In this episode Dave and Steve discuss (2:07) a Stanford study that examined 292 different retirement withdrawal strategies to determine the best one. After that they discuss (15:00) the resurgence of value stocks. Is value investing making a comeback or will growth stocks continue to dominate?
Steve: All right. Welcome to Plan For Life Now, episode number 56.
Dave: Here we go.
Steve: We got a little background noise here.
Dave: I don’t know if they can hear the background noise.
Steve: Oh no, they can.
Dave: Can they?
Steve: Oh yeah, they’re going to hear that thunder I think.
Steve: I did a little test segment before we started recording and I could definitely hear the rain in the background.
Dave: I think this is an awesome background. If I was the podcast listener and not the podcast doer, I’d be really kind of excited about this one. This is cool.
Steve: Why? They don’t think we’re in a soundproof studio [crosstalk 00:00:01:32]?
Dave: Yeah. Just for that exact reason. We’re not in a sterile environment. This is-
Steve: No, we’re in my office.
Dave: This is where it all happens, we’re in the office. It’s a stormy day today.
Dave: And we’re doing a podcast about financial stuff.
Steve: All right, so we’ve got two topics here to talk about today. These were both articles that you had emailed to me, and I had actually seen them as well. So I thought they were both good things to talk about.
Steve: The first one is this study that came out of Stanford, and let me just make sure I get the wording of this correct. Stanford analyzed 292 different retirement strategies to determine the best one. Here’s how it works.
Dave: Yeah. I was intrigued by the headline.
Steve: Of course, yeah.
Dave: I go to headlines, and I like that headline. Okay, they’ve looked at a whole bunch of different retirement strategies. This is what they say works. Let’s see if we agree with this.
Steve: Right. So in 2017, the Stanford Center for Longevity analyzed these strategies. They came up with the best one, what they’re calling the best one. And it’s called SSIRS. I don’t know how you’d say that, SSIRS, which is Spend Safely in Retirement Strategy. All right? So we’re always intrigued by this. This is the name of our company, Capital Retirement Strategies. So I always want to see this stuff.
Dave: Yeah. Spend Safely in Retirement Strategy, or SSIRS.
Dave: SSIRS, as they call it.
Steve: Yeah, it’s really catching on, you know?
Dave: I’m sure.
Steve: So the SSIRS strategy … And when I see this, I’m intrigued because we’re always trying to stay abreast with what’s going on in the market, what’s out there, what are other people doing, how are they approaching the same problem that we’re trying to solve with clients? So I want to see, are they looking at something different? Is this new? Is this something we’ve never thought of?
Steve: So they start off and … Oh, and frankly this article that I’ll post from CNBC just summarizes the study. I actually went to the study, and I’m not going to claim to have read every word of it. It’s 84 pages. But I spent a good 20 minutes going through it and looking at the charts and trying to digest it.
Dave: That’s what I love about our jobs. I find the thing, but you actually do the homework.
Steve: Well, I mean, I find this stuff interesting. I find it fun. We were talking with a guy yesterday and we were sitting down and meeting with him, and he said, “I really love airplanes,” right? He’s into aviation. That’s what his job is. He’s like, “I could probably figure some of this stuff out that you guys do, but I’m not really that into it. I’m not going to pay that much attention to it. So that’s why I’d rather have you guys do it.”.
Steve: So I did go through the 84-page report, and I don’t think the CNBC article did a great job of summarizing it. Shocker, something that’s 500 words doesn’t totally encapsulate what an 84-page report says. But here’s what the CNBC synopsis was, and then we’ll go from there. The first thing, which they certainly hit on correctly, delay social security until age 70. Now, this is something we’ve talked about many times before. If you’re anywhere close to that age as our clients, we’ve had this discussion. We have software programs that analyze the different options, when do you take social security? We used to have some options as far as file and suspend strategies with married couples. That’s kind of off the table now. But this question always comes up, “When do I take social security?” And you have to remember, who is doing this study? Who’s involved in this? What is their background? These people have an actuarial background, they have a data-driven background. They’re looking for a retirement strategy that gives you the highest probability of success.
Dave: Right. They don’t have a background of, “Hey, I was an attorney making $150,000, and now I’m retiring at 66 and I making $0. So if I were to wait to take social security at 70 and I’m making $0 every month,” that’s not their background.
Steve: Well, and I mean, I point this out because there’s no arguing with the data. I mean, if you run the numbers, and anybody who’s looked at this a little bit knows that you get an 8% credit for every year you delay beyond full retirement age. So if your full retirement age is 66, that’s 32% more that you’re getting by delaying to age 70.
Steve: And, frankly, there’s nothing out there, there’s no investments out there where you can feel certain that you’re going to get 8% more by keeping the money in those investments. And certainly nothing safe and guaranteed.
Steve: So from that perspective, yes, you’re going to come out ahead. Now, the big issue or the big question is always how long you’re going to live. So what these numbers, and when people say, “Delay social security,” what they’re saying is that if you live past a certain age, and it’s usually 80, 82, 84, somewhere in that range, if you live past that age, you’re going to collect more in cumulative benefits than you would otherwise.
Steve: Right? So you live to age 90, that pile of money that you’re sitting on is going to be bigger if you delayed.
Steve: What I think it fails to appropriately address or take into account is the value of that money to someone now versus the value of that money to them at 85, because a lot of people will say, “I’m retired, I’m doing things, I’m active, I want to travel. Getting that income now to me means a lot more than potentially having an extra 50,000 or 100,000 at age 85.”
Dave: And I’m not advocating not waiting until 70, but I also don’t think it addresses the emotional … And, again, I get this. I have a pile of money. All right? Let’s say that … I have $180,000 that I want to be part of my retirement plan. And when I’m not working, the one thing I like to see when I look at my statements is that $180,000.
Steve: Yeah [crosstalk 00:08:19]-
Dave: What I don’t like to see is spending 40,000 of it for five years, which comes out to about $200,000, which is basically replacing social security. So then I get that. The math might work, psychologically, for people who aren’t working, that doesn’t work. And that’s, again, that’s not an … And remember, if I have $2 million, and I’m spending $200,000, and then I’m going to have this higher income, and I look at how that all works, that’s more palatable than I have a total of $450,000.
Steve: No, I think-
Dave: And I end up spending 200 up front to get that magic age of 70 going.
Steve: I think you kind of summarized there what I was trying to say, which is, yeah, I mean, the math works out and you’ve got a huge portfolio, absolutely, wait until 17, no brainer. But somebody who’s got a couple hundred thousand dollars and going to have to spend down a chunk of that, it doesn’t feel quite as comfortable, even if they can know in their mind, “Well, once I make it to 82, I’m going to come out ahead.”.
Dave: And in general, one thing they’ve hit on, on SSIRS or whatever-
Steve: SSIRS, yeah.
Dave: … SSIRS is right that social security planning and figuring this stuff out is really an important part of retirement planning. I know it’s certainly, from our practice, that’s really important is figuring out when we’re going to take social security with clients.
Steve: Yeah. So the second thing that they put here, and I mean, this is really just pulling directly from the 84-page report, but of course it’s not going into all the detail behind it. The second thing that they put is create an automatic retirement paycheck, right? This is pretty vague. And what the report actually does is examine the different ways that you can create an automatic retirement paycheck.
Steve: So let me get to that in a minute. But what the CNBC article pulled out of this, which was sort of the conclusion, which is that you should use the RMD tables to guide your withdrawals. All right? So what this means in real terms is the RMD tables, which are the required minimum distributions that the IRS tells you you have to take from your IRAs, starts at 3.65%, that’s when your age 70 and a half, and it goes up a little bit every year. So by the time you’re 78, it’s 5%. And by the time you’re 85, it’s 6%, and so on. But if you live at age 95, you’ve got to take out 15% of your portfolio every year. So basically what they’re saying is use these RMD tables, which are based on life expectancy, as a good guide for retirement withdrawals.
Steve: And, in theory, once again, I’ll agree with that. Where it comes into a problem is when you actually look, and the the actual study addresses this, but when you look at what are those RMD tables if they start at 70 at 3.65%, but a lot of clients don’t wait until 70 to retire, they retire at 65. if you look at that, it’s less than a 3% withdrawal.
Steve: It would be great if you had a $2 million portfolio to say, “Hey, I’ll just take 3%.” the problem is, for a lot of people, that’s just not enough money. I mean, you’ve got $400,000, 3% is $12,000. That’s just not getting [crosstalk 00:11:57]-
Dave: That’s where thought SSIRS really, not dropped the ball, it’s just that real retirement planning is not a mathematical study, just for the exact reason that you said there.
Dave: Now, when I first looked at the heading of that second part of SSIRS, I thought, “Hmm, we’re going to have a discussion here about the pros and cons of annuities.” Well, this-
Steve: Okay. But it didn’t occur in that CNBC article.
Dave: Not in the article, but that is exactly what the actual study did. So if you look at the study, it was very interesting. They go through different ways of generating this, what do they call it, automatic retirement paycheck. And they say one way is to take an RMD table type of withdrawal. Another way would be just to take a fixed dollar amount withdrawal. And then they look at taking immediate annuities, right? We don’t have time to go into all the different annuity strategies, but these are things that will give you a certain amount of income on a regular basis. Right?
Steve: And what I really liked about the full study is they analyzed this, and I’d never seen a chart like this before, they analyzed it in terms of how much income a certain strategy would provide you while you’re living, right? So maximizing the income versus maximizing the leftover money for your heirs. All right?
Steve: And this is ultimately the decision that people are making when they’re analyzing things like annuities. They’re saying, “Okay, I want to get income for me, but I also don’t want to totally give up control of the money to the insurance company. I want to have my heirs get something.”
Steve: So they had a whole section analyzing, on one end of the spectrum, an immediate annuity where you give everything to the insurance company. That’s one extreme. On the other end of the spectrum is just taking a set dollar amount every year and never adjusting it.
Dave: Got you. So I actually like the full version of SSIRS on that. It was the Attorney General Barr redacted version on CNBC that I had a problem with. Similar, this is somehow analogous to the Mueller report.
Steve: That’s not what we said at all. Why did you get that conclusion? No, I mean, they did say that using an RMD table was a good option of those, essentially because it was a combination between those.
Dave: If I had read the entire report, I would have … Okay. Interesting.
Steve: Remember, this report’s only 84 pages. What is the Muller? 477 pages? It’s a lot easier.
Dave: Okay. But in general, that Stanford study really hits on two huge topics that we deal with, which is when to take social security, and how to sure you have enough income with everything coming in combined to last a really long time.
Steve: Okay. We got a couple more minutes. Let’s do another topic here. I was trying to keep it-
Dave: We have no timeframe on this whatsoever.
Steve: Yeah, that’s true. I just don’t [crosstalk 00:15:03]-
Dave: We could sit here for hours and babble, but I know what you mean.
Steve: No, I don’t like these to go too long. You’re right.
Dave: We have a couple more minutes in how we judge your attention span to listen to this thing.
Steve: That’s true. I’m sitting there thinking, “Okay, people like listening, but not that much,” so.
Dave: And I think you’re probably correct about that.
Steve: So the second article that you had sent that I had also seen was an article that talked about value stocks. And it said, the headline was, this was from The Washington Post, Value Stocks May Be In for a Renaissance With Investors.
Steve: Let’s give a little background and color to this. What is a value stock? What is a growth stock? Value stocks, you can measure value in a couple of different ways. Some people use a price to earnings ratio. So they would say, “If the price of the stock is … If the earnings of a stock is a dollar, and the price of the stock is at $12, that’s a pretty low price to earnings ratio,” right?
Steve: And a company they mention in the article, JP Morgan, at a 12 to one price to earnings ratio, versus a company like Amazon is at an 86 to one price to earnings ratio because you’re expecting Amazon to grow quite a bit in the future.
Steve: Well, what have we seen over the last decade? We have seen growth stocks such as, they call them the FANG stocks, Facebook, Amazon, Netflix, Google, dominating over value stocks. And these numbers I wrote down here, over the past 12 years, the value, the Russell 1000 Value Index has underperformed the growth index by 4.3% per year, right? So we’re talking, over the last 12 years, 130% under-performance.
Steve: Now, what does this naturally lead to? This leads to some people saying, “I never want to invest in another value stock ever again. I’m going to put all my money in growth stocks.”.
Dave: Right, or three words … I’m going to put in value to begin this, but it could be anything, emerging markets, the S&P 500, value bonds, value stocks are dead.
Dave: Value is dead. Things that are of value, that’s dead.
Steve: Right. And it reminds me of a famous Time Magazine cover page in 1982, and it was titled The Death of Equities. And it was a long feature article that basically talked about how investing in equities was over, and you were never going to get any sort of decent returns by investing in equities ever again. Well, what happened from 1982 to 1999? greatest bull market in history, right?
Steve: So anyway, this article, it’s a catchy headline. I’ve seen others that are like this. They have a couple of opinions from a few analysts who say, “Ah, it’s time for value to come back.” I didn’t find that the article itself had a whole lot of substantial evidence or support for this. I mean, it was a couple opinions that said, “Okay, the growth run is over, and value might be in for somewhat of a comeback there.”
Steve: I think the bigger point, the bigger takeaway from all of this is trying to avoid falling into that trap of, like you said, that value is dead, emerging markets are dead, bonds are dead.
Dave: We study this stuff more than the average person. If you’re going to look at how value stocks do over any 20-year period of time, you’re going to find them to be very competitive, if not at the top of the heap of most of these other sectors. So you got to take that into account before you say, “Value is dead,” or before you leave your position of whatever value stocks or funds you have.
Steve: Yeah, I mean, that’s why we maintain diversified, balanced portfolios. We’re not going to try to guess, “Okay, growth is ending, so now we’re going to jump into value and catch it on the upswing.” I just don’t think you can reliably do that. And I just don’t think you need to base your retirement plan on something like that.
Steve: All right. Thanks for joining us.
Dave: Good. I hope you enjoyed the rain in the background. And then, if you were listening carefully, there was a screaming child in the background. That was not a lightning strike or anything, it was literally a whining child outside our office.
Steve: Who is not our screaming child.
Dave: No, it wasn’t any of our children. My children are too old to be whining and screaming like that.
Steve: Oh, mine are in full swing of screaming and crying, but they are not here in the office today.
Dave: Mine are millennial, and they actually do whine like that sometimes.
Steve: Thanks for joining us. We’ll check in again next month.