Hesitant to Invest? How to Avoid Running Out of Money During Retirement

Mindy:
Welcome to the BiggerPockets Money podcast where we interviewed David Stein from Money for the Rest Of Us, and talk about the state of the economy, asset classes, including some we’ve never discussed before, and what to do if you’re overwhelmed with your investing options. Hello, hello, hello, my name is Mindy Jensen and with me as always is my fellow rest of us co-host Scott Trench.

Scott:
Thanks, Mindy. Great to be here.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business or learn investing principles from investors who have managed tens of billions of dollars in assets. We’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.

Mindy:
Scott, today’s money moment is, are you traveling internationally? If you have an unlocked phone, consider purchasing a SIM card at your destination instead of using your cell phone carrier’s international plan. Local sim cards typically offer much better rates and larger data allowances than US carriers. And this is actually a really timely tip because my daughter is getting ready to go international and she doesn’t have an international plan, so thank you to our producer for sharing that because I need that.
Do you have a money tip for us? Email [email protected]. All right, Scott, I am super excited to bring back David Stein from Money For the Rest of Us, this is a great episode. We talk about a lot of things. I want you to listen to this episode today and we are talking about annuities near the end. This is a four letter word in the investing community. However, maybe it’s not and David has a really great way to think about them, to look at them, and I am going to be rethinking my position on annuities after his description. Definitely time for some education and deep dives into what that all means.

Scott:
Yeah, I think he’s got a great take on the economy. I think he’s got a great take on portfolio management and like you mentioned, I think in this episode you and I kind of maybe finish the start of a process that has transformed annuities from a bad word that we’re going to stay completely aware of to a tool with certain specific use cases for certain specific individuals.

Mindy:
David Stein teaches people about money, how it works and how to invest it in his popular podcast, Money for the Rest of Us. Money for the Rest of Us is Stein’s primary platform for teaching thousands of individuals about money, investing and the economy. The show has been featured in Business Insider, Forbes and US News and World Report. David, welcome back to the BiggerPockets Money podcast. I’m so excited to talk to you. How have you been?

David:
Wonderful. It’s great to be here. Thanks for having me back.

Mindy:
David, for those of us who didn’t hear you on episode 86 all the way back in 2019, can you tell us a little bit about yourself and your podcast?

David:
Sure, so my background is institutional investing. So, I spent over 15 years as an asset manager working mostly with endowments and foundation. I was a chief portfolio strategist at our firm. We managed over 20 billion dollars in assets at the time, but I sort of was in my mid-forties and was tired of being a money manager and wanted to try retiring early and seeing what that was like. And so I did that and as part of that I realized I missed teaching about investing in the economy. So, I launched Money for the Rest of Us in 2014 and it’s a weekly show and it’s expanded. We have the free podcast, we have a premium membership community where we provide additional education. We have some other software tools called Asset Camp and now it’s very much a family business. So, both my sons are partners and we work together and our daughter works part-time. She got us the podcast, so we’re enjoying teaching and helping others while learning about business.

Mindy:
I love it. Your podcast has such a great name, Money for the Rest of Us. How did you come up with that and how does it sum up your mission as an educator?

David:
The name came from a really good marketer, Verna Chia, who’s a friend of mine. She’s based in Australia, and she just wrote me one day and says, “You need to write a book and here’s the title, Money for the Rest of Us.” And I thought, oh, that is actually a really good title. I wrote a book and realized I have no one that will actually buy the book, because I don’t have a platform or an audience. So, it was around that time that podcasting was getting more popular as people had free data plans on their phone.
And so I launched the podcast to basically grow an audience and teach and ultimately wrote a second book with that title. I didn’t come up with a name, but as it evolves to me, the rest of us would be those that don’t work on Wall Street. So, it’s individual investors, it’s those that are just trying to understand the world of finance and money in the economy and don’t have really an informational edge. We’re all on this investment journey together and that’s sort of what it conveys is it’s the rest of us trying to figure it out.

Scott:
So, how has your relationship with money changed maybe since last time we talked? Has anything evolved or has your viewpoint shifted or anything?

David:
Yeah, I think I’m even more patient. So, since we spoke last, we had a pandemic as you know, and we had central banks be even more proactive in combating the economic turmoil. And so we’ve since then, like immediately, so if you recall, the pandemic was March, 2020. That’s when it really everything shut down and that next month the Federal Reserve was out buying bonds. They were buying non-investment grade bonds, so junk bonds that had been formally investment grade had got downgraded and they were providing massive liquidity. And so my approach to investing has always been to be willing to make adjustments if risks go up. And so in our model portfolio examples, for example, we pulled back risk, we reduced equity exposure, but then within three months we had this massive rally. And so I’m much more wary of how quickly central banks are willing to act to avoid really market turmoil.
And so in that environment you don’t want to make a whole lot of changes. You want to understand what drives asset class returns, and especially if you’re a younger investor, you can ride out many of these storms and even as an older investor it doesn’t make a lot of sense to take extreme positions either in or out of the market. We can make adjustments. And I’ve always invested that way, but I’m even more wary of what they call fighting the Fed. You don’t want to fight the Fed because basically we had 15 trillion dollars of money outstanding, if we call that cash, checking and saving savings accounts, and now we have 23 trillion dollars of money outstanding.
And if we wonder know why housing prices popped and everything else went up dramatically, it’s the amount of liquidity and cash that flowed into the system as result of quantitative easing, the buying of bonds by Central Bank along with massive federal budget deficits. You need both in order to create money and create wealth. It’s just given to people that they went out and spent and that dramatically has changed the financial markets and we’re still seeing the repercussions of that.

Scott:
Yeah, okay. So, low interest rates, massive federal government spending and quantitative easing, which for those who aren’t aware is when the Federal Reserve buys bonds usually from institutions and injects cash into those institutions’ balance sheets, thereby increasing the money supply here. And so that inflated asset values over the last decade or so. How are things changing for you now that has stopped now that we’re seeing interest rates rising and we’re seeing monetary tightening policy coming from the Fed? Is anything changing about your perspective now? You’re talking about not fighting the Fed. Do you believe that investors should be more cautious as the Fed signals their intent to continue raising rates for example?

David:
No, not necessarily. So, for example, in our models we’re about 5% underweight stocks that collectively, everyone’s been waiting for this recession for two years now. They’ve been forecasting that, we’ve not seen that. Inflation is coming down, a big part of at least in the US the consumer price index is things that aren’t even really measured. A third of CPI is home related things and a big portion of home related, most people own their home. And so the Bureau of Labor Statistics goes out and asks people, “What do you think you could rent your house for?” And that gets added to the inflation numbers. So, if we look at the latest inflation numbers, the headline inflation numbers coming down as oil prices fall, but that housing element, which is part of core inflation remains sticky because it takes people a while to realize, hey, my house isn’t appreciating 20% a year anymore.
It’s actually maybe has fallen back a little bit and I don’t think I can get as much rent. And so there’s a lag when you look at some of the inflation statistics, but they are coming down. But once you get into a high inflation cycle, it’s hard to exit, because people get used to higher inflation. And so they start to change their behavior, they start to perhaps to hoard, they start to think they can get more of rent for the house or they’re willing to pay higher prices. So, instead of changing what they buy and substituting, it’s like, well, everything’s going up. I’m going to just buy the most expensive marinara sauce out there, because it doesn’t matter at this point. And so this behavior changes is what central banks fear the most because then high inflation expectations become anchored. Now I don’t think we’re going to stay at six, 7% inflation.
It will eventually come down to four to three, but it could be many years before we get 2% inflation like we had. And as a result, higher interest rates, and that can put pressure on some asset classes such as real estate that BiggerPockets focuses a lot on because higher interest rates means there are other asset classes that are competitive. If you can get 5% yield on your cash, why would you buy a building that has a 5% cap rate, which many, many apartments were sold at in the last three to five years. And so that’s why you’re seeing some corrections in commercial real estate values including multifamily housing, because now cap rates need to go up because the risk-free rate has gone up and appears that it will stay up for some time.

Scott:
So, you have a long track record as a professional asset manager. You used the word underweight to refer to something related to stock portfolio earlier. Could you explain what that means and what kind of portfolio concentration your ideal portfolio looks like in today’s environment? How it might have shifted from a few years ago?

David:
Sure. So, when I say underweight, what I’m saying is that we have some static, let’s say 70% stock, 30% bond portfolios that own a couple Vanguard funds. So, that’s sort of a starting point. And then we have some portfolios where we include more of a value tilt on the stock side, more small cap. And as part of that weighing, we’re maybe like 65% stocks. And the point of mentioning it at all is not so people go out and follow our models because they can, but that’s not the point. The point is we’re not overly bearish right now. So, we’re not saying that the world is going to pot, that we should be completely out of stocks because valuations for stocks outside of the US are not expensive.
And there are still opportunities in the dividend yields for example. I mean they’re attractive. And so there are elements, and so when I say underweight, I’m just saying that we’re not fully allocated. We have a little less, more in cash, a little less in stocks, but we’re not overly bearish. It’s just recognizing that economic trends have deteriorated but they haven’t fallen off a cliff either. And we’ve been waiting around for two years. And so in that environment you don’t want to get overly bearish and as younger investors, probably not bearish at all, because the time horizons are so long, 30 years or more.

Mindy:
One of the things you talk about on your podcast is the economy, and I am not an economist, but I’m wondering if there’s any factors in the economy that you’re currently keeping an eye on that those of us who might not pay so much attention should be paying a little bit more attention to?

David:
Well, I mean we talked about inflation, so certainly, and I don’t know to what extent people pay attention to inflation, but it’s certainly something we look at on a monthly basis just to understand is inflation coming down? We also spend a lot of time on the podcast talking about leading economic indicators. So, one for example, is purchasing manager indices or PMI. These are surveys that are done around the world. So, they’re just asking businesses, “How’s business? How are your new orders? What’s your inventory like? What kind of prices are you paying? What about your employment in terms of who you’re hiring?” And these things are adjusted to where if it’s above 50, it signals an expanding economy and if it’s below 50, it basically normalizes to an economy contracting and it’s one of the main signals that we use just to get an understanding where we are economically and there’s the manufacturing element and the services.
Now, does a typical investor need to follow that? Probably not, but it’s a simple tool and it’s a helpful tool, because it’s so comprehensive then it’s one number. And so if most of the economies are above 50, then things are going well and we’re sort of right around 50 right now, which is why it’s not like in March, 2020 when the PMI data plummeted to 42 or even into the thirties during the great financial crisis. And so it’s sort of just one signal and we want to simplify our investing as much as possible, but if someone’s interested in where are we in the economy, then looking at what’s known as the JP Morgan global manufacturing PMI or the global services PMI and just kind of know where that’s at could be helpful. And there’s equivalent in the US, there’s a US PMI market or as S&P provides it as well as ISM does an analysis of that.

Scott:
So, when I hear your overall position is the economy’s fine right now. A lot of people are out there declaring doom and gloom in a lot of things, but it seems like it’s neither good nor bad. And if anything, I’m just going to shift literally 5% of my portfolio more to debt probably just because interest rates are higher and the returns are a little better in the debt space now in the bond space but still keep in the market from an equity perspective. First of all, is that an accurate assessment? And then second, if so, that’s bad news for real estate because I would presume in that case you would not expect interest rates for example, to come down in the near future if that’s your read on the economy.

David:
Yeah, so I would say that, so one of the things that we look at when we look at overall investment conditions, we rate them red, green or yellow and overall investment conditions which include asset class valuations, it includes the economy or economic trends and includes what we call market internals. It’s just a level of fear and greed in the market and they’re low neutral, so not overall, but economy wise it’s been red for eight months now. And so some of this, like this PMI data hasn’t fallen off the cliff, but it’s not been above 50.
So, that is some warning sign. But you’re right, because there isn’t really a housing bubble or a debt bubble or a global pandemic where we have no idea what mass casualties would be at the time in early 2020, no, it’s sort of a correction. An economic contraction is if we get a recession it probably won’t be very deep or very long and the markets are so forward-looking, they’re already looking for the recovery and earnings and we’re actually seeing that on the earnings front. Earnings have fallen over the past year, but analysts are expecting earnings to improve, but it also means inflation hasn’t come down because we haven’t had a deep recession.
There’s a lot of money out there and people still have a lot of savings that there’s spending. Now they’re going traveling. If you look at airline flights, everybody’s going to Europe. I mean people that have discretionary income, they’re all traveling. And so that’s not an environment where that the economy’s going to fall off a cliff and it is an environment where interest rates could stay higher and you’re seeing this slow correction in real estate. Only half the people were going back to work in major cities, they’re not in their offices, but there was just a building that sold in Fort Worth at a premium in the past week. Well, what kind of building was it? It’s a class A building. So, people are sort of upgrading to the nicer buildings and the buildings that are suffering are those that B class and aren’t as nice and they’re seeing their valuations marked down and you’re seeing basically the equity holders walking away and turning the keys over to the bank.
And so you have this sort of ongoing correction, but that doesn’t mean everything in real estate is bad. There’s things that have done very well because that’s what real estate is. It’s incredible, as you know, it’s incredibly innovative and things change over time, but if you have the wrong building one that’s not as nice in the office space, then yeah, you’re potentially suffering there. On the apartment front, one of the things that concerns me is the sheer number of apartments coming online. So, there’s a million apartments under construction right now. And so if you own multi-family housing such as maybe in the southeast southwest, there’s a potential concern because those rental rates are starting to fall a little bit or at least stagnate because of the ongoing supply.

Mindy:
You’ve mentioned a couple of reports and there’s reports that come out every month or every quarter, the consumer price index, the inflation, the jobs report, the GDP, the non-farm payroll, the consumer confidence, which reports are really important to pay attention to for the average investor and which one should they just kind of gloss over when the radio announcer starts reading them off?

David:
The average investor, they could probably-

Scott:
The rest of us.

Mindy:
The rest of us.

David:
The rest of us could probably ignore it, right? Because they can buy their target date funds or their index funds and just focus on saving and increasing their income.

Mindy:
Oh.

David:
One is focused on interested in the economy than the two that I mentioned, the PMI surveys and the consumer price index. Part of it is just understanding the narrative and so we don’t forecast, we’re so we’re not here predicting the economy’s going into recession, we just want to know what the market’s temperature is so we know if we should get out of the way. And the reality is you hardly ever have to get out of the way. Like 2008 doesn’t come very often. Now we’ve had two, we’ve had 2008 and we’ve had a global pandemic, but it’s infrequent. And so it’s helpful to know where we stand. I think investors should probably be more focused on is the market expensive or not, as opposed to trying to figure out whether we’re going to have a recession or not. So, one of the things that we have recommended for a number of years is to have less in the US stock market because US stock market is so expensive relative to its average, whereas the non-US, which has much higher dividend yields of 3%, so they’re generating more cash.
The earnings growth of non-US versus US isn’t that different and the valuations are cheaper. And so if think about on a real estate basis, would you rather have a building that has a higher cash yield that has comparable rental growth to a lower cash yielding building, but it’s also cheaper, that’s where you want to invest. And it works the same way for the stock market. We can look at the cashflow or how fast is that cashflow growing in terms of earnings and what are we paying for that cashflow in terms of the price to earnings ratio?

Mindy:
Okay, you said non-US market and that made me think of Scott and his uber successful investment in a Chinese juice company a couple of years ago where I believe his current holding value is $0. So, which non-US markets are you more favorably leaning towards and which would you say maybe not?

David:
Well, when I say non-US, I’m saying buy all of it, you can buy a world XUS ETF that has thousands and thousands of companies in it, because we don’t purchase, we don’t recommend individual stocks. I don’t invest in individual stocks because it’s easy to invest in an individual building, because it’s appraisal based, you can get comparables. When you’re investing in an individual stock, you’re competing against Wall Street, you’re competing against all these analysts that are looking at the company coming up with earnings estimates. And so when you buy an individual stock, you’re saying first off, the price is wrong, that everyone else is wrong, the consensus that’s buying and selling the stock and estimating earnings is wrong. And so in order for the stock to do well, it’s got to do better than what everybody expects. It has a surprise to the upside.
And this is critical when it comes to stock investing individual stocks, because we don’t have, the rest of us, an informational edge to say, “No, the market’s wrong. All the investors are wrong. Netflix is going to do better than everybody expects. And so my stock will outperform the S&P 500 because it’s going to do better than everyone expects.” Which is why if you buy an exchange traded fund or an index fund that has hundreds of thousands of holdings, what you’ll see is some will do worse than expected and their stocks will fall, but some will do better than expected and those cancel out. So, at the end of the day, what drives the returns of an ETF is the dividend yield, the cash and the earnings growth in aggregate, which is tied to the growth of the economy. And whether the overall stock market gets more expensive or cheaper over time, which is why investing in a non-US exchange traded fund such as something at Vanguard, it has a higher dividend yield, there’s a 3% dividend yield versus one and a half percent for the US stock market.
So, right there you have a one point half percent advantage compared to US stocks. And if the earnings grow five to 6% per year over the next decade, you can add those two. A 3% return dividend yield plus 6% earnings growth, that’s a 9% return for non-US stocks. Whereas if US stocks has a 1.5% dividend yield and 6% earnings growth, that’s 7.5% expected return. But then we’re sitting here with price to earnings ratios for US stocks around 22 whereas they’re 15, the PE for non-US. So, it’s much cheaper. And that’s what I’m saying is don’t figure out which juice company to buy overseas or China, just buy the overall market, have some developed market, have some Europe, have some Asia, have some emerging markets and you can do it one ETF and then you’re good.

Scott:
So, how should I think about this asset … I love this discussion. I haven’t really considered this. I’m in all. My index fund portfolio is essentially all S&P 500 stocks, which are heavily US based here. I have a two-part question here. One, I read recently that the in 2023 year to date returns for the S&P 500 or that US stock market, I can’t remember which one, but basically they were completely inflated up to 15% by the FAANGs. So, these are Facebook, Alphabet, Amazon and a couple of those other guys. And the positive returns from those five companies were basically lifting the market from a negative 2% return excluding them to a 15% return. How does that factor into your thinking first and then second, how would you develop a portfolio thesis for this externally? How much should I put in international funds excluding the US? How much should I put in the US? How should I think about that problem?

David:
So, the global stock market, so if we rate or rank all the companies by size, 60% of the global stock market is US, 40% is non-US. So, if you just want to be equal to the market, what is the consensus of the market, the size? You should have 40% of your stock allocation in non-US. So, when you’re, we’re investing a hundred percent in US, you’re right, you’re because it is size weighted and because of the whole AI extravaganza that everybody is excited about that which we can talk about if you would like, you’re right, you have these top five holdings that have driven the market. If we look at the S&P on an equal weighted basis, so every stock is equal, it’s returned about 5% year to date. And if somebody’s really aggressive, it’s like I got a question the other day from one of our members and they asked, “Why not just the NASDAQ?”
So, the NASDAQ 100. The NASDAQ 100 is the top 100 US stocks, well, it’s 30% in those top five companies. And the problem with having such a big weight in the top five companies is again, their prices reflect the consensus. And so invariably when a company disappoints, especially when they’re very expensive, then they fall and you’d see a change in the top five companies over time. And so having 40% outside the US would be a good starting point and then you could have some more, for example, you can buy more dividend yielding ETFs and they’re not going to have the big allocation to those top five companies, but it also means in a year like this year, that portfolio isn’t going to do as well.
And that stinks when it comes to investing because there’s always something doing better and that gets all the press, et cetera. And that’s why we like to come back and just focus on principles. The principle is diversify as much as possible, recognize that something will always be the hot thing and maybe we have a little bit in it, but ultimately focus just like you do with real estate, what’s the cashflow, the dividend yield for stocks or the interest income for bonds? Is that cashflow growing and what are you paying for that?

Scott:
I love it. I love the principles first focus with this. The last 10 years I started investing when I was 21, 22 years old and bond rates were essentially close to zero and declining to zero over that decade, I was the first decade of my life investing, so I never had any allocation to bonds until recently. And the reason I’m changing that personally is because of the rising interest rate environment, I’m liking short term debt because I don’t know how interest rates are going to move and I don’t want to have a lot of all subjectivity to that. When you think about the 35% weighting, the slight change you made to a potential portfolio to weight a little bit more towards debt, how should someone think about getting into that market? Should they be factoring in things like the time horizon on the underlying debt? Are there ETFs that people should look into or think about?

David:
Well right now, first off, make sure your cash is invested. So, it is just not sitting there earning whatever banks pay nowadays. I think we have a credit union, I looked and I think they raised it to 0.2% is what they were paying on at a credit union. So, you can buy a money market mutual fund, which is a fund that basically at this point is investing most of their assets at the Federal Reserve is what they’re getting and they’re getting four or 5%. So, that’s the starting point. The other interesting area right now, which is the first time in a decade, you mentioned a decade. For the first time in a decade, it actually makes sense to purchase treasury inflation protection, security. So, these are inflation protected bonds. Anyone can go to treasury direct if you’re a US investor and you can purchase the latest five-year tips, it is a bond that is yielding close to 2%.
So, that’s your real rate. And then you get inflation on top of that and you can hold it for five years and you’re going to earn 2% plus whatever the rate of inflation is and it’s completely safe and you don’t have to worry about … which is safer than investing in a like TIPS ETF because for the exact reasons you point out, Scott. If interest rates go up, you get volatility because the value of that ETF can go down. But if you buy an individual treasury inflation protection security and you hold it in to maturity, you lock in that yield, that 2% yield plus the rate of inflation and people can figure out TIPS are not that hard to figure out you or treasury direct, you just, it’s a government bond that’s protected against inflation and hold one for five years and buy one of the newly issued ones. They do an auction about every month and you just say, I want to buy whatever, $20,000 or $10,000 of the latest TIPS and it’ll take your money and you’ll have it on your treasury direct account.

Mindy:
Okay, so you guys are starting to get into some pretty complicated things and I’ve got friends that are involved in complicated things. And one of the things that I really loved about your last visit with us, David, was when you spoke you said the first thing you should ask yourself is whenever you’re investing in anything, you should be able to answer the question, what is it? This is a quote that I copied from our last transcript, “You should be able to describe in detail if you were talking to a friend, I had a college client, one of my first endowment clients. He said to me, I’m not comfortable investing in anything that I cannot explain to somebody that’s not on our investment committee. So, if I can’t explain it then we shouldn’t invest in it.” What would you say to somebody who is overwhelmed by investing but keeps hearing that you should be investing because yes, you should invest in the stock market.
I have a huge love of the stock market. I have huge support for the stock market. I truly believe in the future of the American economy and the American stock market going forward. I don’t know anything about foreign stocks. I don’t invest in anything foreign, although now I’m going to start doing research. So, thanks for that rabbit hole you’re sending me down, David, but what advice would you give to somebody who is feeling overwhelmed by all of the things that we’re discussing at maybe a higher level or things that their friends are discussing?

David:
Well, the simplest is what I mentioned earlier. So, most people have a 401k plan with their employer or maybe they don’t. And so they can open an account at Vanguard and they can decide which year they hope to retire and they can buy a target date fund, the 2040 fund for example. And the Vanguard will do all that. They’ll have an allocation to stocks, they’ll have an allocation to bonds and they’ll have an allocation to both us and non-US. So, you don’t have to worry about it. Now granted we’ve talked about TIPS, we’ve talked about PMI, but I’m assuming that that individuals that listen to your podcast are interested in money and investing. But for typical people, if they could just get their 401K match and invest in a target date fund and go on with their lives and because the biggest thing is advance their career and figure out how can I save 10 to 20% of my income or whatever so that ultimately they can benefit from the compounding of these cash flows over time.
And especially on a tax deferred basis if you’re in a 401k and that’s the starting point. And for many people that’s the ending point, that’s enough. Focus on making more money in your career and spending time with your family and friends and don’t feel like you have to invest in the latest cryptocurrency or you need to be adjusting your allocation, because most people don’t. And it’s just some of us that enjoy doing it and especially if you approach retirement, they want to eke out a little more yield or whatever. But for many of us, you don’t have to.

Mindy:
I love that, straight from David Stein from Money for the Rest of Us’ mouth. You don’t have to invest in absolutely everything. And by the way, that was the answer I was looking for, David, I knew you were going to come through.

Scott:
So, David, for those who are a little bit more advanced than that and are looking to retire early in particular, what do you think is enough these days to retire?

David:
We did an episode last week called Live like you Already Retired. And so the first thing is try not to retire. So, you can quit your job. But I quit my job 10 years ago, 11 years ago ago now. And yes, I could have retired and be frugal and not work again. Well, I’d be more than frugal, but not spend as much as I want. And retirement is a huge mental shift if you’re really going to live on your portfolio, that’s hard because if you just spent 20 years collecting income from pay and then not, it can really mess with your mind. And so I think most people should figure out a way that, yeah, I’m going to live some on my portfolio, but I’m also going to figure out a way to generate other income, be it a side project or a part-time job. Because the reality is the 4% rule is a good starting point, but there are some challenges with it because there are many countries where 4%, it depends on what the stock market does.
If the stock market returns to eight, 9% per year, yeah, 4% would be fine. But if you were in Japan in the late eighties and retired and wanted to use the 4% rule, you’ve run out of money already, because their stock market didn’t support it. And there’s been studies that look it, well, maybe it’s 3%, I would be more comfortable with 3% rule, because again, what you’re trying to do is sort of endowment finance. So, you’re your spending rate plus inflation to not run out of money, the spending rate plus inflation, that’s what you need to earn. So, if inflation, you’re using the 4% rule and inflation is 3%, then that means your portfolio has to earn 7% to never have to run out of money. Now the problem is people are going to die, but it’s figuring out, well, what is glide path?
How much can I spend for a 40-year retirement? And when I quit in my mid-forties, I couldn’t imagine, how do you plan for 50 years? And what I realized is I don’t, I just have to make it one year at a time. So, did my net worth grow after spending? Did it at least grow by the rate of inflation? And if you can grow your net worth through your investment income through your outside work and it keeps growing, to me, that’s a much safer place to be if you’re in your forties retiring or in your fifties. Now if you’re in your seventies or eighties and you really are done, then there’s many things you could do, but one would be, and I’ll do it if I’m in my seventies, I’ll buy an immediate annuity which basically pay me income for life and let the insurance company worry about investing it. Because if somebody’s 70 right now, they’ll get 8% on their portfolio. So, a hundred thousand dollars, they would get 8% of that every year.
So, no, that’s $8,000 right there. So, if you have more than that, then you’re going to get more of that, but you get that. And that’s one way to do it. And most people that don’t understand investing should be looking closer at immediate annuities, because Mindy, your question earlier, if people that are overwhelmed by investing and then they retire and they’re feeling like, okay, now I have this nest egg that has to sustain me to the rest of my life, that’s an incredibly overwhelming problem. That’s way more overwhelming than saving for retirement when you actually have a paycheck. But when you don’t have one, consider investing in an annuity for a portion of it if you don’t have a traditional pension plan or defined benefit plan.

Mindy:
And this is why I’m so passionate about just teaching people to start investing and the index fund is what we are really, really passionate about here because you just set it and forget it. Choose the index fund and just put money into it every single month or quarter, however frequent you have made your decision to invest in. But you don’t have to know everything. You don’t have to be investing in the latest and greatest. It broke my heart to see all of those GameStop and AMC investors when Robin Hood was doing all of that, they didn’t know what they were doing. They were jumping on a bandwagon, they were throwing in money that they couldn’t afford to lose, and then Robin Hood wouldn’t let them sell and all of a sudden they lost everything that they had put in or they put in, not the people in the beginning, but the people who started jumping in on the bandwagon or that the crypto people they buy at 60,000 thinking that it was going to continue to go up and then it dropped.
And I don’t even know what crypto’s at right now because I have $0 in that. But just people who are making uninformed choices about their investing, I can understand why they’re doing it, but it just really makes me feel sad when I see people who have lost everything or lost so much because they didn’t know what they were doing. And then to hear those stories on the news and see other people say, oh, well I don’t want to lose it, so I’m just not going to invest at all. I’m like, but the stock market’s different if you invest in a different way, but how do you-

David:
Right. But again, we can say index funds and then people want to know which index fund, and I think there’s a base level of knowledge if you can do target date fund, there’s a reason why target date funds have both US and non-US index funds in that. And so at a minimum, people should have, they could own VT for example, which is a Vanguard total world stock market ETF. So, it has US and non-US, because we don’t want to have home country bias. If you’re Canadian, should you have 90% of your stock exposure to Canadian stocks? No. But as many US investors, they figure well Pepsi’s around the world, there is a benefit to global diversification, because there is no given that the US stock market will continue to outperform indefinitely. Definitely like it has the past decade, especially given it’s more expensive than the rest of the world. So, at least globally diversified index funds would be the way to go.

Scott:
So, I have two reactions to what you said there. First, the 4% rule and the 3% commentary, I think there’s a lot of folks out there that would disagree with the, hey, you may want to go down to the 3% and cite a large body of research around the 4% rule. And I would just want to comment that while there’s a lot of research on the 4% rule, a lot of debate about what is the right number here. The fact of the matter is that of the hundreds of people I’ve now met that consider themselves financially independent and know personally none of them or maybe one couple out of that entire crew actually is retired and does not earn additional income on a true 4% rule portfolio.
So, there’s the theory, which I think a lot of people would argue with you, David, and say is very sound. And there’s the practice, which I think you were alluding to as well. Are you going to be actually comfortable on this of nobody actually retiring on just that 4% rule without a few ACEs in the hole? What be it a pension, a large cash position, a real estate portfolio on top of that, a small business or whatever out there?

David:
Well, right, I mean the 4% rule is a good starting point. I mentioned 3% if I wasn’t going to change throughout my entire retirement. But that’s the beauty of retirement. We can change how much we spend each year. So, if we start out the 4% rule and the market falls 10% per year for three years to where suddenly, oh, we’re now spending 8% of our portfolio and it’s only going to last 20 years at that rate, then we need to adjust. So, I agree with you. I think Scott, we need the flexibility to adjust the rules.
We just don’t want to naively say four percent’s it and no matter what I’m going to … because if you model it out with a 4% rule, if you do a Monte Carlo simulation, there’s about a 10% risk of running out of money during retirement. So, who does anything with a 10% risk of ruin and just like, I’m just going to keep going until I’m ruined. We don’t do that. We adapt and adjust so that we’re not ruined. And that’s what most retirees do. They’re flexible, they can adjust. So, start with a 4% rule and be willing to adjust if the market doesn’t support it. And maybe you can spend more than that if we get an incredibly good markets for the next decade.

Scott:
The other thing I wanted to react to is the comment you made around annuities. So, you’re one of the most sophisticated investors we talked to on BiggerPockets Money. You’ve managed 20 billion dollars in assets at one point in your career and have these great thoughts. Until probably the last month or two I would’ve kind of considered an annuity a dirty word, a salesy word that has no place on the BiggerPockets Money podcast probably incorrectly. I read a book recently called Die with Zero by Bill Perkins, and he kind of talked about those things as well.
And there’s a certain attraction I think of annuities, especially with rising interest rates and I think you literally can now go out and get an 8.5% annuity, for example. You type it into Google and you’ll be able to find some of those things. What would you say to people who kind of share that same viewpoint that I might have had a year, a month or two ago about annuities being a complete waste of time and a ripoff in that context? Have recent events changed or should their thinking have been different all along around annuities and they’re just a useful tool and have been for a long time?

David:
Well, they have been for a long time, but I was like you. In 2008 during the great financial crisis, we managed money for financial planners. And I went to Baltimore, one of our financial planner clients, and they had their basically retirees come in and I presented to them and they were literally shell-shocked. And because they had stock exposure and we didn’t choose the allocation for them, but we were managing the underlying assets and in many cases they were had lost 30 to 40% of their assets. And I remember looking at them and seeing the fear in their eyes and trying to alleviate it, but I walked away was like, there’s got to be a better way. Who gambles their retirement on whether the stock market’s going to be up or not? And so I started going to a number of insurance conferences like, well, there’s got to be a solution.
And the reality is, it’s annuities because the benefit and there’s all kinds of annuities and there are bad annuities and there are better annuities or good annuities. And immediate annuities, the one I was referring to is … And I’ve seen this with family members where they’re incredibly worried about investing and they take couple hundred thousand dollars and they buy an annuity from a highly rated company like New York Life, and then it pays them a check every month for the rest of their life. And that can be so peace giving to an investor that they don’t have to worry about that. And the reason why annuities can pay the 8% is because it’s an annuity pool. Annuities have been around for a millennia, because with an immediate annuity, if you give the principle to them and then if you die within the first five years, you can get some of it back.
But eventually it gets to the point where some of the people die and the insurance company then has their money and can pay the people that live to be into their mid-nineties. And so it takes out that longevity risk that for, and it doesn’t have to be all your portfolio, but a portion of the portfolio should be annuitized. And for most people that’s what it used to be, because you had a pension and along with social security. And so it’s a way to take some money off the table and get a check for the rest of your life and know it’s going to be there. And then you can use the other part of your portfolio to basically meet increased expenses due to inflation.
And they’re a great tool. They’ve been around for years, but most people aren’t aware of them because they don’t want to lose that control. It’s like, why would I give an insurance company half my money? Well, you would because they’re pooling it with other people. And you might live to be your mid-nineties, and most states have insurance pools in case the annuity company goes under. And you buy from an insurance company like New York Life that’s been around for several hundred years or at least over a hundred years. And it’s just a tool. It’s one tool of many that can be used in retirement.

Scott:
And one other point that I think Bill Perkins would make or made in and Die with Zero is this concept of many investors have a lot of trouble. Let’s say you have a million dollars, you’re going to have a lot of trouble spending 8% of that million, $80,000, if it’s invested in your investment portfolio because of the rational way you’d think about spending that money. You wouldn’t spend the target return. You’re going to spend something considerably lower than that. If you have an annuity, you’re going to spend all of it, or you’re much more likely to spend a bigger chunk of it and feel very good about that spending to a degree. So, there was kind of a psychological benefit of it in a way that I had never really fully grasped. I have not owned any annuities and I’m not sure I actually will, but I’m no longer kind of, they’re a dirty word that we’re going to stay away from here on BP money, because I think that there’s some valid use cases for that point and the ones that you brought up.

David:
Well, you shouldn’t, I mean at your age you should not have an annuity. You buy an annuity when you’re 70 or 65 and you’re tired of investing in real estate or you’re tired or whatever. And you just want to basically lock in an income stream for your rest of your life, which allows you, as you point out, to potentially be more aggressive with the rest of your portfolio, because you don’t have that fear. I can’t spend my money because it’s all dependent on the stock market. Well, if I know that I have social security and I have an annuity and whatever, I get some rent from a building, then maybe I can go buy a flyer, a juice company or a crypto just or something interesting just for fun because I’m not so fearful that I’ll lose all my money, because potentially you only lose a part of it, the part that you speculated on.

Mindy:
Is there an age minimum that you can start collecting on your annuity?

David:
No, you can do it at any age, but the way that the math works, because they’re paying the payment for, again, this is immediate annuity, so this is separate from variable annuities or fixed annuities. This is a straight-up income for life, immediate annuity, single premium. So, you pay the premium once and then you start collecting the income. So, the older you are, the higher the payment because your life expectancy is going down. So, if you’re 40, you’re buying an immediate annuity, it’s going to be a much lower payment because your life expectancy is 50 years. And so the two drivers of annuity payments are life expectancy and then interest rates. So, as interest rates have gone up, annuity payments have also gone up. So, if you’re retired at 60 or 70, now’s a great time to buy an annuity because interest rates are very high and so annuity payouts are high, higher than they were five to seven years ago.

Mindy:
Awesome. Well, I think we should do an episode at some point on annuities, Mindy, because I think that they’re an interesting topic and a tool that we really haven’t covered too much in the past and that I think is a valuable one for especially our older listeners that are nearing retirement age and can benefit from potentially much higher payments. And that sounds like you had another good reason to try to do everything you can to take care of your health here as well because you’re going to get a better financial return on the annuity.

David:
Oh, right, exactly. Yeah.

Scott:
If you’re able to live longer. So, lots of interesting things here. And again, it’s a world I got to wrap my mind around and learn more about.

Mindy:
I absolutely agree that we should do an episode on that. I was thinking of the way that Joe Saul-Sehy explained life insurance and whole life versus term life. And when I asked him which one was better in that episode, he’s like, “Well, it isn’t one is better than the other, it depends on what you need.” And like Scott, I have always thought that annuity is a four letter word. Why would you invest in an annuity? That’s silly. But the way you described it, David, was made me rethink it.

David:
Yeah, you should do an episode on it.

Mindy:
I appreciate your information. That was very helpful.

Scott:
David. Thank you so much for coming on the show today. Are there any other parting thoughts you’d like to leave us with before we adjourn here?

David:
No, I think the theme is that investing doesn’t have to be complicated. That there are tools that we can use, target date funds, index funds, global diversification, immediate annuities when you get of age that it doesn’t have to be real estate if you want to do that. Or even we didn’t talk about equity REITs, which is a simple way to invest in commercial real estate. And those are tools that are out there that we can use and not feel overwhelmed.

Mindy:
Awesome. David, where can people find you online?

David:
So, our website is moneyfortherestofus.com. We also have a new project we’re working on at assetcamp.com and then occasionally on, well at JD Stein on Twitter. But I haven’t spent a whole lot of time with social media. You can also find me on LinkedIn. You can reach out there.

Mindy:
Wonderful. David, thank you so much for your time today and we will talk to you soon.

David:
Thanks for having me.

Mindy:
Okay, Scott, that was so much fun. First of all, David is such a good teacher. I love the way that you can throw any question at him and he can smoothly answer it. I am very excited about learning more about annuities and also that global ETF thing he was talking about. I have a new deep dive to do.

Scott:
Yeah, I mean immediately after the conversation I googled index funds that exclude US stocks and was able to find a few, including from Vanguard that I’m really interested in. I’m not going to stop investing in US stocks, but I might add more of that international exposure to my portfolio in the context of my stock portfolio following this conversation. So, I think it was just a really good thing. Probably should have done it years ago, frankly, but because it’s probably just best practice, but something that I’d been ignoring personally in my portfolio and we’ll probably rectify in the near future.

Mindy:
Yeah, same. I’m going to have a big old conversation with Carl after he listens to this episode and see what allocation changes we’re going to make to our portfolio.

Scott:
Yeah, so two easy ways to do that. If you’re brand new, you could go with a total international index fund, you can Google those and find out more about them. We’re not going to recommend specific things for obvious reasons. Or you can Google for index funds that exclude US stock market and if you already have a lot of the US stock exposure. So, it’d be two simple ways to begin thinking about if you’re interested in international stock exposure. We’re not recommending or not recommending that. That’s just a path for you to go down and explore if you’d like to look at those things after this podcast.

Mindy:
That was very helpful, Scott. Thanks for sharing that. All right. Should we get out of here?

Scott:
Let’s do it.

Mindy:
That wraps up this episode of the BiggerPockets Money podcast. He is Scott Trench and I am Mindy Jensen saying, time to scoot, little newt.

Scott:
If you enjoyed today’s episode, please give us a five star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.

Mindy:
BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Kailyn Bennett, editing by Exodus Media, Copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.