I recently read a WSJ article about a retirement community in Northern California that has become divided due to one group wanting to spend $300K to build a pickleball court, and one group that opposes it because they don’t want to see their association fees increase. The article rings a tone of income inequality, which has always been, and continues to be a major issue in our society. The article struck a chord with me for a variety of reasons that I thought I’d share. There are a lot of things in life that we simply have no control over. If you were born in the United States, you’ve already started ahead of most others. Luck definitely plays a big role in financial success. If I grew up in Ethiopia, my odds of financial success would be a tiny fraction of what they are here. Amazingly people emerge and achieve great things. We have clients that have achieved the American dream from all over the world and many of their stories have inspired the thoughts I’m going to share in obtaining a better financial future. This article is about the things that we can control and put into practice to create a more comfortable retirement, so hopefully you can avoid the pitfalls that bedevil so many.
I’ve spent most of my life in California and nearly all of that in Orange County. In Orange County, I’ve seen housing prices rise to levels where even those that make a solid-six figure salary, often struggle to be able to afford a relatively modest home. 2600 square foot inland homes in cities that were once lightly regarded can sell for $1.6MM. Image and status, as defined by material things and/or lifestyle, would definitely be a characterization of the area, whether fair or not. Clearly money is just an aspect of life and is certainly not the most important by any means, but since it is my business of course it is my focus when I write. Having been interested in finance and investing from a very young age, I’ve always been fascinated in how people with similar earnings can have totally different financial outcomes. While of course there are many various factors, one major differentiator I’ve witnessed that creates a lot of the disparity is that those that postpone consumption for investment tend to find themselves in a much stronger financial footing. Those that are short-term focused without a true long-term plan, tend to struggle when the inevitable adversity hits. This is where businesses fail or too much leverage can lead to defaults and/or foreclosures.
It is important to look at your money as a financial asset that can be deployed in a number of different ways. You can spend it on a trip and make wonderful memories. You could buy a nicer home or car. You can eat at better restaurants or join that exclusive gym. Those are all decisions, which may or may not be right for you and your family. It depends on what is important to you, what you value, and let’s not forget, what you can afford. Often the best answers seem to be a balance between savings, consumption, and importantly investment. The point I’m trying to make is that you should look at your cash and your expenditures and weigh them versus the opportunity cost of investing those funds. Does upgrading your car to the newest Tesla warrant taking $80K of chips off the compounding table? In a very simple example, $80,000 compounded at 10% per annum over 20 years equals $538,200. An extra $460K makes a very big difference upon retirement. There is no doubt that driving that Tesla would be a lot of fun too, but if you aren’t at least thinking about the opportunity cost, I believe you are doing yourself a disservice.
One might say, well life isn’t simply about maximizing your financial resources and I’d 100% agree with you. With that said, we have all witnessed the ravenous physical, mental, and emotional outcomes that arise from serious financial distress. It is believed that the largest cause of divorce in the United States is financial difficulties. The amount of a person’s salary is really not a great indicator of how likely they are to achieve retirement success from my experience. More indicative based on my personal experiences are the following: Do you live within your means? Do you save money and invest? When you invest, do you panic after short-term losses or volatility? Are you chasing whatever is hot or speculating on a gut instinct? Are your goals realistic? These are critical issues, and at least following a path that increases your odds for success seems like sound guidance.
For instance, I know a couple that are both very successful financially. Combined, they likely have had an average income of between $400-600K a year over the last 5-7 years. This couple lives very comfortably and have still managed to save $500K, which is excellent, and they have solid equity in their home. Given their relatively young ages both being in their mid-30’s, they are way ahead of the curve. However, this couple has always kept all of their cash at the bank. They don’t invest those funds because they are scared of losing the money, due to some negative experiences during the Financial Crisis. If we invested that $500K and earned 7% per annum for 30 years, they would have a $3.8MM before-tax nest-egg, without adding any additional funds. If they earn 2% at the bank, they will have less than $1MM after those 30 years. This is not a rare circumstance. I see it all of the time in a variety of different ways. Compare hoarding the money in cash to someone that starts with no assets and contributes $1,500 a month. A reasonable return of just 7% compounded annually leads to a nest-egg of $1.764MM. I have several clients that are worth millions and never made more than $100K in a year, but they started investing early and saved aggressively.
Even those that do invest often fall prey to other traps. How many people out there have been over-allocated to bonds in this low interest rate environment, and have missed out on the strong equity returns that have occurred over the last decade? How many people were too scared to get back into the market after the Financial Crisis and missed out on the great returns that followed? Maybe you got into the annuity because you wanted a “guarantee” but instead guaranteed yourself a less enjoyable retirement. Now with markets at all-time highs, I’m not saying it is the time to be 100% invested in equities. It is our job at T&T Capital Management to look at the opportunities and risks that are out there and put your portfolios in the best position to deal with them. There is a time to be conservative and a time to be aggressive. After the European Crisis in 2011, I advocated backing up the truck on stocks. We did the same thing after the 2016 early-year selloff and then Brexit. Now is not the time to shoot for the stars, but there are enough good opportunities that we don’t need to run for the hills either.
Just like with our fundamental and rational approach to deciding between spending or saving, we want to always look at maximizing our opportunity set when we look at investments. One of the biggest advantages we have at T&T Capital Management (TTCM) is that we carry an arsenal of investment weapons to the fight. Most financial advisors are hamstrung by their companies’ into only offering traditional buckets. Maybe they work for an insurance company and can only really sell mutual funds and annuities. Maybe they work at Merrill Lynch and their sole focus is in growing assets, so the rational approach for them is to shovel you into some model portfolio and move on to the next networking event. If we took the same approach at TTCM, we would be unsuccessful. Why would you invest with us versus them, if we didn’t add any additional value? While returns are important, they aren’t the only thing. Many of our proudest moments have been talking clients off the ledge in stressful situations. When markets are tanking, and losses are adding up, it can be easier emotionally to lock-in losses and go to cash, but it is almost always the worst move you can make. Avoiding that is half the battle when it comes to investing. One simple heuristic, don’t look at your account every day. I believe that there is a correlation between those that are most disconnected between day to day swings and positive investment returns. If everyone around you starts losing their heads either positively or negatively, we are probably better going the other way.
In today’s environment we are going to need to use all of these tools/weapons to navigate what is likely to be a challenging future. Valuations on stocks are some of the highest in history in year-9.5 of a bull market. Interest rates are rising somewhat rapidly from historically low levels. We are likely overdue for a recession but predicting when that recession will occur is a fool’s errand. This situation has been roughly the same for the last few years. If we only had stock funds and bond funds, the only answer would be using some 60/40 or 70/30 allocation, or another equivalent. In a rising interest rate environment, both stocks and bonds are under pressure, not to forget real estate. We can reduce risk dramatically by focusing on hand-selecting each and every security in the portfolio. There are many securities that benefit from rising interest rates for instance and that also carry inexpensive valuations. Identifying these mispriced opportunities allows us to avoid the most expensive or risky areas, and focus on securities that offer a better risk/reward. In this environment I also believe that those that aren’t able to utilize strategies such as cash-secured puts and covered calls are at a disadvantage. Instead of putting your money into bond funds that are losing money as interest rates go up, we can generate attractive income streams via utilizing options. When using cash-secured puts, our worst-case scenario is having to buy the stock we want to own anyways at a discounted price, or selling a stock we own at a price we are willing to sell at. Most advisors are not willing to incorporate distressed debt into a client portfolio. While we have eschewed most bonds due to interest rate risk, our purchases of Puerto Rico debt and the bond insurers, have created some of our most successful investments ever.
This takes a lot of work and skill and not everyone has the business model and acumen to do it. If I worked for 99% of firms I’m aware of, we would not be able to do it and I don’t think we’d be able to invest as successfully for our clients. After experiencing working at other financial companies and seeing how they operate, I realized that the only way I could be successful was by only doing for clients what I’m willing to do for my family and myself. Sadly, for the industry, that is a competitive advantage and is unique. Ask your local gold-coin or annuity salesmen if they bought the same product for themselves. I’ll never recommend anything I wouldn’t do myself. Every time I’ve seen others do so for greater short-term profit, it has bit them back over the long-term.
I empathize with those that don’t have the same weapons at their disposal as I believe that hard times are coming. Not generating enough investment returns means less future assets for people. Higher interest rates mean higher expenses, except for net savers. I believe you will see major problems in various pension funds and many baby boomers are likely going to find themselves either over-exposed to too risky of stocks or being unable to generate enough income from their fixed income assets. Our goal as a financial advisor and money manager is to do everything in our power to create a better financial present and future for you and your families. We can’t promise any specific rate of return but we can promise you that we will always deal with you honestly, work our tails off, and do everything in our power to protect and grow your hard-earned assets. If we can ever be of service to a friend or family member, please don’t hesitate to refer them. We take tremendous pride in not making you regret introducing us and I’m confident we can improve most people’s financial futures. Below is the article I referenced and thank you for your time and trust.
A Retirement Wealth Gap Adds a New Indignity to Old Age