#42 | Refinance Your Retirement

Jon “Jag” Gay: Welcome back to Protecting and Preserving Wealth. I am Jon “Jag” Gay. I am joined by Bruce Hosler and Alex Koury of Hosler Wealth Management. Gentlemen, great to be with you as always.

Bruce: Good morning. Great to be with you, Jon.

Alex: Good Morning, Jon.

Jon: Today we’re talking about refinancing your retirement. Most of us are familiar with the concept of refinancing a whole mortgage, car loan, but I got to say, I’ve never heard the concept of refinancing your retirement. Over the last couple of years we’ve seen interest rates skyrocket really to levels we hadn’t seen since the early to mid-2000s.

Although the news might be telling you that higher interest rates are bad, Alex and Bruce are here to tell you why higher interest rates can be a good thing actually, and why you’d want to consider locking in these long-term higher interest rates right now, before the interest rates fall again. Bruce, let’s start at the basic level here. What does it mean to refinance your retirement?

Bruce: Jon, these higher rates have given us opportunities to lock in high-income payouts on annuities and annuity living benefits that we have not seen in maybe 15 years. These higher rates allow people to look at what they have, where their money’s invested, and potentially lock in income guarantees that we haven’t seen in a very long time.

Jon: What else, Alex, are some of the benefits to refinancing your retirement now?

Alex: Think about it this way, what we’re trying to accomplish is buying more income with fewer dollars and then being able to reinvest the rest of that for the long term. We think about pre-inflation of what we experienced over the last few years, plus the higher interest rates, people were having to use a lot more money just to get the income that they were trying to generate for themselves. Now with rates being higher than what they are, think about it, if you have higher rates at say 5%, 6%, 7% on bonds, money market funds and annuities like we’re talking about here, that means potentially, you can use less of your money today to get more money out of those dollars.

Then you can reinvest the rest for the long term, look for some other goal planning, really think strategically about how you’re using your money today. The thing is though, rates aren’t going to stay this high forever. Eventually they’re going to come down. When that happens, it may be too late to consider refinancing your retirement at that point.

Jon: Alex started to hit on this a little bit, but who should be thinking ideally about refinancing their retirement?

Bruce: Everybody. Even if you’re in your 40s, you could potentially be thinking with these higher interest rates, locking in some of these living benefits if you’re in your 50s or 60s or 70s. Anybody right now that has money, repositioning that correctly to replace maybe another annuity or something that doesn’t have a strong income stream or other investments whether it’s fixed income or whatever, to guarantee a portion of their retirement with these living benefits right now, with the higher interest rates that we’re seeing that we have not seen in a while, they should all be thinking about this.

Jon: That’s a fair point. We touched on this in a previous episode. I’ve been reading about this as well, that there’s currently $6 trillion, that’s trillion with a T dollars, sitting in money market funds in the sidelines earning roughly 5% for investors that deposit their cash there. That’s pretty good, right, Alex?

Alex: It’s very good. In fact, we still have a lot of our own clients with a portion of their investments in money market funds for that exact purpose. The problem is– two things is, eventually when rates go down, the money market interest rates you’re earning will go down as well. That may be a trigger sign to a lot of, not just institutional investors, but also retail investors that says, “Hey, I need to do something else for my money.”

By that point again, what we’re talking about is, if we see the outflow from money market funds, it’s going to find its way into other sources. What happens to those other sources that we’re referring to, and we’ll talk about that in a little bit, is rates will come down again, prices will go up and you lose the opportunity to lock in the gains for the long-term, like we’re really suggesting here. Who knows how fast that’s actually going to happen and at what rate or when it’s going to start? We want to be ahead of the curve here and be a little bit more proactive.

Jon: Why should investors consider, Bruce, reallocating their cash right now?

Bruce: Their cash is getting a good rate right now in the short term. As you hear in the news, we’re probably expecting the Federal Reserve sometime by the middle of the year, June, July, August, to start lowering the interest rates. When they do that, the market may anticipate that before they do or right when they do, so those money market accounts that might be paying close to 5% right now, that may fall off a cliff very quickly and now these people are scrambling to try and find somewhere where they can get yield. You have the opportunity right now while these rates are higher to lock in the opportunity of tying these rates up for a longer period of time.

Jon: That’s the why. How about the where, Alex? Where should investors be allocating their cash to if they’re moving it around?

Alex: We have a few different areas that we’re really focused on right now, in particular bonds. For most people that are more conservative, that are retired, that seems like the most logical place to go with investing or reallocating some of your money for the same purpose. Again, if you can lock in for the next three to five years, rates even higher than 5%, that’s a pretty good deal. Looking at the equity markets, same thing. Dividend-paying stocks may be a good area to take a look at as well. There’s still a lot of room for we believe the market to run here over the next say 12 months or so.

Even real estate for people that have been sitting on the sidelines as well. The same thing applies is folks that are waiting for rates to come down in mortgage rates. Even if you’re not retired and you’re looking to buy a home, let’s say as an example, think about looking at that now as an opportunity because if the prices for homes are lower and rates are higher and most people are scared by the higher interest rates on mortgages, you get in now, rates will come down eventually, you can then refinance down the road in the future and lock in lower rates that way just the same.

Those are the three main key areas, but that’s where you feel like the most of the money will flow to once rates start coming down and when the Federal Reserve starts lowering their federal funds rate as well.

Bruce: Or for that matter, even if they used a variable interest loan so when the rates come down that loan can adjust down lower.

Jon: Fair point.

Alex: We all know that in January of this year, the stock market has reached all-time highs. If we compare this to January of 2022, when the market was also at the previous all-time high, we’re still undervalued in today’s market by about 8% to 10% less than we were back then. Earnings have surprised everyone. Really good earnings. We still have a very strong consumer out there and this is a good scenario for stocks to continue to have the justification to potentially run higher into 2024. A presidential election year, by the way, is typically the second-best year of a four-year presidential election cycle.

Jon: Alex, any other areas you’re seeing opportunity for investments in 2024?

Alex: Yes. Private equity’s one area that really has been talked a little bit about but not really presented to many clients or investors because the misconception out there is you have to have a lot, a lot of money to be able to invest in private companies. That doesn’t seem to be the case any longer because private equity realizes there are individuals and families out there that do have significant wealth that they can invest in similar tools and private equity markets.

Why we justify encouraging our clients to allocate some of their money there just as well is you’re diversifying your holdings. Not just being all in the public markets, which we know are very volatile. If you could have a sleeve of your investment portfolio in a private equity fund that doesn’t go up and down with a market every day that is justifiably marked to a true valuation of those companies, we see that as a great opportunity to hedge against some of your other risk out there in the market.

Bruce: Non-correlation.

Alex: Correct. Then as well, we always talk about the magnificent seven that still is a real thing. There is going to be a lot of opportunity in the marketplace to buy other stocks at discounts that haven’t been treated fairly in the market that still are good companies that make a lot of money, that are profitable, that have low debt. They still are opportunistic ways that you can invest your money now as well.

Jon: In previous episode of the podcast, we’ve talked about the specific strategy that you guys use at Hosler Wealth Management regarding your clients, but for some of our new listeners especially, Bruce, tell us a little bit about your income strategy for retirement and what makes Hosler different from other advisors out there.

Bruce: First of all, we are very aware of sequence of return risk. We use a buckets of money approach. In the life of a retiree, if you imagine, 1 to 5 years, 6 to 10 years, 10 to 15, and 16 to 20, in those first 10 years, we don’t really want clients taking a lot of risk in the stock market in those early years. We want to use fixed income. We want to use annuities or other vehicles that have guarantees.

If the market drops too early in your retirement, you get to 65 and you retire and you have 3 negative years and you’re drawing down money out of your portfolio, at the same time the market’s dropping, your portfolio may not be able to recover. That’s what we call sequence of return risk. We’re very aware of that. We use financial planning software, we plan our investments around that. Then again, we’ll use things like annuities to guarantee income.

We’re very cautious about that because we think that the biggest expense that many people have, and they don’t realize that over their lifetime, is taxes. If you’re taking non-qualified money and you’re putting that into annuity, you are taking capital gain potential taxes, and you’re turning it into ordinary income. We’re not really big fans of that. We like to see perhaps in an IRA, if it’s already going to be ordinary income, then we may use some of that for an annuity.

We may break those annuities up into size annuity contracts so you can convert one of those each year to a Roth IRA and we give you a path to be able to convert your IRA to a Roth that way, even though you’re buying an annuity and you’re getting guarantees on that. The other bucket we like is if you have your Roth IRA, which is long-term money, and you want to buy one of these income benefits for the rest of your life, and it’s going to generate tax-free income when you finally turn it on, that’s not a bad place to be either.

Jon: That takes care of the retirement piece of it, but there’s also the working years piece of it. Alex, what about the financial planning process at Hosler Wealth Management? How does that help retirees reach their long-term goals?

Alex: We work with a lot of successful people that have accumulated significant wealth because they had a plan and that’s accumulating assets. Everyone has that plan, save more than you spend, and you’re going to have enough money to be able to retire one day. The problem is that we’ve all been conditioned in the same way to assume, well, that’s how you should be investing over your entire lifetime.

When they come talk to us for their initial complimentary consultation, most people don’t have a strategy or even an idea about how to protect their money, spend it responsibly, and they haven’t considered all the risks, like Bruce talked about, taxes, sequence of returns risk, and even long-term care as a bigger risk further down the road.

There’s a lot more tools that we can use and people should consider using to create that roadmap to success, because as time goes on, as we realize people want to spend their money, they want to enjoy what they’ve earned over their lifetimes or what they’ve actually saved, they don’t just have a tool or outlet to actually express that in a way which actually allows them to spend the money that they want to and accomplish long-term goals, such as legacy planning or charitable giving as an example.

We create the roadmap and then you have a plan for every year that’s dynamic, because we know life is going to not be a straight line. It’s going to go up and it’s going to go down. We’re going to have good times and bad times, so why wouldn’t you want to have a roadmap to compliment where you’re trying to get to over your entire lifetime?

Jon: Well, they say in marriage route, “Sickness and health,” this is a financial plan for sickness and health, both health-wise and financially, right?

Alex: That’s exactly correct. That’s exactly correct, Jon.

Jon: Bruce, what other things should retirees consider when refinancing their retirement, back to our original point here?

Bruce: Well, just like Alex was saying, there’s static financial planning, which someone prints your financial plan and you put it on the shelf and you say, “Oh, I have my financial plan.” But dynamic financial planning, you need a plan that is on the computer online that you have access to, and the markets go up and down, you can look at it and see your statistical probability that you’re going to be successfully okay.

When it comes to planning this retirement, it doesn’t hurt to, in refinancing your retirement, perhaps some of your fixed income or that maybe you lock in some of these rates long-term in an annuity right now, especially with the higher living benefits that we’re seeing right now, you lock that in for income for the rest of your life, that’s the opportunity that we see right now. If you get a bond or a fixed income mutual fund, that might give you 5 to 7 years, but we’re talking locking in rates for 10, 20, 30 years, the rest of your life. This is a unique opportunity in our minds.

What we’re seeing right now, allocating part of your portfolio to lock in some of those gains, that’s probably wise for someone to do that. Not all your money, just a sliver of it that you would have as a guaranteed income for the rest of your life.

Jon: What really strikes me about our conversation today, gentlemen, is that you have a dynamic plan that changes for your clients and the advice changes. We’re talking about the unique circumstances that we’re facing here as we record this on February 13th of 2024. Before we wrap up, Bruce, Alex, anything else you want our listeners to know?

Alex: I’d say this, when it comes to retirement planning, it’s a lot different than, again, accumulating wealth during your working years. You should come into a conversation with an open mind about what else is available. We talk about different tools and tool sets that we can use to help you create the retirement that you desire to have. Apart from the traditional recommendations of most advisors out there that are only focused on asset allocation models of stocks and just bonds as an example, there’s way more out there that’s available.

Right now there’s not a lot of risk in the markets and the economy, but we always know there’s going to be events that occur in the future. We want to protect against those risks before they actually happen. The tools that we’re talking about here today can help you accomplish that and have a more successful, peaceful and enjoyable retirement.

Bruce: I just want to talk about for a second, the change in technology that’s taken place in the financial industry. A lot of times if we talk about annuities, a lot of people have negative views of those because for many years in the insurance industry, they’ve had big upfront commissions, long surrender charges, and locked people into very low rates.

Alex: Oh yes.

Bruce: We’re not talking about those type of vehicles today. We’re talking about fee-based annuities that are flexible and can let you get in and out of them and can provide you with these living benefits that you can choose, but if life changes, you’re not locked in, you have flexibility. We have everything up and down the scale, and so people have preconceived notions. I just want to remind everyone, hey, these rates are high right now. You can lock in some choices, but what used to be your grandfather’s annuity is not the annuities that are available today.

[laughter]

Bruce: Just like your mom and dad have a flip phone and they don’t have a smartphone and they can’t run that, but you have a smartphone. That’s the same thing with the annuities today, there is a lot of new innovation in these financial instruments that is very new and different than what people have experienced in the past.

Jon: Please, don’t get me started on my parents and cell phones. That’s a whole other podcast.

[laughter]

Jon: If our listeners want to know more about how you do things at Hosler Wealth Management, or really have any questions about planning their financial future, including their retirement, how do they best find you?

Bruce: They can reach us on the web at our website, https://hoslerwm.com. Hosler, H-O-S-L-E-R wm.com, or reach us at Scottsdale here, 480-994-7342. We’re up in Prescott, 928-778-7666.

Jon: Great stuff as always today, gentlemen. We’ll talk again soon.

Alex: Thanks, Jon.

Bruce: Thanks, Jon.

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