Ric Shares Wisdom on the 60/40 Portfolio and Half-Life Annuities
Ric Edelman: Let's go to the phones here on the Truth about Your Future. Head off to Columbus, Ohio. Joe is with us on the air. How are you doing, Joe?
Joe from Columbus, OH: Hey, good. How about yourself?.
Ric Edelman: Doing very well, thank you. What can we do to help?
ASK RIC: Joe from Columbus, OH: I'll give you a little background on what my concerns are. I'm 77. My wife is 68. I have a portfolio that's approximately 60/40 with 60% equities, maybe 35% fixed, and two and a half percent of cash have a $40,000 six-year annuity that I did years ago to hopefully eliminate the risk. We have about $60,000 in cash, checking and savings. We have no mortgage, no credit card, no car payment. We live pretty comfortably on my teachers pension. I'm a retired teacher. My concern is over this last crash, we've lost over $110,000 or $120,000. Now, at our age, it's very difficult, obviously, to make that up. If we were in our 40s and 50s, obviously, it wouldn't be too much of an issue, but should we be seeing those kinds of swings at our age?
Ric Edelman: Well, Joe, let me ask you this. Shouldn't you have been asking that question before you built the 60/40 portfolio?
Joe from Columbus, OH: Well, I keep asking that with our advisor, and he keeps saying that we're going to be okay. See, my main concern is when I retired from teaching, our previous advisor told me to take the half-life annuity because, you know, we would have tons of money for the future. That didn't happen.
Ric Edelman: What is the amount of your monthly pension?
Joe from Columbus, OH: $3400 and change.
Ric Edelman: Which means when you pass away, your wife will get $1700 a month.
Joe from Columbus, OH: Correct. About $300 in Social Security right now.
Ric Edelman: So can your wife live on two grand a month?
Joe from Columbus, OH: Probably not.
Ric Edelman: Then the half-life annuity was not a great idea. It sounds like the advisors that you've been dealing with have not been all that fabulous. How many years has your current advisor been an advisor?
Joe from Columbus, OH: Boy, I'd say about eight or nine years.
Ric Edelman: Okay. Well, the problem is that over the past eight or nine years, the stock market and the bond market, the real estate market – all have all been doing fabulously. So has the crypto market. And if your advisor’s total experience is just the last eight or nine years and they don't have a lot of training in longer term economic history, meaning they don't understand what happened in the 1970s or the 1950s or the 1930s, let alone we go back to a great number of periods throughout American history, for example, the 1860s and 1870s, then they could have a Pollyanna perspective.
You know, it's been rather casual and rather cavalier for people to say, “Oh, market decline, don't worry about it, sit tight, it'll come back, because it pretty rapidly has done that every year for the past 10 years.” But if we go back to 2000, 2007, 2008, which predates your advisor's experience, we had three years of severe declines that you will remember if we go back to 2001 - the dotcom bubble and 9/11. It was a horrific period of time. If we go back to 1992 with the major recession that we had at that period or of course, the 1970s. I'm not so sure that a person who lived through all of those would take a cavalier attitude of, oh, just sit tight, 60/40, you'll be fine and you'll do okay. I think that it does make sense to reevaluate the level of risks that you're taking. The bond market is totally different than what it's been for the past 42 years. You know, if we go back to 1980, interest rates were very high. Did you own a home back in 1980?
Joe from Columbus, OH: Yeah, we purchased in '75 and we thought we were getting a great deal at 8%.
Ric Edelman: An 8% mortgage in 1975. And you remember what happened by 1980 where mortgage rates were 15%, then 18%. So we now have seen those interest rates drop from 18% in 1980, dropping all the way down where mortgage rates were to two and a half percent a year ago. This was a 42-year period of declining interest rates, a generational occasion. In other words, people have spent their adult lives over the past 42 years experienced nothing but declining interest rates. And that means rising bond prices, because when interest rates go down, the value of bonds goes up. And that has been very exciting for the past 42 years. But now look where we are. We're now at the bottom of that valley where interest rates are at their very lowest and now interest rates have started to go up. And as interest rates go up, bond prices fall. So you have to ask yourself, what can I reasonably expect from interest rates over the next several years? The rest of this decade, our interest rates are going to keep going up. Can we reasonably expect them to go back down to where they were? Because that's what would have to happen for your bond prices to recover. So I'm not so sure that I feel comfortable at all about owning long-term bonds. I don't own any. I don't recommend the bond market at all right now. I don't think it makes any sense because we are in a rising interest rate environment. We've seen severe losses in the bond market. I think those are going to continue. And I think it's Pollyanna to suggest, oh, “just hang in there and it'll all work out if you own mutual funds of bonds or ETFs of bonds.” I'm not so sure that is the right strategy.
We also have to look at the stock market because we have severe pressures going on right now and we are in the middle of a bear market at the moment. We have a recession on the horizon. So you have to put all of this into proper perspective to ask yourself why am I invested in the first place? The reason you've been doing what you've been doing for the past 50 years is that you've been accumulating assets, building wealth to support yourself in your retirement, and you've done a great job of it. You've amassed $430,000 in investments, $60,000 in cash. Your home is fully paid for. You've got money in an annuity and a pension. You're doing fabulous. What that means is, Joe, you've been spending your entire life climbing the mountain. Well, you've now reached the top of the mountain. It's time to stop climbing. If you try to keep climbing, you'll fall off the other side. So we need to recognize it's now time to protect and preserve the money that we've got. We don't need to double it anymore. We don't need to triple it. That's not going to change your lifestyle. But if you lose half of it, that could create financial jeopardy for you and your wife. So I think what you need to do is reevaluate what you're doing with your financial advisor. If you're not satisfied with the answers that you're getting, talk to other advisors, get other opinions and see what they may have to offer you in terms of advice for your situation now, given the economic environment that we're in.
Joe from Columbus, OH: See, that was my concern that from 2008 to right now, that was 14 years to get us to $530,000. We don't have 14 more years to get that $110,000 back. So that's the direction I want to go to try to just like what you said, is to protect and not worry so much about trying to accumulate more wealth, which would be nice.
Ric Edelman: But so I'd recommend that you talk with a financial advisor. Of course. You know, I created Edelman Financial Engines 37 years ago with advisors all around the U.S. Talking with them would be a good idea for you. You can reach them at EdelmanFinancialEngines.com. And I would encourage you to talk with other financial advisors or to get second or third opinions and contrast that to the advice that you've been receiving to date so you can figure out what makes sense for your situation.
Joe from Columbus, OH: Listen, I appreciate your help and your conversation and thanks so much again for everything you you've talked about.
Ric Edelman: It's my pleasure. I really enjoyed the phone call, Joe. And I wish you and your wife the very best. That was Joe in Columbus, Ohio here on the Truth about Your Future. You can do what Joe did. Send me your question to AskRic@thetruthayf.com.