Announcer:
It’s time now on KROS for Financial Focus. Brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker dealer, member FINRA, SIPC, investment advisor representative, Cambridge Investment Research Advisors Incorporated. A registered investment advisor, Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate. James is joining me again today. We walked up the Hill today and kind of a little brisk, I guess you could say normal December weather here in Iowa. But as we were talking, doesn’t look like over the next five to six days that that’s going to necessarily be the case. I see some of those temperatures trying to creep back up again.
James Nelson:
Yeah, exactly. We’ll take it as long as we can and get to mid end of December with no snow. I’m fine with that.
Nate Kreinbrink:
I don’t think there’d be too many people saying. I know the people like to see the white Christmas, but if the alternative is we have nice pleasant temperatures, I think that’s a decent trade off. And I know this time of year, you never know what you can going to get. We’ve had snow on Halloween before and all that. So again, Midwest weather, we always say, “Close your eyes way today, and it’s going to change on you.” So I’m sure we’re going to end up getting that. We know it’s going to be coming, but any day that we can have in the 40s, 50s, and possibly even a 60. We’ll take it.
James Nelson:
Yeah. This time of year. We’ll definitely take it.
Nate Kreinbrink:
Absolutely. Topics for today. I know we talk a lot of times as far as the different things we want to go over. One of the things that continues to be remain in the headlines and we thought we’d kind of address a little bit today is just that idea of inflation and how it impacts your accounts, the markets, and everything not just this year, but going forward. And again, it’s been in the news a lot and just maybe talk a little bit as far as how it actually does impact the financial markets and what should people be looking for.
James Nelson:
Yeah, absolutely. I mean, inflation’s everywhere in the news. People are well aware of it. It’s real, it’s here. But how long is it going to be here and is this sustainable trend where we’re going to be dealing with high inflation for a long period of time? So most conversations regarding inflation this year have been in some form of how it will affect stock prices or bond yields. And that’s definitely a worthwhile discussion and worth considering. But when we look at things, it’s a little bit more or nuanced when it comes to retirees. And the reason I say that is because in our industry, we’ve talked about the 4% safe withdrawal approach. And Nate and I have chatted about this on our show before, meaning that a retiree could basically take 4% of their account value each and every year adjusted for inflation in over any period of time, 20, 30 year period of time, they’ve been okay. Meaning that 4% was almost a worse case scenario.
James Nelson:
Oftentimes they’re left with far more money after that 20-30 year period of time. They’ve spent that income, that 4% stream adjusted for inflation each year. And everybody’s been fine during those periods of time. And that’s been history. That’s been true. Any period of time you’ve looked at the markets, that’s been acceptable. So what we’re considering now is, hey, we’re only basically a year into this higher inflation environment. Is that a sustainable withdrawal rate or rule of thumb that we used in the past? Is that sustainable going forward when we’re looking at high inflation, if it were to continue? And again, we don’t know if it’s going to, but for now it seems to be here. Is that a safe approach? And is that something that we can really bank on going forward?
Nate Kreinbrink:
Right. And I think that question that you brought up is one that we address a lot of times with those that are just getting into retirement or near retirement is, “How much can I take out and still leave my principle basically intact as far as an income stream for it and that 4%, that rule withdrawal rate continues to come up?” And I think where people don’t necessarily understand that is is the purchasing power of money over time and how inflation does kind of go into that and impact that, not just in the near term, but in the long term as well. Again, especially over the last 10-12 years, we’ve kind of been in a sustained bull market and returns have been obviously higher for the most part in a lot of areas than that 4%.
Nate Kreinbrink:
So again, with that withdrawal rate where it’s at, people often say, “Well, can I take a little bit more out?” And then obviously you want to look at all things considered and make sure that you’re doing the prudent thing with that. Because again, if you look at that 4% withdrawal rate, and if you, let’s just say throwing numbers out there that you have $500,000, you take out 4%, that’s $20,000 a year that you could technically take out again and maintain that principle.
Nate Kreinbrink:
But again, if we have a 3% basically inflation on top of that 4% withdrawal rate, you’re not just taking out the $20,000, you’re taking out $20,600. So again, that 2-3% doesn’t seem like a lot in the near term, but again, if that’s sustained over a 20 or a 30 year time period, again, we just got to make sure that we can keep up with that. And, again, if inflation numbers being low for how long over the last few years now, all of a sudden we’ve seen this spike, how long will they asked? Again, it’s something we need to take into consideration.
James Nelson:
Yeah. The other interesting point when it comes to inflation and looking at how that can really impact a retiree’s retirement, is that most people think market decline would be about the worst thing that could happen in retirement or at least early in retirement. “Hey, I retire and then market decline, a significant market decline comes about.” That’s almost the worst case scenario in a lot of people’s minds. And that could be bad and that’s been true for several people. But actually when you look at the data, the worst case scenario was somebody who retired in the late ’60s and then we go into the ’70s with almost hyperinflation for a period of time. That actually worked out far worse for those individuals who retired in the late ’60s and then had to deal with high inflation for a long stretch.
James Nelson:
That was worse than, say, a 20%, or 30%, or 40% market decline right away when you retire. So like you said, Nate, 2% or 3% doesn’t sound like a whole lot when we’re talking inflation year to year. But when you take a 2%, 3%, 4% inflation rate compounded over a 20 or 30 year time period, that translates into a lot of money. And that’s a big difference than just taking a 4% withdrawal rate. It’s 4% plus whatever the inflation rate is. And again, that can turn into a pretty significant number.
Nate Kreinbrink:
Right. And I think just the basic concept that we see, people see this all the time nowadays when you go fill up your car, you go to the store, all these things, as far as cost of things going forward. And again, a benefit of this that people saw back in early October was social security and how their cost of living adjustment for next year was going to jump up 5.9% and people are excited and happy with it and should be. But again, when you actually look that and understand that, okay, when you have a big jump like that in social security, when the Medicare premiums come out, they usually kind of go hand in hand with that as far as the increase that they are. And we’re seeing that next year with the Part B premium and the first tier jumping up to just over $170.
Nate Kreinbrink:
So again, it’s just something that people need to keep track of, need to understand a little bit to know, again, the purchasing power of $1 that they’re taking out. And I use the concept all the time, $1 20 years ago isn’t the same as $1 today and isn’t the same as what $1 is going to be 20 years from now. So again, making sure that the assets, the pile of money that we have is going to still be able to purchase the same exact thing 20 years from now as it does now.
James Nelson:
Yeah. And people say, “Well, what can we do about it?” And again, that comes back to what we do as far as the investments. We’ve got to be agile there and we’ve got to be willing to make adjustments when needed. But the other thing is we can adjust spending. And I think this is what the federal reserve is worried about. If inflation persists, people just start spending less. They don’t do as much. They cut back on their spending, which obviously is a very bad sign for the overall economy.
James Nelson:
Now, the numbers aren’t indicating that we’re there yet, but if inflation were to continue, people, again, often ask, “Well, what can you do?” Well, you can spend less and try to curb that a little bit to buy some time. And hopefully things don’t don’t carry on forever. So again, something that we’re aware of, the Fed’s certainly aware of it. And that’s been their concern here. The last several meetings, as far as inflation being where it’s at, they’re concerned about people spending less here at some point.
James Nelson:
Hopefully inflation comes back down to earth a little bit with some of these labor shortages hopefully getting worked out, some of the supply chain issues hopefully getting worked out here in the foreseeable future. So hopefully inflation comes back down to earth, but certainly an issue right now.
Nate Kreinbrink:
Well, I think that term that you said, spending, I think is an oftentimes overlooked aspect of the planning. We do a lot of financial planning and projections for people as far as retirement. And the big question, as we said, that always comes up is, “Well, how much do I need to have in order to retire?” And it’s kind of a loaded question because depends on what your expenses are. And someone that comes in that has a lot of debt and needs a lot on a monthly basis as far as to fund their retirement is going to have to have a bunch bigger pile of assets in order to fund that.
Nate Kreinbrink:
Someone that has little to no debt and doesn’t need a whole lot on a monthly basis other than to pay the bills, they’re not going to have to have as big of a pile there. So understanding those two dynamics and how they play into each other is just a simplistic fundamental of the retirement planning that we do for people. But again, obviously we want to look into that as far as taxes and all that other stuff to make sure that everything is in tune, all the pieces fit together. And obviously, it’s the best plan for them moving forward.
James Nelson:
Yeah, absolutely. We’ve got to be agile with the investments. Clients sometimes need to be a little agile with their spending at times, and that could be a pretty good formula in a bad period of time.
Nate Kreinbrink:
All good stuff. If you got questions, give us a call. We’d be happy to sit down with. Did want to mention real quick that every Friday NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of December will be donated to the Clinton/Camanche Knights of Columbus Ladies Auxiliary. James, as always, appreciate you joining me.
James Nelson:
Absolutely.
Nate Kreinbrink:
Again, Nate and James with NelsonCorp wealth management, bringing you this week’s Financial Focus. Thanks again for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker dealer, member FINRA, SIPC, investment advisor representative, Cambridge Investment Research Advisors Incorporated. A registered investment advisor, Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.