5 Keys to Achieving Financial Security in Retirement

When retirement is already a fact, it is too late to talk about saving money. What do you do then? Financial advisor Allan Roth has some practical strategies that he’s going to share with us today. Enjoy the show!

Margaret Manning:

My guest today is Allan Roth, who is the founder of a company called Wealth Logic. He’s been working in the investment world and corporate finance for over 25 years, meaning he is an expert with all things related to money and retirement. I invited him to come and talk to us today about something that I know is a concern to a lot of women: How to manage your money in retirement. Welcome, Allan.

Allan Roth:

Thank you for having me, Margaret.

Margaret:

Thank you for being here. Especially because I’m not a very savvy person when it comes to finances. I’m happy to have you guide us through this really important conversation. If we are in our mid-60s, we’re probably retired, and a lot of times it’s not even by choice. What do we do to manage our finances in this period?

Allan:

The first year of retirement is especially scary because it’s a year of transition. When we’re young, most of our capital is in what I call human capital, and it constitutes earning a salary, etc. As we get older, our human capital dwindles, and hopefully, our investment capital is growing, if we were investing well.

Then suddenly, in retirement, human capital is all used up. So, investment capital is what lies between us living the way we want to live or living on a pension.

Margaret:

Yeah, that is super scary. Until retirement, not only have we been earning money, but our mindset has been structured around abundance and getting anything we want. But now, we’ve got to start thinking about freedom from money. How do we get independence without having savings? What’s the secret?

Allan:

If you haven’t saved, you’re going to be living on a government pension. Buying a Lotto ticket is probably not going to work. I know I’m supposed to inspire your community, but that’s the bottom line.

Margaret:

No. You are absolutely right.

Allan:

You have to save. Even if you have done the right thing and saved, that first year of transition is really scary because if stocks tank it’s going to hurt a whole lot more. That financial freedom would shrink, and you’re going to have to figure out what will be the right thing to do.

Margaret:

What is your advice to people who have got stock? Should they keep it going, or maybe switch to something that’s going to give them an income, as opposed to you having to sell the stocks?

Allan:

I think income is the wrong goal. It’s natural for people that have been accumulators all their lives, but it’s incredibly scary spinning down that portfolio. If you try to get some extra income, like bonds that are paying an extra one percent, seeing them get slaughtered when the market goes down will be devastating. So looking for income is the wrong goal.

Going into retirement, it’s important to pick a portfolio that you think you can live with. Let’s say you’re 60% stocks. You could go down to 50 or 40% stocks, so that when stocks do plunge, you not only can stay the course, but can rebalance and go back to that 40 or 50% by buying more stocks and going the opposite of the herd. So, it’s about being more conservative when stocks are on an all-time high, and sticking with it. It’s definitely not easy.

Margaret:

Let’s say a person is in their early 60s and they’ve retired, or they’ve been made redundant and let go. They have saved some money, but it’s not a lot. Would you advise them to start investing in their 60s, when they have already retired?

Allan:

Do you mean investing some of what they’ve saved?

Margaret:

Yes, or maybe they have received a compensation for being let go. They could always keep the money under the bed, but spending from it will make it dwindle. So, would you suggest they buy stock in their 60s, even though they’ve no prior stock experience?

Allan:

It depends. If you have cash, and you put it under your mattress, or deposit it in the local bank paying .01% where your money will double in 9 345 years, you know that is risky. You’re guaranteed to lose spending power due to inflation.

On the other hand, if you buy a broad stock index fund, which is at an ultra-low cost—like every public health company on the planet—that will probably be a good thing with the capital, if you’re going to stay the course. However, if you have never invested before, and the next time stocks tank you panic and sell, that would be worse than putting it under the mattress.

Margaret:

What course should a person take? Life expectation is 30 years more than it was in the last century. In your 60s you still are likely to have 20 or 30 more years of life. So, is investing the right course? If you think, “I’m healthy, I have no medical bills, and I’ve got a good 10 years,” does that make it worthwhile?

Allan:

If you have the willingness to take the risk, yes. However, it’s common for people to think they have a high willingness to take the risk when stocks are in an all-time high like now. But suddenly, when stocks tank, they realize they’re risk averse. So yes, if you think that you can stick to it, then I absolutely believe you should have some stocks.

If we go the other way around, people who have saved a bundle and have met their goals, should probably keep it there. As William Bernstein would say—he’s a financial theorist and a good friend—”If you’ve won the game, quit playing.” In that case, you should take risk off the table and get more of a fixed income.

Margaret:

When we discussed the topic of this interview, you mentioned something about save-spend rates being ideally at 3.5%. Tell me what you mean by that because I wanted to clarify that recommendation.

Allan:

If, for instance, you’ve saved a hundred thousand dollars, and you’re investing it very well at ultra-low cost, which enables you not to make those emotional mistakes of buying high and selling low, then that 3.5% would make three thousand five hundred dollars. This is a safe spin rate that you would then increase each year with inflation.

So, if inflation was 2%, the next year you could increase it by $70 etc. That gives you, roughly, a 90% probability of not out living your money. So that $3500, plus whatever your pension etc. is, is what I consider a save-spend rate.

Margaret:

I think I got it. Are there any benefits to being 60 years old in this world of investing? Are there things that retirees can benefit from in the financial world?

Allan:

There are all sorts of discounts and such that seniors get here in the US. I presume it’s probably the same in Europe and Australia, etc. In relevance to our topic, there are bank certificates of deposits where we are insured by the US government for deposits up to $250 000.

You get a certain interest rate, and you don’t have to worry about the bank going under because there is the institution of the FDIC, Federal Deposit Insurance Corp, that guarantees your money. These deposits pay more than bonds and are safer than bonds.

Margaret:

I’m becoming aware that the 450 000 women that we reach around the world are probably thinking, “Where are the good ideas? Where is the helpful advice?” What you are saying though, is that there is no magic that you can do to increase our money overnight.

What we can do is cut our costs, stay the course on investments instead of getting panicked, get control of your emotions, and look for ways to save.

Allan:

The closest thing to magic I can give you is this: avoid expenses and emotions. Don’t make my industry a lot of money by paying high fees for things. Don’t be your own worst enemy by buying high and selling low.

Margaret:

The financial services industry is a big industry, with a lot of positives and negatives. So, the more you can take control of your own situation the better. Something else I wanted to ask you about are annuities. What they are? Are you pro or con?

Allan:

I am con to almost everything that my industry comes up with. However, annuity in itself is not a bad thing. The concept goes like this: You put money aside. It grows, and then later on it pays out a certain cash flow, often for the rest of your life. It’s a really good concept, and there is an immense amount of flavors of annuities.

Generally speaking, when you buy an annuity here in the United States, you’re going through two intermediaries: the insurance agent a.k.a. the financial planner and the insurance company. This makes annuities way too expensive. Here in the US, you can delay social security by buying a government annuity, and I’m absolutely for that.

Margaret:

Financial services individuals all over the country need to make money too, so going through them, or going through them and an insurance company, is going to cost you money. That is, unless you start early. Though, annuities are probably not going to be of much value to you in your mid-to-late 60’s.

Allan:

Starting early and avoiding any intermediaries would save you money. I’ll admit, my paying my son’s college tuition is dependent upon me trying to sell you and your viewers’ annuities.

Margaret:

You should have a sign up there saying, “Buy annuities!” Really though, I appreciate that you’re totally down to earth, Allen.

I wanted to mention your website, which is daretobedull.com. Tell people why you chose that name because it’s relevant to this conversation.

Allan:

I think that if you are investing well, it should be very boring and unexciting. Although, it’s not that easy to avoid reading the newspapers or the web, watching TV, etc. telling us the great depression is coming or stocks are going to go up. Basically, it’s not as easy to be as boring as I am.

Margaret:

Thank you for that. I think being boring has to do with living in the real world. We discuss this a lot in our community, and if we could turn back the clock we would do exactly as you are saying. We wouldn’t take frivolous chances; we would have been much more thoughtful to the lead up period to retirement.

It’s too late for that; we’ve made our choices, and we can’t beat ourselves up about it. We can’t go on forever feeling like we’ve made a huge mistake. At this point, it’s just a matter of minimizing your costs, and saving what you can. It’s also important to change your mindset and deal with the emotional side.

Allan:

Living frugally and saving will help you be happier in the long run. Buying that brand new car, etc. will bring you only a short-lived excitement.

Margaret:

One book on retirement that you recommended was “Are You Ready to Retire?” by Mike Piper. Are there any other books out there that will help people to get a handle on budgeting and stocks’ management?

Allan:

There’s “The Bogleheads’ Guide on Retirement Planning,” which is relevant for the United States. Bogleheads is a wonderful site to go and check out. It’s bogleheads.org, and it’s organized as a forum where people can ask questions on investing, and other people post answers without any invested interest.

Margaret:

You too write financial articles for the Wall Street Journal and the Money Magazine. Do you write for Next Avenue as well?

Allan:

I do, occasionally, write for Richard Eisenberg of Next Avenue, which is a wonderful retirement website. I also write for AARP, which I think is a wonderful retirement magazine.

Margaret:

These are great resources, and they are all relevant around the world. Even if you live outside of the United States, these are going to be useful. Next Avenue is excellent because they tend to be very practical. They feature a lot of best practices articles that help you get better at dealing with your finances.

Allan:

If you Google my name along with Next Avenue and Annuities, you will see my view on annuities.

Margaret:

We will surely try that. Thank you so much Allan for taking the time to help us dig through this and navigate us through this world of finances and retirement.

Allan:

I’ve enjoyed it. Dare to be dull! Have an exciting life in retirement, but make sure your investments are boring.

When you hear the word annuities, what’s the first thing that comes to mind? Have you read/subscribed to a financial magazine? Would you recommend any great resource that you have benefitted from? Please join the conversation!