I’m in good shape!”

You might compare yourself to people around you: “My neighbor said he finally hit the million dollar mark with his savings so he’s ready to retire. But I don’t have nearly that much. I’m going to have to work until I’m 75!”

Or you might lean on rules of thumb that don’t actually mean anything: “I heard that I can take out 4% of my savings each year without having to worry about running out of money.”

So what might be some better criteria for you to use in assessing the health of your retirement plan? You could start by seeing how many of these questions you know the answer to:

How much do I need to spend each month to maintain my lifestyle as I know it?

How much income will I need in 20 years to maintain the same buying power?

How much income is my portfolio generating now?

How much money am I likely to lose if we have another market crash similar to 2008?

What are the current fees and costs in my portfolio?

How well-prepared am I to address long term care costs if I end up needing nursing home or assisted living care?

Do I want to leave a legacy to my kids and grandkids, and if so, what’s my plan to do that?

If you know the answer to all of those questions, we’ve established that your retirement plan is probably close to being worthy of Hall of Fame induction. If you know the answer to half of them, you’re still ahead of most people, but you still have work to do. If you don’t know the answer to any of them, you have a long way to go before we can consider you to be a candidate for the Retirement Hall of Fame.

A Series of Overcorrections

Human history is a series of overcorrections.

I remember in Driver’s Ed, they talked constantly about the danger of running off the road. The peril had nothing to do with hazards lingering on the right shoulder, but instead in the reflex that causes most people to overcorrect and swerve into oncoming traffic.

This reflex is nothing new. In fact, it’s plagued the human race for ages.

We overcorrect in our presidential elections. How else could you explain a country electing George W. Bush, followed by Barack Obama, followed by Donald Trump?

We overcorrect during midterm elections. The party of the presidential victor usually does well in Congressional races when the president is elected because of the coattail effect. But then the sitting president almost always sees his party lose seats in Congress during his first midterm election, as the electorate feels the need to overcorrect from their choices just a couple of years earlier.

We overcorrect in world conflicts. After getting their spiky helmets kicked in by Napoleon and the French Empire for most of the 19th century, the Germans sat and stewed for decades before finally getting their act together in 1871 when they kicked the crêpes out of the French in the Franco-Prussian war. The French then let their resentment against Germany smolder for decades until they eventually goaded the Russians into aggressions that marked the beginning of hostilities that led to World War I.

After Germany was defeated again in World War I, the French and their smoldering resentment led the way in crafting a peace agreement so punitive to the Germans that it once again created strong feelings of resentment and nationalism throughout Germany, paving the way for Hitler and the National Socialist German Workers’ Party, which eventually led to an ethnic genocide and a second world war.

Napoleon died in 1821, but the rippling effect of constant overcorrections that followed his reign led to a global war more 120 years after his death.

We overcorrect in matters of racial interaction. A country that once allowed slavery swings the pendulum in the other direction after the Civil War with Reconstruction policies that render southern states politically irrelevant at the national level for years to come. From that came southern resentment, which gave us the KKK and Jim Crow laws as a measure of overcorrection.

The same racial overcorrections exist in modern society, where culture initially goes to the extreme with political correctness and protection of minority interests, eventually leading to an extreme overcorrection that looks like a group of white guys in their mid-20s trying to frame themselves as society’s new victim class as they march through Charlottesville with their Tiki torches, Nazi flags, and very small chance of ever making love to a woman.

So if we tend to overcorrect in all areas of society, wouldn’t it make sense that we do the same thing with our investing? Of course it does, and that’s exactly what happens during bull markets and bear markets.

When the market is rising, investor confidence swells, which means more and more money goes into the market. At some point during that ride to the top, we cross a line where almost all of the money coming in is being invested for emotional reasons, not based on a rational assessment of P/E ratios or the general health of the economy. Very few people pay attention to those metrics during an upward overcorrection.

But as soon as one catastrophic event changes everyone’s mood, suddenly the downward overcorrection in upon us. Stocks fall, and rightly so, because they were overpriced to begin with. But the fall ends up being much more precipitous that it would be if everyone was acting rationally. But instead of rational behavior, a 10% drop causes panic which creates even more sellers than we had the day before, which leads to a 20% drop, which causes even more panic and the next thing you know, we’re down 50%. What should have probably been a 10% correction is instead a gargantuan overcorrection.

And so the cycle goes on, decade after decade, generation after generation.

So what’s our lesson in all of this? Well, the lesson for society as a whole is that life would be better for all of us if we merely corrected our behavior instead of vastly overcorrecting. But you can bet that society will never learn that lesson. So the lesson for you as an individual is to remember that overcorrection is apparently the natural human instinct and you should keep that in mind as you shuffle around this mortal coil.

Control your own behavior when you can—by not steering into oncoming traffic after you accidentally drive off the road, and by not moving to Montana to live in a tent and join a militia because you’re upset about the PC culture that dictates that kids in preschool now have to sit “criss-cross applesauce” instead of “Indian style.”

And in the areas of life where your well-being isn’t completely controlled by your own behavior (like your exposure to stock market risk), keep in mind the way that society tends to behave and position yourself accordingly so that you’ll be prepared when history repeats itself again.

Hey Jude, Don't Make it Bad

Occasionally we can pluck something from rock ‘n’ roll history and learn a financial lesson from it. Today we’ll be looking at Hey Jude, released by the Beatles in 1968. But what does this song have to do with your financial planning? Stick around and find out…

1) “Hey Jude” is the Beatles longest-running single.

Not only is it the Beatles longest single, but at the time of its release, it was the longest song ever released as a single…by any artist. 7 minutes and 11 seconds, if you’re keeping score at home.

And the fact that it was so long made it very important and influential. No song of its length had ever gotten significant radio airplay before, but when it’s 1968 and the Beatles release a new single, you don’t really have much choice if you’re a radio station. You sorta have to play it.

And as the song got more and more airplay, stations started to realize that listeners would actually stick around to listen to a longer song if they liked it (or the artist) enough. So in many ways, Hey Jude paved the way for other longer songs that would be released in the coming years like American Pie and Layla.
 
Now, if Hey Jude was over and done in three minutes, it wouldn’t have quite the same feel. Not a lot of time for naaaah-naaaaah-naaaaah-na-na-na-naaaaaah down the stretch if we’re trying to wrap it up too quickly. And sometimes in the financial world, a certain strategy or approach might take a little bit longer to come to fruition.

One example would be the stock market in general. If you invest money in a well-diversified stock-based portfolio and leave it alone for 20 years, there’s almost no scenario where you don’t end up making money over the course of those two decades. But there’s no guarantee that you’ll make money in the first year. In fact, you could see your investment get cut in half that first year. But if you let the song finish, you’re going to make your money back, and then some.

The problem, of course, is the people who believe strongly in this principle, but they don’t have 20 years on their side. If you’re 58 years old and you’re planning to retire in the next 5-7 years, you might not have time for the song to finish because you’re going to need some of your savings to start creating income for you relatively soon.

So if you have time to let the song play to the end, that’s great. If not, you need to find a shorter song that gets the job done for you.

2) “Hey Jude” was once accidentally offensive to Jews.

For a while, the Beatles owned a retail store on Baker Street in London called the Apple Boutique, which they just happened to be closing right around the time that Hey Jude was released. On the shuttered building, an employee scrawled the words "Revolution" and "Hey Jude" to promote the new single (Revolution was the song on Side B).

Well, as it turns out, “Jude” is the German word for “Jew.” And without proper context, this marketing message was seen by Jewish folks in the area as hateful graffiti.

And in the very same way, there are things in the financial world that require the proper context before they can be evaluated properly.

Here’s a prime example. A couple of years ago, I met with a couple who was already retired and they had an extremely low income. So low, in fact, that they hadn’t paid taxes in several years. After their Social Security benefits, they only had about $8,000 each year that they were withdrawing from IRAs, and this meant that they’d been in a zero percent tax bracket (with room to spare) for the last three years.

When I took a look at their investments, I discovered that every penny in their brokerage account was invested in municipal bonds. Or, as they’re sometimes called, “tax-free bonds.”

Municipal bonds pay a lower rate of interest than corporate bonds, but the trade-off is that you don’t have to pay federal taxes on the interest that you earn. But in their case, they could have had corporate bonds that paid the higher interest rate, and they still would have paid no taxes because their income was so low.

But some broker had come along and said, “Hey, what do you think about buying these tax free bonds?” and they’d said, “Tax free? That sounds fantastic!”

But to them, the tax free component was meaningless. They would have been better off with taxable bonds that paid them a higher income. But because the broker didn’t bother to look at their overall plan in the proper context, the words “tax free” were basically just graffiti that was littering their financial plan.

3) John Lennon thought the song was about him, instead of his son.

Paul McCartney wrote Hey Jude in an effort to comfort John Lennon’s 5-year-old son, Julian, while John and his first wife Cynthia were going through a divorce. But when Paul first played the song for John, the narcissist Lennon thought it was about him. He thought the lyrics “you were made to go out and get her” was Paul encouraging him to leave his wife and go after Yoko. John completely failed to grasp the notion that the song was written for his son, not for him.

And sometimes in the financial world, we run across advisors who think that your retirement plan is all about them.

About a year ago, I had a client who needed $50,000 to help out one of her kids that had run into a medical issue. Most of her accounts were invested with us, but she did have one other account (with roughly $100,000 in it) that she’d kept invested elsewhere.

She seemed stunned when I suggested to her that the $50,000 would best be generated by selling some of the assets in one of our portfolios and I told her I’d get a check processed and sent her way soon.

She looked at me quizzically, because she’d just assumed that I’d tell her to take the $50,000 from the account that I wasn’t managing.

“Won’t that hurt your business if I’m withdrawing money from my account here?” she asked me.

God love her for her concern, but I had to inform her that, first of all, I’d have a pretty terrible business model if I couldn’t sustain people taking money out of their own accounts. Second of all, IT’S NOT MY MONEY, IT’S YOUR MONEY!

But it occurred to me later that she probably only had that mindset because somewhere along the way, she’d worked with an “advisor” who was much more concerned about his own financial wellbeing than hers.

So the next time you’re listening to Hey Jude, keep these lessons in mind. Take a sad song and make it better.

Billy Joel vs. Vanilla Ice: The Longevity Quotient

Billy Joel started touring in the fall of 1971 as an opening act for The J. Geils Band and The Beach Boys. He released Piano Man in 1973. His first #1 hit came in 1980 with It’s Still Rock and Roll To Me.

This fall, a mere 46 years after his first tour, he’s still selling out huge ballparks…from Wrigley Field to Fenway Park to Madison Square Garden. In the last 12 months, he’s been the highest paid singer in the world, earning about $75 million from June 2016 to June 2017.

Reginald Kenneth Dwight has also had remarkable longevity. You might know him as Elton John. His debut album was released in 1970, and he’s had #1 hits spanning from Crocodile Rock (1973) to Candle in the Wind (1997). Because of his contract with Caesars Palace, you’ll have to go to Vegas if you want to see him live these days. Unless you want to catch him on the international tour in places like Spain and Georgia (the one on the Black Sea, not the one where the Braves and the Falcons play).

Paul McCartney is still touring and still making millions, even though he’s 75 years old and looks like an androgynous women’s basketball coach these days.

Two interesting notes on Sir Paul. First, he’s a strict vegetarian and animal rights activist, and demands the enforcement of a strict “no meat” policy while touring. At whatever venue he’s playing, employees are informed that they’re not allowed to have meat in any form backstage or anywhere around Paul. If someone brought a meal from home that includes meat, they’re expected to eat it in a private office, or in their car.

Second note: Paul still performs all of his songs in the same key that he originally wrote them in (which, for many of those songs, was in his 20s). That’s pretty rare for a musician of his age. For instance, Billy Joel has dropped most of his songs a key or two to accommodate his aging voice.

And any conversation about musician longevity would have to at least include a mention of the Rolling Stones, Bruce Springsteen, and U2.

At the other end of the spectrum, there are plenty of artists who had a huge year (or several years) but weren’t exactly cut out for a multi-decade run. Vanilla Ice, Britney Spears, Duran Duran, Tina Turner, Nirvana, and Foreigner were all huge acts at one point, but none of them stood the test of time (for various reasons) in terms of ongoing income potential.

You could probably collect a wide range of opinions as to why some artists’ careers span multiple decades and others flame out in just a few years. That’s not my area of expertise, but we see the exact same phenomenon with retirement income plans. Some are set up to last as long as they need to, while others are in danger of flaming out too early.

Let’s take a look at some of the reasons behind early flame-outs.

1) An unsustainable withdrawal percentage

Most people used to subscribe to the 4% rule as a guideline to help with knowing how much they can take out of their retirement accounts each year. This rule essentially stated that you could withdraw 4% from a classic stock-and-bond portfolio every year throughout retirement with relatively little chance of running out of money before you die.

In today’s environment, the reality is that a 4% withdrawal rate from a standard portfolio leaves you with a much higher chance of running out of money. Many experts have amended this to the 2.8% rule. On the other hand, with a portfolio that’s truly structured for income generation (instead of just the typical mix of stocks and bonds), you can usually generate more than 4% over the course of your lifetime, but it takes a much more specialized approach to construct that portfolio.

2) Bad choices on spousal benefits

Too often, we meet with people who have already started their pension and made a bad choice. When you start getting a monthly income from a pension, you usually have the option to take a certain amount (let’s just say $3,000/month) with no spousal continuation; or you could take a slightly smaller amount (let’s say $2,850/mo) but your spouse continues to receive some or all of it after you die.

Most people don’t take into account the income gap that gets created at the death of the first spouse. We’re already going to lose one Social Security benefit when the first spouse dies. If we exacerbate the problem by taking away a pension too, that could leave the remaining spouse in a position where they suddenly need to rely much more heavily on their investments—possibly to an unsustainable degree—for their income.

3) Not enough lifetime income streams

It's almost never a good idea to enter into retirement with Social Security as your only predictable lifetime income stream. In most cases, unless you live very simply, that means that the overwhelming majority of your income is being generated by a market-based portfolio. That means that if you spend through everything in the portfolio, a meager Social Security payment is all you have left.

It’s crucial to explore other options for predictable lifetime that don’t run the risk of drying up after an account balance hits zero. Pensions, annuities, rental income, and business income are all examples of predictable income streams that could suffice as a supplement to your Social Security.

So how is your income plan structured? Are you on track to have a retirement that looks like Billy Joel or Paul McCartney, with strong paychecks coming in for several decades? Or are you on the Vanilla Ice track where you’ll eventually have to start hosting a reality show on the DIY Network to make ends meet?