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Apollo D. Lupescu

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Joseph Anderson

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Alan Clopine

ABOUT Alan

Published On

September 18, 2017

3 Dimensions of Expected Returns: Size, Price and Profitability

Apollo Lupescu of Dimensional Fund Advisors explains how risk and expected returns are affected by size, price, and profitability of a company, why the latest from President Trump shouldn’t affect our investing choices, how diversification can protect us from market downturns, and how our fear and greed have us tripping over our portfolios. Also, emails and phone calls on timing retirement and saving while pregnant, plus 6 Last Minute Retirement Strategies and some retirement tips for our younger selves.

Show Notes

01:02 – Retirement Tips For My Younger Self
11:47 – Apollo Lupescu: Why You Shouldn’t Trade Based on Politics or Current Events
21:33 – Apollo Lupescu: International Investing, The Matrix Book, and 3 Dimensions of Expected Returns: Size, Price, and Profitability
33:54 – Apollo Lupescu: Why Is Profitability a Risk/Return Indicator? Why Should You Work With an Advisor?
43:10 – My Wife is Having a Baby. Should I Max 401(k) or Save Cash? (James on the phone from Yardley, PA)
54:37 – Big Al’s List: 6 Last Minute Retirement Planning Strategies
1:03:38 – When Should I Retire?
1:09:03 – What Is the Right Amount to Save When Aiming for a Certain Retirement Goal?

Transcription

“So, if you wanted to build a portfolio that exceeded the returns of what you would get in the S&P 500 or the Dow Jones, which are large companies, that’s all they are, then one way that you can do that is not just buying these large companies, but also place an emphasis to some degree on the small company stocks, on value stocks, and high profitability stocks.” – Apollo Lupescu, Dimensional Fund Advisors

That’s Apollo Lupescu from Dimensional Fund Advisors. Today on Your Money, Your Wealth he explains why size, price, and profitability of a company matter when looking at risk and expected returns. In this packed interview, he also talks about why the latest from President Trump shouldn’t affect our investing choices, how diversification can protect us from market downturns, and how our fear and greed have us tripping over our own portfolios. Also, the fellas answer your emails and phone calls on timing retirement and saving while pregnant, and Big Al’s got 6 Last Minute Retirement Strategies and some retirement tips for our younger selves. Now, here are Big Al Clopine, CPA and a strong, tall, handsome guy that lives with his mother, Joe Anderson, CFP.

1:02 – Retirement Tips For My Younger Self

JA: Got a great show lined up, Alan. Super great show.

AC: We do. I mean, there’s so much content I don’t know how we can fit it all in, but we’ll try.

JA: I came into the studio with one sheet of paper.

AC: But it’s your head, all the stuff in your head, we could be here all weekend.

JA: Yeah I was kind of running a little late.

AC: Well, Joe, I’ve got some advice.

JA: Yeah, for your younger self. So let’s say if you went back in time, Alan. Have you ever heard those stupid questions? What would you say to a younger Alan Clopine?

AC: Yeah. And as a matter of fact, I have an article here, written by Jill Cornfield, about retirement tips for my younger self. So lets, you and I, see if this is what we want to tell our younger self.

JA: I am still very young, so. (laughs)

AC: Not that young. I’m talking about 20-year-olds. You’re in your 40s. I just turned 60. Oh, my goodness. All right so h5ere’s how she starts this article. “There are many things about money I wish a wiser person had told me when I was younger. Now I hope to be that person for you.” So I guess that implies that she’s now wise. So we’re going with that premise. Here are some tips. You’ll regret not saving.

JA: (laughs) Really? This is earth-shattering. If I could go back in time. Wouldn’t you save a couple bucks? Hell no! No, I’d still spend it all on beer.

AC: (laughs) She says you will get older and you will want money for retirement. If you start saving young, you don’t have to do it quite as aggressively because of the compounding of growth and interest over many decades. So that’s her first suggestion. So let’s unpack that because we all know we should probably be saving when we’re three years old. And I think I saved a dime. My first allowance.

JA: (laughs) But yes, so let’s say you and I go to a high school. And we talk about compound interest. And then we follow that young group into college, and then we follow them into their first jobs. Yes, I think in today’s world we all should know. I mean, when I was in high school, I knew that I probably should save a couple of bucks.

AC: I think we all kind of get that, especially when we look at our parents.

JA: Did your parents say, “Yeah you should save?”

AC: Yeah, I heard that. (laughs)

JA: I’ve heard, yes, and I’m sure my parents’ parents heard that!

AC: So this isn’t earth-shattering is what you’re saying. (laughs)

JA: And it’s just very difficult to do. If you can tell me away how to do it. Because we live in a society where I want things now because retirement is 400 years from now.

AC: Right. And you think about it, so you graduate from college, you’ve got student debt, so you want to pay that down. You probably got some credit card debt, just to buy meals, to get yourself through college.

JA: I was a financial advisor when I was 23-years-old. And I’m running calculations, and I know all about compound interest. The power of that. How much money do you think I was saving at 23?

AC: I’m assuming by your intonation, not very much.

JA: Nothin’! Zero.

AC: Now, me on the other hand, I graduated a sociology major, but soon thereafter I became an accountant and got all my classes after college. And I actually was a saver from the very start. In fact, when I bought my first home at age 27, I had $13,000 saved, which at that time was a couple of million. (laughs) If I do the inflation math. ‘Cause I was born in 1714 or something like that. (laughs) Anyway. So the thing is, I bought my first house, I had a downpayment. It still wasn’t enough for a down payment, even back then. I had to borrow some money from my grandma. I got the first house and I’m thinking, “no problem. I save,” That’s actually kind of how I’m programmed. But then I realized as I was dating, if I dated people like me, that would be a pretty boring life. So I thought, “I gotta find someone more interesting than me.” And you know what it turns out, people that are more interesting than me tend to spend more.

JA: They get out of the box.

AC: Out of the box. Vacation. We could die tomorrow, let’s have fun. So it’s like, “Ooh, I’m not saving so much anymore.” But that’s real life.

JA: That’s life. Yeah. I mean textbook is, yes, of course, you save some money. So all of you listeners in your 20s. Save. (laughs) OK, I’m going to check in with you in five years.

AC: (laughs) Well, she also says it’s easier to save when you’re younger. I’m not so sure. She’s used an example of like having your wisdom teeth removed. It’s easier when you’re younger. So I guess saving money, that’s a correlation? (laughs)

JA: (laughs) Why would that be easier?

AC: Because you develop good habits, I guess.

JA: No, your wisdom teeth. I’m not a dentist. Because what, your gums haven’t formed over the wisdom teeth yet and it’s going to hurt like hell when you’re older? Probably huh?

AC: Yeah. I don’t know. (laughs) I had mine out at 24, it still hurt like heck. (laughs) I remember that thinking, “is this ever going to stop hurting?”

JA: Yeah I know, I remember kids in high school that got them and then they looked like a Cabbage Patch Kid. (laughs) Campbell’s Kid for a couple days. So what other words of wisdom does Cornhole have?

AC: (laughs) Cornfield. Although there is a cool game called cornhole. You play that sometimes?

JA: Yes I do, I play that all the time. I call it Baggo. Same-same.

AC: OK. Let’s see, related to that is cool kids save. We’re on a roll here, aren’t we? (laughs)

JA: You’ve got to be part of the cool kids? So cool kids save?

AC: I’m not sure that’s true, but maybe when you’re 65, then all of a sudden you’re cool.

JA: (laughs) Yes, exactly. If I’m 65, I’ve got a couple of million bucks. I’m way cooler than if I’m broke. Yes. Guaranteed. (laughs)

AC: (laughs) I guess there’s a little bit on investing here, to tell your 20-year-old self, or 23-year-old self.

JA: Buy an index fund.

AC: Yeah. Index funds are easy, and keep fees low. I mean we’re going simple here.

JA: Yeah, I understand that fees are a drag on the overall portfolio. But there’s a lot more to investing than just the lowest fee.

AC: Yeah, like you can invest in a CD. There are no fees there. There are very few. But you won’t earn anything.

JA: Yeah. So you’ve got to look at things a little bit differently. Anyway. I’ll on a tangent that I probably shouldn’t go down.

AC: Think hard before you buy. That’s actually a good one. And here’s here’s why. Because you already brought it up. We sort of live in this culture where we want everything now, and we want to buy it now, we want to experience it now. And I think sometimes if you can just say, “all right, I really want this now, but I’m going to wait a month and see if I still want it.”

JA: Or even 24 hours.

AC: Right. At least 24 hours, if you can wait a week or two or even a month. Probably, the longer you can wait, the more you realize, “I didn’t really need that new surfboard, I already got six of them.” So I think that’s a good one.

JA: Because those impulse buys blows you up. The Internet is so good at that now. Oh my god. Amazon. It’s crazy. You look up, “Hey I need to get some new shoes. Golf shoes.” And now every browser, every page I go on is like a new pair of golf shoes.

AC: You just Google golf shoes and now it’s on everything until you buy. And then you buy it and it says, “Would you like another pair?”

JA: (laughs) Right! Do you need golf balls to go with that? Sonofabitch. Yes, I do.

AC: And you know I like to travel, and so I do a lot of airfare online. And of course, you always get the follow-up. “Well, let’s set up your hotel. Let’s set up your rental car. How about your activities?”

JA: You need a convertible. (laughs)

AC: (laughs) You do! How about this, it’s like, you’re thinking about going somewhere and you Google it and stuff, go on Kayak or Priceline or whatever, and then next thing you know, you’re getting e-mails. “Are you still thinking of going to Chile? There’s still plane fares available!” I’m getting those right now.

JA: “Book your flight tomorrow!”

AC: Because we’re going in February.

JA: Really, Chile?

AC: Yes, Patagonia. I mean, we’re going to white water raft, hike, horseback ride, kayaking.

JA: Oh my god. It’s going to be great. Can’t wait to see your outfits. (laughs)

AC: (laughs) We’re gonna walk on a glacier. It’s going to be awesome.

If you’d like some retirement tips for your current self, visit YourMoneyYourWealth.com to access white papers, articles, webinars and hundreds of video clips on tax planning, investing, retirement planning, Social Security, estate planning, small business strategies and more. I’d guess that just about ANY money question you have can be answered at YourMoneyYourWealth.com, but if by some small chance you need more help, you can always email us at info@purefinancial.com, or pick up the phone and call us at 888-99-GOALS. That’s 888-994-6257.

11:47 – Apollo Lupescu, Dimensional Fund Advisors: Why You Shouldn’t Trade Based on Politics or Current Events & How To Protect Yourself From Market Downturns

JA: Big Al, it’s that time of the show.

AC: It is. Very exciting. When we get to interview somebody that goes by one name, that means they’re quite important.

JA: So ladies and gentlemen, we have Madonna, is going to talk a little bit about her financial track. Because we couldn’t get Prince. God bless his soul. But we do have Apollo. Apollo, welcome to the show, my friend.

AL: Well thank you, guys. Yeah, that’s a first for me. But yes, I guess with a name like Apollo you can go with that.

JA: Let’s just start here. Give a brief introduction, tell our listeners a little bit about your background, kind of what you do, how you do it. And then we’ll kind of pick your brain on how to make our audience a better investor.

AL: Sure. So my name is Apollo Lupescu, I do have a last name, fortunately, or unfortunately. And I have been with an investment firm called Dimensional Fund Advisors for the last 13 or 14 years. And before that, I received my Ph.D. from UC Santa Barbara, and before that, Michigan State. And I’ve been doing investing in one way or another for the last 20 years or so, and I had a variety of roles, anywhere from working with the retirement business to being in Dimensional Investment Strategies Group, to being in this role, where more or less, I try to educate and try to shed light on a different way to invest.

JA: First question I got for ya because you’re a very attractive man. I’m curious what kind of Bic do you use on your head?

AL: (laughs) Actually it’s an electric razor.

AC: (laughs) That’s the strangest question we’ve ever had for a guest.

JA: (laughs) What, we gotta keep him here, we’re just warming up, Al! We gotta keep on the script!

AC: I know, but I thought we were going to keep it classy for at least a couple minutes.

AL: It’s radio so it’s probably worth mentioning to people that my head looks like like a crystal ball, although I don’t have one. (laughs) But I do have a very shiny, shaved everyday type of head.

JA: So you don’t go with Harry’s razor or anything like that, huh?

AL: No I have this, and I don’t want to be an infomercial, but there is a brand that I think is a Dutch brand, that makes these very good razors, electric razors. And I haven’t touched a manual razor in a very long time. That’s what I cannot be trusted with those. Anything that is sharp around me is not a good idea. (laughs)

AC: Alright, so we’re going to be talking about shaving for the next 20 minutes?

JA: What the hell, Al, we’re just having fun.

AL: It’s a radio show, anything goes.

JA: Alright, let’s dive into the brass tacks here. So this year has been kind of unusual in regards to headlines. We started the year off with a Presidential election, and then I think most people were a little bit surprised, maybe not necessarily who got elected – well, I would say a lot of people got surprised by who got elected, but maybe more importantly what the markets did after President Trump got into office. What the heck is going on with the overall markets?

AL: And as you mentioned the election, and maybe I’ll start there for a second, because in talking to investors across the country, I’ve realized that this particular election, probably a lot of others, but this one more so than before, it had a very deep emotional impact on individuals, because it touched on their core beliefs, it touched on their identity. And what I think is important to do is disentangle that emotional part from actual investment decisions. And to your point, the market did surprise a lot of people, because even before the election, I surveyed investors about what would they do if Donald Trump was elected. The majority of people that I surveyed would say they would sell. So even if they knew the outcome of the election, it turns out that wouldn’t have been the right decision. So the market did surprise a lot of people, and that’s just the nature of the market. But I don’t believe that investors should buy or sell, in fact, trade in general, in the market because of politics or current events. I think that the basis for trade should be a little bit more robust than what happens on any given day in politics or in other current events.

JA: The market doesn’t care, right? The market is not Democrat or Republican. The market is the market. But it’s funny when you look at the surveys if you’re a Democrat, and if a Republican gets in, then you have kind of more of a gloomy look on the overall markets, so you might trade against it. But if you’re a Republican, you have more of a bullish look on the overall markets. And again, I think that’s just your emotions and personal beliefs going into your investment strategies, that probably shouldn’t be part of your investment decision.

AL: Correct. I think that this day and age, the basis of an investment decision should be a lot more based on data, should analyze the data, and should really make it about the evidence that you have. But what’s interesting in what you said is that, I noticed this across the country, that there is not a universal agreement among people that this is either good or bad. And there is a lot of disagreement. But the same disagreement has been happening in the stock market for a very long time, because in the stock market, for every buyer there has to be a seller. For every optimist, there has to be a pessimist. Otherwise, people wouldn’t trade at that particular price. So there is disagreement even within the market participants about what the direction is. And that disagreement is reflected in the price that you see, because the market is a mechanism that is like a machine that aggregates all this information and expectations about the future, and it does incorporate the optimist. It does incorporate the pessimists. And what you see at the end is that the price is reflective of both the optimists and the pessimists.

AC: Yeah, let me ask you Apollo, we talked about politics, but the economy, we’ve had kind of about an eight-year bull run, and so some people get the sense that, “gosh, maybe I should get out of the market now because it’s at all time highs and boy interest rates are probably going to go up, so bonds will go down.” I guess my question is, where do you think we are in the economy right now and should that matter, or how should it matter investing?

AL: Yeah, that’s one of the very common questions that we’re seeing these days, is that people are looking and saying, “we’ve had this long run, we reached the all-time highs, and perhaps we’re in a bubble, and this is not the right time to invest. Should I be moving to cash?” And the way that I look at it, there are two very distinct ways to protect yourself. Because I think the investors are trying to do is protect themselves against some market downturn. And one of the ways that you can do it, which is the conventional way of doing it, is to try to identify when is the wrong time to be in the market and get out and move to cash. And this way, when the market does go down, you’re protected because you’re not invested in it. And I’ve personally tried that several times, and what I found is that, in order for that strategy to work, not only do you need to know when to get out of the market – so you might be looking and saying, “the market’s too high right now,” but you have to make an equally important decision, which is when to get back in. And what I found is that nobody, as far as I can tell, has consistently been able to make that decision. Not only when to get out, but if you don’t think the market level today, 22,000 whatever it is, if you don’t think that’s the right level, what is the right level? Is it 19,500 is it 21,000? What if it never gets there? You’re always going to stay out. So to me, that line of thought, it might be appealing intuitively, but when you look at the evidence, it doesn’t seem that it would work very well.

I think that probably a different way to do it, and something that’s, in my opinion, more robust, try to protect yourself from the market, not necessarily by selling, but also by diversifying into other types of investments. Number one would probably be bonds. And bonds, historically, have proven to be a good ballast when the stock market does decline. The second possibility, international stocks. Because they do tend to move sometimes in lockstep, but quite often actually, they’re not quite that perfectly correlated with the U.S. market. And the last one is to trim some gains. I think that when the market does go up, and I think this is what an advisor does, and Pure certainly are really really good at this, is when the market does go to all-time highs, to trim some of the asset classes. Some of the pieces of the portfolio that have run up. For example the U.S. large-cap stocks, and then take that money and reinvest it into something that might be at a lower valuation that might have gone down. So treat the market highs maybe as an opportunity to take some chips off the table and buy other asset classes at lower valuations.

Making trades based on politics or current events is not recommended, but being aware of what changing financial policy could mean to you is critical. President Trump is urging Congress to pass new tax legislation before the end of September. Visit the White Papers section of the Learning Center at YourMoneyYourWealth.com and download the white paper, “Tax Reform: Trump Vs. House GOP” to find out how income tax, estate tax, and business tax could change. Are your tax strategies at risk? Get year-end tax-planning tips that can help you stay on track in the midst of uncertainty. Download the Tax Reform white paper to find out more. Visit the White Papers section of the Learning Center at YourMoneyYourWealth.com

21:33 – Apollo Lupescu, Dimensional Fund Advisors: International Investing, The Matrix Book, and 3 Dimensions of Expected Returns: Size, Price, and Profitability

JA: Welcome back to the program, the show’s called Your Money, Your Wealth. Joe Anderson here, Big Al Clopine. We’re talking to Apollo from Dimensional Fund Advisors, DFA. Hey, you talked about international stocks. Are there any particular situations, or countries, folks should be keeping a close eye on?

AL: It’s interesting because these days there are quite a few headlines that are catching our attention. You have North Korea, you have all the other ones. The real question for any investor is should I be doing something. I personally don’t believe that investors should make any changes to their portfolios because of what is going on in the world at any moment in time. And the reason for that is because there are thousands or many tens of thousands of professional market participants whose job every single day is to keep an eye on all these events, and try to determine what is the impact of that event on the market, and even more specifically, because the market is a label – it’s just the word that basically reflects thousands of individual companies – what is the impact of North Korea, and what is the impact of whatever might be happening in the world, Venezuela, what is the impact on those particular companies? And it might sound cold-hearted, but what they’re trying to answer is, if there is a conflict with North Korea, what would happen to the sales of Coca-Cola or McDonald’s or Apple or Toyota pickup trucks? If ISIS is defeated, what’s the opportunity that Syria and Iraq and maybe the Middle East would present? And that’s what the market is trying to do, and it’s doing this every second, with so many participants, that as soon as something is coming out, it’s news, information, that that wasn’t really known before, all these future expectations are adjusted. And they’re adjusted so fast that by the time you try to do something as an individual investor, it’s way too late.

JA: I think that’s such a good point because fear drives us to make these decisions. And so if you hear, “Oh my gosh, what’s going on in North Korea? The guy’s a lunatic. We’re going to go to war.” All of a sudden it seems like you isolate yourself like you’re the only one that knows that information, or feels that. Everyone else is feeling the same thing or knows the same information that you do. In most cases, they know a heck of a lot more than you do. It’s already priced into those particular securities. So that’s a point well taken. But it’s hard to digest, I think, for an average investor.

AL: It is hard because I think part of it is that, to a point, there’s a big behavioral component to investing that drives decisions, and that’s mostly the fear and the greed. But there is also this idea that I don’t like to lose control. So if I can do something about it, let me do something about it. And the reality is that there’s not much that you can do about it, that anybody can do about it. And I actually look at the market, and look at the market response, because these are folks who have incredible resources, incredible knowledge, much more so than any one individual as a whole. And I look at, what is their reaction? If I see the market dropping by 5,000 points, I might get a sense that the expectations that they have, is that there will be something going on, and that will have a dramatic impact on our lifestyle. But if I see that the markets going up and down a little bit, like usual, I think that the probability that these market participants assign to that outcome is quite low, because nobody knows. I don’t think, anybody even me with a crystal ball, (laughs) nobody knows exactly the future. But what you have are different outcomes and different probabilities associated with those outcomes. And I think that what the market’s telling you by the way it moves is that the probability associated with that particular event is quite low. If the probability changes, obviously, that might make the market move.

JA: You know we’re talking I guess North Korea and ISIS in other places besides the U.S. And I think a lot of investors still have a very strong home bias. Al and I look at thousands of portfolios. I would say the majority of the stock positions that they hold are here, U.S. large company USA. Does international investing make sense? Or how do you educate to make sure that, hey, you want to be a little bit broader here? Even though we’re hearing some bad news like with the Eurozone, what’s going on with the U.K. They get out. There’s always been kind of this negative news over the last couple of years, what advice would you give there? What statements would you say?

AL: It’s only recently because I think that the background of investing was, invest in companies that you know. And what are the local companies that I know? Where do I shop? And that’s been almost again the conventional way that people have done it, so there is a bias towards companies that you know and love. What I would tell people is that that the world is a bit different today. It is a lot more integrated. To look around and even what they have in their pantry, what they have in their garage. In other words, if you are OK with buying Kraft Foods, but you also have Nestle, what’s wrong with buying both Kraft and Nestle not only in your pantry but also in your portfolio? If you have GM and Ford as part of your portfolio, why not consider BMW or Toyota? In other words, intuitively, it is a global world and there’s a big opportunity set. But what I would tell people is that the U.S. market, particularly the S&P 500, has done really well relative to international markets over the last decade. And when that happens, people start questioning, “why do I need all these international stocks, when the U.S. has done so well?” Well, I think what I would tell people is that it is important to have U.S. stocks, no doubt about it, but it’s also important to have international stocks because there are times when the U.S. market might not do as well.

And in fact, we don’t have to go back longer than 2000 and 2009. Over that entire decade, the U.S. market, the S&P 500, had a negative average annual return over the entire decade. It was actually dubbed The Lost Decade. But a globally diversified portfolio would have had positive returns. And in a particular book that’s been published called The Matrix Book, the average annual return over the same periods by being invested, not only in the U.S. stocks but international, developed and emerging, is over 7%. So in those times, those international stocks held you up. So to me, it’s almost like it’s good news that the U.S. and international stocks don’t always move in lockstep. And there will be times when the U.S. will hold up international stocks, but there will be other times when international stocks would hold up the US. And the last point I’ll make here is that whenever something goes down in value, I would look at it as an opportunity rather than a threat. People are talking about U.S. markets being at all time highs, well maybe this is a good time to look at some asset classes in some parts of the world that have gone down. Particularly if you do it through a systematic process, and you guys do it through something called rebalancing. I think that’s actually really important because again, don’t look at it in a fearful manner, but look at it as an opportunity. And in that respect, I absolutely think that there is a role for international stocks.

AC: It’s not just domestic and international, there are different kinds of companies. There are smaller companies, larger companies, there’s growth in value stocks. Can you sort of address maybe some of the differences in those? And should you tilt your portfolio one way or another?

AL: Right. So what you’re mentioning now is part of the core research that’s been done in the academic community, and that research has to do with distinguishing between different categories of investments, different categories of stocks. So to begin with in terms of investments, we know that stocks and bonds are different. One buys you ownership in companies. The other one is a form of lending. So when you buy ownership into a company, that’s what it means to have a stock. Now even as the market does a really good job in processing the information and assigning a particular fair value to what the stock is worth, it doesn’t mean that all stocks in the market have exactly the same expected return going forward for an investor.

And what the academic science has been trying to do, and Dimensional as well is trying to identify these dimensions of expected returns for stocks. And what we’ve found is that there are 3 things that really matter when it comes to stocks: First is the size of the company. If you look at companies that are large, the Jumbotron, well-known companies that are in the Dow Jones or the S&P 500, those have a different investment expected return profile from the smaller companies. And right now in the U.S. market, there are roughly about 2,000 of these smaller companies that are not part of the S&P, they’re not part of the Dow Jones, they’re stand alone. And historically, these have had a different return pattern and different expected returns going forward than the large companies. So the first distinction is small versus large. And it turns out that, historically, the small company stocks have had a better historical average return, and also going forward, there is a higher expected return.

The second characteristic is the price at which you buy a company fundamentals. It could be earnings, cash flows, the book value. So how much are you paying, for example, for a dollar in earnings, or for a dollar in book value, for a dollar in cash flows? And it turns out that the companies that have a relatively low price, they historically have had a higher return. So those are called value stocks and going forward, they tend to have a higher expected return than the more expensive counterparts, called the growth stocks. So we know that small company stocks, they historically have done better than large company stocks. We know the low price or value stocks did better than growth.

And more recently there was a third distinction being made, and that had to do with the profitability. And there is a specific way to define the profitability of a firm, but in that particular metric, the companies that tended to be profitable, they continue that way. These companies are profitable, they tend to continue to be profitable, and the return of these companies differ. The high profitability companies, they tended to have higher returns than the low profitability. So, if you wanted to build a portfolio that exceeded the returns of what you would get in the S&P 500 or the Dow Jones, which are large companies, that’s all they are, then one way that you can do that is not just buying these large companies, but also place an emphasis to some degree on the small company stocks, on value stocks, and high profitability stocks.

We’ll get back to our interview with Apollo Lupescu from Dimensional Fund Advisors in a moment. But once the podcast is over, if you need more information on just about any financial topic you can think of, check out Your Money, Your Wealth and Pure Financial Advisors on YouTube for educational video clips and full episodes of the Your Money, Your Wealth TV show. We’ve got Certified Financial Planner Jason Thomas on saving for college and understanding Medicare, attorney Nicole Newman on estate planning, Dr. Wade Pfau on banking on your house in retirement, and many, many more. There are literally hundreds of videos to get you up to speed on just about every money topic that affects you. Just search YouTube for Pure Financial Advisors and Your Money, Your Wealth and start binge-watching with purpose! Check back regularly, we’re always adding new videos. Now back to Apollo!

33:54 – Apollo Lupescu, Dimensional Fund Advisors: Why Is Profitability a Risk/Return Indicator? Why Should You Work With an Advisor?

JA: Welcome back to the program, the show’s called Your Money, Your Wealth. Joe Anderson here, Big Al Clopine. We’re talking to Apollo from Dimensional Fund Advisors, DFA. I got a question for you. I understand small versus large small companies. Small companies, you never heard of. They’re small. They’re risky. Most small companies fail. So if you buy into a small company, yes, you’re taking on a heck of a lot more risk than if I bought Wal-Mart. OK. So I understand that. Then I look at value. Well, on lower priced, I might be in a distressed industry at the time. I still might be profitable, but my price to cash flows is lower, or my price to the overall book value of my company is lower than it had been. So there’s more risk there. So tell me, I don’t understand the profitability. Where is the risk story there? Because I understand that, highly profitable companies, if they’re already highly profitable, why would that give me a higher expected return? Throwing you on the spot here Apollo.

AL: No, it’s a good question because it seems like the intuition, to your point, is quite simple on the small company and the value side. Whereas for profitability doesn’t seem that obvious. Why would I get paid more as an investor, why would I have a higher expected return as an investor in these highly profitable companies? And I think that there are several ways that you can look at it.

The first one is that you have to look at profitability, not in isolation, but also alongside with the other two factors. So given that a company is large, given that a company is, for example, expensive, let’s say from a relative perspective. So you have a large growth asset class. Within the large growth, the question is, are all these companies exactly the same? If you look at small growth companies, are they all exactly the same? And what you see there is that, when you apply this profitability, then you do have a gradation there, in terms of expected returns. But instead of saying that the profitability is something that is real, I want to find a highly profitable (company), one of the things that you can also think about is that the companies that are unprofitable, they tend to stay unprofitable for quite a while. So in other words, you might want to steer away from them, rather than just saying, “I’m going to shoot the lights out with the high profitability.”

So one way is to put the shoe on the other foot and just saying, these companies that are highly unprofitable, will they continue to stay that way? The second way to look at it is that, even if a company is profitable, the way that you can define risk is sometimes a little bit more complicated. And I think it’s not as simple as I personally thought to define risk because there are so many ways that we can define it. But I agree with you, intuitively it doesn’t seem like the risk is so clearly defined in the profitability, but it is a form of risk. And we don’t have a chalkboard here, but there’s actually quite an elegant math formula that shows exactly how profitability impacts the expected returns, given the control for the size of the company and whether it’s value or growth.

JA: Because Big Al here, he’s got a side business. He plays the ukulele on Saturday nights. It is a highly profitable company.

AC: I’ve never been paid so I’m still losing money. (laughs)

JA: it’s highly profitable. So people are paying a premium to see Big Al and the ukulele. So I’m just referring back to my experience, paying that high ticket item to see Big Al playing the ukulele. I gotta pay a premium for this one. The same would equate to a lot larger company. If I was profitable, I would have to pay a premium to get into that highly profitable company. But I think you kind of cleared that up.

AC: Apollo, I think the evidence certainly shows that smaller companies outperform larger companies over the long term. But it doesn’t happen every year, and so the tendency then is, “well, let’s just load up completely on small companies.” But then you got a volatility problem.

AL: And on top of the volatility problem, I think even a bigger issue is that you have a behavioral problem. Because most people, when they hear just the framework, and they don’t work with an advisor, which I think is hugely important if you want to implement this type of strategy, is that you don’t have your expectations managed properly. And a year goes by, and you see that small doesn’t beat large, and value doesn’t beat growth. And all of a sudden you say, “well maybe this doesn’t work anymore.” Even though it’s in line with historical patterns. Historically, if you look at these, what’s called premiums, which is the difference between small and large, value and growth. Those have been present, roughly about 60% or so, in any given year. These are rough numbers. Which means that in any given year, you have four in 10 chance of not seeing it. So if your expectation going in is this will be there every minute, every year, every quarter, and then it’s not there for a year, or two years, or five years for that matter, which is still in line with historical data, then all of a sudden, you’ll break the discipline. So I think it’s hugely important for anybody who wants to do an investment system of this nature, to work with an advisor, because there is a science to how you allocate between large, small, value, growth, and then how do you maintain the discipline along the way? And what we found is that, by far, the most successful folks basically have a good understanding of the system and they do work with an advisor.

JA: The discipline is I think so key. I just read a quick article. It was a survey done about 401(k) plans, and they were looking at the trades within the 401(k) plans. And I guess July was the lowest tradespeople made in their 401(k) plans in five years. But the trades that they did make: where do you think most of the money flew into or went into, what asset class? Does anyone want to take a guess?

AL: Boy I wouldn’t even – I don’t know, I mean do the drum roll and you tell me.

AC: I’ll guess S&P.

JA: They went into, #1 was international, and #2 would be what do you think it was? And it’s not the S&P.

AL: REITs?

JA: Emerging markets. And why do you think that was the case? What is international and emerging markets up, year to date?

AC: Yeah. They’ve done well.

JA: Up 25%. So that is the problem. They don’t even know what international – they just look at, “I’m allocating my 401(k) plan, what am I going to do here? I’m going to look at this year, the last nine months. What is the best performance? Oh, boom. 25%. That’s where I’m going to allocate my money to.” So discipline is key my friend.

AL: Yep. I also think that it’s important for people to realize a little bit their limitations. I think that as a society, we encourage people to believe that you can do it, you can do whatever you want, whatever you set your mind to. Which is absolutely true, as long as you study enough, and you work enough to become a true expert in a particular field. And I think quite a bit of folks are better served by working with an advisor rather than them believing that they are the experts. if you haven’t studied enough, if you’re not up to speed on everything that’s going on, and you cannot control some of these behaviors because of not having the information, I think that it’s time to basically go and find yourself somebody who can help you.

JA: Talking to Apollo from Dimensional Fund Advisors. This is a lot better interview then Madonna would’ve been, Apollo. (laughs)

AL: I’m prettier. (laughs)

JA: (laughs) Yeah. Thank you Apollo, I really appreciate your time. What are you going to do the rest of the weekend here?

AL: It’s kids. Kids, kids, kids, kids. Fun for the whole family.

JA: (laughs) That’s Apollo from Dimensional Fund Advisors, we gotta take a break.The show’s called Your Money, Your Wealth.

So you’re about to retire. You may not have enough saved, you may not even have a retirement strategy, and chances are what you think you know about retirement is dead. In a stress test, do you think your portfolio and your retirement plan could stand up to record low-interest rates, skyrocketing healthcare costs, market volatility and possibly living to 90 or 100 years old? Or like Apollo mentioned earlier, are fear and greed the things that are driving your investing choices? Visit YourMoneyYourWealth.com and sign up for free two-meeting assessment with a Certified Financial Planner. There is no cost or obligation to you, and you’ll learn highly effective strategies to transform your savings and income in retirement, minimize your risk, reduce your taxes and withstand today’s challenges in a stress test. Sign up for a free two-meeting assessment with a Certified Financial Planner at YourMoneyYourWealth.com

Now for the first time in a long time, we’re taking your calls on Your Money, Your Wealth. If you have a money question, call 888-994-6257. That’s 888-994-6257

43:10 – My Wife is Having a Baby. Should I Max 401(k) or Save Cash? (James on the phone from Yardley, PA)

JA: Do you know how many years it’s been since we’ve taken live phone calls?

AC: Longer than I can remember. It’s been a while.

JA: And why haven’t we, because we were afraid that we’d get stumped? Remember the Stump Big Al segment?

AC: Yeah, which never happened.

JA: Oh come on. (laughs) One guy kept on asking crazy questions of Iraqi dinar.

AC: I don’t count that.

JA: Well I do! (laughs) I absolutely do! I think we have James on the line. James welcome to Your Money, Your Wealth.

James: Thank you so much for having me. It’s a great pleasure for me. I’ve been listening to your podcast for a while now.

JA: James, where are you from?

James: Yardley Pennsylvania. About as far in the country, as I could get from you guys. (laughs)

AC: So our reach is all the way out to Pennsylvania. That’s cool.

JA: Well what do you got for us?

James: Well, my question is more of a strategy question, I guess. My wife and I, after a couple of years of trying, we are due for our second child, early next year. And when we have the second kid, expected date of March, end of March of 2018, she’ll probably leave work at least for a little while, at least until 2019. I was originally thinking that she could, basically, max out, as much as she could, her 401(k) contributions for January, February, March. Probably getting something like $12,000 in of the $18K max. Or do you think, strategy-wise, it would be better just to kind of keep that money kind of flowing in, getting it back into our bank accounts in case she’s out of work longer than expected?

JA: Let’s start here. James, how old are you?

James: 36.

JA: 36. Tell me a little bit more about, what’s your income, what’s your wife’s income. Roughly.

James: I’m the main breadwinner in the family, I make about $140,000 before bonus. Next year, actually, is the first year I’m going to be bonus eligible. So that will be a nice offset to losing her income. She makes $47,500 per year.

JA: And then, right now, are you maxing out your retirement accounts?

James: This year will be the first year that we do so. Yep.

JA: And how much do you have total in retirement accounts?

James: $415,000.

JA: $415,000 at 36.

AC: That’s excellent.

JA: (laughs) Big James with the big wallet. I like it. So is that all in 401(k), IRAs or do you have Roth IRAs as well?

James: Yeah, we have some in Roth, but it’s mostly 401(k)s and traditional.

JA: OK. And then, so your wife makes 46, she’s going to stop working, and then you’re going to be bonus eligible, $140,000. The question is, should she jam as much as she can in the three months that she’s going to work into her 401(k), or just maybe have that go into cash. Tell me about what you have outside of retirement accounts. Do you have cash reserves, brokerage accounts, things like that?

James: I haven’t been very good about the taxable investments, but we have about $200,000 in cash, most of it is kind of set aside. I have $120,000 set aside for a house down payment or for something like that. We’re planning on getting a house sometime next year, so it’ll be a big year for us next year. (laughs) But for emergency savings, we have $42K already set aside. That’s probably, for us, about six to nine months worth of expenses.

JA: OK. So what, you’re at about $90,000 living expenses?

James: Yeah, that’s including taxes and for us, the big cost is daycare, which is pretty exorbitant where we are.

JA: How long is your wife going to take off of work?

James: She can get four months off. But our plan is to move to another part of the state. And so she would not be going back to work. So that’s my concern because let’s say she takes six months off to recover and to bond, but after that, it might take another six months to find another job. She’s in a somewhat specialized area of higher education, working in financial aid. So I think it would be fairly difficult to find her another job in the same profession. That might take longer. My expectation is that she would be out of work until at least early 2019.

JA: Big Al, you have two kids. What’s your advice?

AC: Yeah, that’s a great question, James. So just listening to you, you have $200,000 in cash, although $120,000 is earmarked for the house, you also said you have about 40-some thousand for emergency cash. Where’s the other money? Or what’s the other money earmarked for? If I understood you right.

James: If we need to buy another car, I also have another $20,000 – er, it’s going to end up being $20,000 for Roth IRA contributions. I tend to save ahead of time, so I’ll have the money for next year set up for 2019, just in case we can’t save as much over the course of 2018.

AC: OK. And one other question. Any idea how much your bonus might be? Is it a couple of thousand dollars, are we talking 10, 20?

James: I’m expecting it to be somewhere in the $20,000 – $28,000 range.

AC: Got it. OK good. So here’s what I might say. I do like the idea of potentially having her max out her 401(k) because you’ve got so many cash reserves, as well as your potential bonus. But you might want to take a look at your tax bracket because maybe you’re in a low enough tax bracket, if she has a Roth option in her 401(k), it might make sense to put it into the Roth side. So there’s a couple of thoughts I had.

James: She doesn’t, but I do. So that’s a good point. I’ll definitely think about that.

JA: Next year if she’s not working, then that’s $47,000 less of income. So of course, Big Al goes to the tax implications of things. So yeah, then that’s going to reduce your taxable income to that component, but you’re still making a buck 40, you’ve got deductions, now you’ve got a couple of kids, a couple of exemptions, things like that, that could probably push you down into a lot lower bracket. Here’s the thing though. So now you’re going to buy a house. What’s your rent right now?

James: $1250.

JA: And then, how big a house are you going to buy? What are you looking at purchasing?

James: A max of $450,000, so all in, probably jump out my housing payment from $1250 to like $2,500-ish.

JA: OK. So then now your living expenses will go from $90,000 to maybe $100,000? Does that seem right?

James: Yeah.

JA: So now your living expenses are going to go up. But now you’re making $140,000 plus that $28,000 bonus on top of that?

James: Yes.

JA: OK. Yeah, I think you’ve got enough cash, there’s some good cushion there. Yeah, I think she should save, I agree with Al. If you can jam that in, if you only had like $5,000 in cash I would say no, you’ve got to build that up. But I think you’re on the right path there, you’ve got enough cash, you already have a really good savings in 401(k) dollars. At your age though, now you have to look at, OK, tax diversification might be even a key component. Because what Al and I see are people now in their 60s, with several million dollars all tied up in a 401(k) plan that’s going to be subject to ordinary income. So if your tax bracket is going to be lower next year because your wife’s not working, she can then shelter close to most of her income in those couple of years, into a 401(k) plan. You still max out your plan, you do the Roth IRA contributions, and then you look at what tax bracket that you think you’re going to be in. And then you might even look at doing some conversions along the way.

AC: I agree with that too, and I think if you look at your tax bracket right now, probably with your deductions it’s going to be probably in the 25% federal tax bracket, maybe close to the 28% bracket based upon your spending, and I know you’re young, but if we just sort of project things forward, you’ll probably be in a similar tax bracket in retirement, particularly with your savings rate. So then it’s like, well maybe that tax diversification would make sense. Getting money to the Roth IRA contributions, as you’re already doing, or looking at the Roth option, in at least your plan, James might make a lot of sense.

James: Yeah that makes a lot of sense.

JA: What else do you got for us, anything?

James: No, that’s it. Thank you, you guys have given me a lot to think about, I really appreciate it.

JA: All right James. Hey man, we really appreciate your call. Thanks for listening. That’s James, good job, Big Al. You just went right to the taxes. You didn’t care about anything else but the guy’s tax bracket.

AC: (laughs) Because he’s got a lot of cash reserves.

JA: I know, that’s pretty impressive. James is on top of it.

AC: He beats us, doesn’t he?

JA: I think when you look at it. He’s 36 years old. So he just blew up our whole first segment. (laughs) 36. I mean, I’m four years older than him. Actually six years older.

AC: Almost 10. (laughs)

JA: Oh whatever! I’m not even close to 10 years older than James. (laughs) But he’s got $400,000 saved, and then he’s got another $200,000. He’s got $600,000, he’s making a buck 40, that’s almost five times his income at age 36, that’s pretty good.

AC: You just do the math. I mean, if he just keeps going ahead, let’s just say age 65, without even my financial calculator, that’s millions in a 401(k) at that point.

JA: Exactly. And then making that type of income, he’s going to have fairly large Social Security. So his retirement track looks pretty good. But the caveat, now you’ve got two kids, now you’ve got daycare. So you’re going to have to juggle a little bit, and maybe his savings is going to go down in the future. Because then you’ve got college education that you need to start thinking about. Then you have private schools, or whatever their goals are that they wanted to do. So if they have the ability to save now, it’s always the time value of money. And just get it in and forget about it, because you do have other resources. But in the future, he might have to tone down his savings. And I think he’ll still be in a really good spot.

AC: Well, and the other thing that can happen and often does, Joe, is his wife, maybe she has trouble getting a job and it’s like, “Well, I’d rather be with the two kids anyway.” So James, why don’t you work. And so then they may have less income from that, and then they’re buying a house at the same time, which oftentimes is more expensive. And it kind of goes to show, when we talk about planning strategies, it’s not just one and done. This is what makes sense maybe right here right today, but in six months to a year, maybe something has to change because life changes.

JA: Exactly. So it’s like if you do reduce your overall savings, what is that going to have on the full impact of your overall retirement, given the fact that, hey, you’re in the mid-30s, and you’ve already accumulated two times more than people in their 60s. And then you just have the compounding of that, making sure that it’s invested appropriately, we didn’t get into that at all. But I’m sure James listens to the show. He’s globally diversified and tilting his portfolio toward small and value, I would imagine. (laughs)

Okay, so now that you’ve heard how it’s done, it’s your turn! If you have a burning financial question for Joe and Big Al, just call 888-994-6257 for your chance to talk to the fellas and have your question answered during Your Money Your Wealth. That number again is 888-994-6257. That’s 888-994-6257. Time now for Big Al’s List: Every week, Big Al Clopine scours the media to find the best tips, do’s and don’ts, mistakes, myths and advice to improve your overall financial picture – in handy bullet-point format. This week, 6 Last Minute Retirement Planning Strategies

54:37 – Big Al’s List: 6 Last Minute Retirement Planning Strategies

JA: We’re just super busy today.

AC: I know, usually we get to this much sooner.

JA: We got callers, we got Apollo.

AC: We’re having some fun today. But Joe, I was looking for a cool list for this week, and I found one I think. It says it’s not too late: 6 Last Minute Retirement Planning Strategies. Started reading it, and I thought this is pretty good stuff, And then I looked at the author: Brian Perry, who is an employee of ours. A new employee, been with us, what, three or four months, something like that. And he’s an author, and so I went and I said, “Is this you?” And I figured it was because his first example is quoting a CFP in the San Diego area. So I thought that was a pretty good clue right there.

JA: Who’s the CFP he quoted?

AC: Not Joe Anderson. (laughs)

JA: He’s fired. (laughs)

AC: (laughs) It was Michael Shanahan. I don’t know him. But he did tell me that this article was written about five years ago. I guess it just got recycled. It’s an oldie but goodie because it just got republished on August 28, 2017. But the list, I thought Brian did a great job if I do say so myself. So there are a few things that you may want to think about if you’re in your 50s or 60s or late 40s, and behind the eight ball, which I think probably a lot of us, maybe the majority of us, feel, even if we’ve done a good job, we always feel like, “gosh, I could have done better. What can I do to speed things up and to make things better? Maybe I’m 50. Maybe I haven’t done anything or just a little bit.” It’s like, “Well, I know I’m going to have to retire someday so now what?” So he came up with six different ideas, and the first one is called save like crazy. Save like crazy, what he says is “financial professionals recommend that you save 15% or more of your income throughout your career and retirement, but if you’re 50 you don’t have anything, you might want to really try to accelerate that quite a bit.

JA: Saving cures all, and I know we kind of joke about this, but so many people fret about, “oh my gosh, what’s going on in the markets. Oh, this and that.” Those people that are… because they’re not saving enough.

AC: Right. So they’re always worried about what little they have. They might lose a dollar.

JA: Well just keep throwing money at it. That’s your cure. Throw money, throw money, throw money at it. Do whatever you possibly can. If you’re in your 50s and 60s, I get it. Things are tight. But, you just have to start putting things through the acid test of what is the most important part of this.

AC: Not everyone realizes how much you can save in retirement plans, and if you have a 401(k) or a 403(b), it’s $18,000 is the amount this year. And if you’re 50 and above, it’s another $6,000 catch up. So it’s $24,000, and then you could also contribute to an IRA or Roth IRA. That’s another $5,500, plus the $1,000 catch up, $6,500. $30,500 is actually what you can put into retirement plans. I’m not saying that’s easy. I’m not saying it’s easy at all. But the thing is, if you are making a pretty good income, and have very little to save, this is not sustainable. So you better make some spending changes right now, because otherwise, you’ll get to 65, 70, still have not very much, and now you’re going to be living on Social Security. Which I gotta tell you, is probably 30% of your income. So then you gotta be forced to cut back then. And then of course with the 401(k), 403(b), a lot of times you have matches. Brian Perry did a little math here. He said, start at 50, you max out the 401(k), the IRA. $30,500. 6% total rate of return. $1.1 million by age 70. And I did check the math and he was correct.

JA: Good. Fact check.

AC: (laughs) Another one is, number two, take more risk. And this is particularly for those extremely conservative investors that just can’t handle any risk, they have all their money in CDs, even in their retirement accounts. And the thing is, with your money in very safe, let’s just start with CDs for example. The rate of return in a certificate of deposit doesn’t even match up with inflation. And so if there are any guaranteed investments, that would be one. You’re guaranteed to lose with a CD because it doesn’t keep up with inflation, which means, yes, you have more money each and every year, but it doesn’t keep up with the purchasing power that you’d actually use that money for. No comment?

JA: Absolutely. (laughs) No, I got blown up on the e-mail. Did you read that email that guy sent? He’s like, “hey why don’t you let Big Al talk. Who the hell is Joel anyway? Guy talks too much.”

AC: No he said you’ve got to let poor Al talk. (laughs)

JA: Come on. Whatever.

AC: So you letting me talk?

JA: Yeah, I’m lettin’ you talk, it’s your show, it’s the Big Al hour.

AC: All right. Number three is delaying your retirement. And so we’ve talked about this a lot.

JA: Just hitting the levers, right? Save a little bit more, delay because your Social Security goes up, you’re not taking money from the portfolio.

AC: Yeah I mean working, that’s one that people I think overlook, because it’s like, “well, what’s the difference between whether I retire at 64 or 66?” Well, it turns out, a lot. Because those extra couple of years, or three years, or five years, first of all, you’re saving during those years. So you’re adding to your portfolio. And secondly, you’re not taking money out of your portfolio. So it’s kind of a double benefit. And then, oh, you probably postpone your Social Security two, three more years, which means you get a higher benefit for life. A lot of really good things happen by waiting.

JA: Huge. Yeah. But I get it. Hey, I’m burnt out, I want to get out. You’ve got to do the numbers. You got to run the math.

AC: OK. So the next one is spending less in retirement. And again, this is realistic. If you are at age 50 with nothing saved, then this is an option. And really, the truth is, it’s probably a combination of all these things together.

JA: Here’s what my advice is. So let’s say I’m in my 50s and I haven’t saved anything. Here’s what you do. You go to SSA.gov. You following this? This is the strategy I want people to do. Go to Security Administration. Find out what you believe your Social Security benefits are going to be at age full retirement – 67, 66 and whatever months. Let’s say it’s $24,000 So that’s $2,000 a month. So for the next month, only spend $2,000. That’s it. See how enjoyable your life is by just spending $2,000. Because if you don’t save, that’s the rest of your retirement. That’s it. So put yourself through misery for one month. If it’s that bad, just think of the next 30 years of your retirement is going to be that bad. Save.

AC: That’s actually a really good point, and that was actually the very last point of this article, which is the suggestion, determine how much money you’ll be receiving in Social Security, pensions, dividends and interest from investments, and then try to live on that for two years. This is two years prior to retirement. Same idea, but in other words, you practice retirement before you actually retire and see how this works. How many times do people retire without even thinking about it? And then it’s a complete nightmare because it’s like whoa, wait a minute I thought these were the golden years and we’re going to be able to spend all this money, and Social Security was going to do this. And I got a little pension, and I saved, I saved a couple of hundred thousand dollars, why can’t I spend $100,000 a year? The math doesn’t work out.

JA: Yeah, and it’s all arithmetic. All you going to do is do a little bit of math, and hopefully, this will encourage you to kind of get your planning in order.

It’s time to dip into the email bag, with financial questions courtesy of Advisor Insights from Investopedia, and you, the Your Money, Your Wealth listeners. Joe and Big Al are always willing to answer your money questions! Email info@purefinancial.com – or you can send your questions directly to joe.anderson@purefinancial.com, or alan.clopine@purefinancial.com Today’s emails are about how you know you’re ready to retire – and Medicare will play an important part in your retirement plans. If you or someone you know is turning 65, it’s time to start navigating the Medicare maze so you can choose the right plan for you, at the right cost. The Understanding Medicare Video Series, featuring Certified Financial Planners Joe Anderson and Jason Thomas is available free, on demand, at YourMoneyYourWealth.com. Learn the basics of Medicare, how to Bridge the Gap to Medicare, and 11 Common Medicare Mistakes to Avoid. Just visit the Learning Center at YourMoneyYourWealth.com to watch the Understanding Medicare Video Series free, on demand.

1:03:38 – When Should I Retire?

JA: “When should I retire?” is the heading of this e-mail. “I have $1 million in my 401(k) and I’m 48 years old. My wife and I have a $550,000 house, paid off with no debt. We have $200,000 in CDs and cash. I have a pension that I will receive, $1200 per month for life. Currently, I max out my 401(k) plan. We save $35,000 per year, on top of both of our 401(k)s. My wife is 50 and she also maxed out her 401(k), but her plans are to retire at 52. My question is can I, or should I, retire?” Well, one of the big components of this whole equation is missing. (laughs)

AC: Yeah. We have to know how much you’re spending. If you’re spending a dollar a year? Tomorrow. If you’re spending $1 million a year? No. Not so much.

JA: So let’s do this. So he’s 48. He wants to retire, she’s going to retire in two years, let’s just say he retires at 50, she retires at 52. So they’re maxing out 401(k) plans. So they got a million bucks in 401(k) plans. He’s going to add another $40,000, call it. Then she’s going to add another $50,000 to her 401(k) plan. So let’s just call it another $100,000 in the old 401(k) plans. So that’s $1.1 million, call it. And then they got $200,000 in CDs, so that’s cool. And then they also are saving $35,000 on top. So you’re looking at…

AC: We’ll just round that to $300,000. So now they got about $1.4 million.

JA: Alright. So $1.4 million. His pension at $1200 per month, I’m assuming that’s not going to be able to be collected until at least full retirement age. That’s the assumption?

AC: Yeah that could be, or 62 anyway. That’s about $14,000 per year.

JA: OK. And then Social Security’s, let’s call it, maybe a couple of thousand bucks for each of them?

AC: Yeah. Well again, we don’t know what they’re spending or their salary.

JA: Well if they’re saving that much, they must be making over the max?

AC: Probably yeah. So if they both take it at full retirement age, it will be around $30,000 each. Something like that.

JA: So the problem is he’s going to retire at 50.

AC: I know. That is the problem. So let’s just look at it right now. You’ve got $1.4 million, and Joe, let’s say if you’re retiring at 50, you probably only want to pull out about 3% of your portfolio may be.

JA: I would say that’s a pretty good number.

AC: So we’re looking at, what, about $42,000? Something like that is what he could spend. So if he can do that. But here’s the problem though. Among other things, is now you have to pay for your own medical insurance for the next 15 years.

JA: That’s going to cost you $32,000 a year. (laughs)

AC: Right. There you go. Can you live on 10 grand? (laughs) So I guess without knowing the spending, maybe you just do the math that way. OK well here’s your budget, and this has to include everything. I mean, utilities, food, vacation, clothes, medical, medical insurance, medical costs, whatever they may be. We don’t know whether they have kids or not in college. And there’s a lot. And herein lies the difficulty of retiring young, because it’s before pensions, it’s before Social Security. Your life expectancy at age 50 is probably 40 years plus, which is lovely. But to finance it is tough.

JA: Yeah the whole FIRE movement. You know what that is?

AC: No.

JA: Financial independence, retire early. Some people, “I’m saving 70% of my income.” How do you do that? That’s crazy! That’s solid. But I’m just thinking, “man, after taxes, I don’t know. If you live in California it’s pretty hard to save 70% of your gross income.

AC: Yeah. Maybe they’re in the Midwest or something where it’s a little cheaper.

JA: Yeah. I think 70% of net income is achievable.

AC: Now if you lived with your mom…

JA: I do live with my mom. But unfortunately, I pay the bills. (laughs)

AC: It’s the other way around. I think she kinda lives with you. But only during vacation.

JA: Yeah, I live with my mother. I’m 43 years old, single, and I live with my mother.

AC: Your home is her winter home.

JA: But I am 6’4,” 212 lbs. I can bench press about 275.

AC: I’m not even listening. All I heard is you live with your mother.

JA: Some people have called me handsome, but I do live with my mother. (laughs) In the basement.

AC: And if you want Joe’s phone number, then look me up at PureFinancial.com and you can e-mail me. So you got another question?

1:09:03 – What Is the Right Amount to Save When Aiming for a Certain Retirement Goal?

JA: I do. I was going to say something stupid. But I’m just gonna follow the script here. So let’s do this. “What is the right amount to save when aiming for a certain retirement goal?” I guarantee you we will not have enough information, that’s why we’re going back to calls because we can ask questions. These emails are great, they’re fun, but we’ve got to make half the stuff up. “I’m 58 years old. Earning $100,000 per year, and have investments in multiple retirement accounts, totaling $686,250.” Detailed. I like it. “I’m retiring at the age of 65. I’m currently investing $16,000 per year in my accounts. I project to have $848,819 in my retirement accounts at age 65.” (laughs)

AC: Lemme guess, he’s an accountant?

JA: (laughs) “I’ll be collecting $2,200 in Social Security when I retire. I also do not own my home, due to my divorce. How much money will I need to hit my projection? Should I be saving more?”

AC: What’s his projection?

JA: “I project to have $848,819 in my retirement account at age 65.”

AC: So we still don’t know spending though.

JA: No, of course not. Did you get your HP12C?

AC: Yeah, I got an HP on my phone.

JA: All right, so do this. A present value of $686,250.

AC: I’m just going to go with $686,000. What are you gonna do?

JA: I’m going to see how much money he needs to save, we’re going to solve for payment.

AC: OK. Oh, to get the 848?

JA: Yeah. So $686,000 is the present value, $848,000 is the future value.

AC: Figure we’ll do 6%, say?

JA: Yeah let’s say 7 years.

AC: So the payment is… did something wrong here.

JA: It came out to be a large number, didn’t it?

AC: Yeah. I forgot to put a negative sign on this one. Hold on here. $22,000 a year.

JA: So saving $16,000. Little short.

AC: Well sure it needs to approach a couple of thousand per month.

JA: What about 7%? That’s highly unlikely, in seven years, to get 7%. It’s possible, not probable. Compliance.

AC: (laughs) It’s like $21,800 and change at that much.

JA: So yeah, you’re on the right track, $16,000. I’m not sure where he came up with this projection of $848,819.

AC: Well I guess that’s what he felt he needed to cover his lifestyle. Well, tell me more!

AC: So it’s just like you said, we have to make up stuff. So let’s say let’s say $850,000. So probably at 65, are you comfortable with 4%? So 4% of a million is $40,000. So let’s say it’s about 35. Just roughly. And then his Social Security $2,200 a month, so that’s about $27,000, $28,000, something like that. So we’re looking at about $60,000, a little over $60,000 of income. So yeah, if you can live off of that, and at 65 you get your Medicare-covered, so you’ll still have some supplemental insurance costs. Health insurance is not free, but it’s definitely cheaper than when you’re 62, 63, and trying to pay for this yourself. So yeah, if you can cover your lifestyle.

JA: What’s the number, 60 grand? So he’s making a hundred now and he’s saving 16.

AC: With his taxes, it’s probably pretty close. I mean it’s just kind of ballpark.

JA: I would say yeah, he’s within $10,000. $500 to $1,000 a month differential.

AC: And something else that I was going to talk about on the list, but we didn’t have time is when you do retire, sometimes working part time just to supplement things a little bit, can make a big difference.

JA: Right. Let’s say it makes $15,000 a year. $1,000 a month. That covers it.

AC: Yeah. So where he’s at right now, it’s probably pretty close. I mean, I rounded a whole bunch of stuff. So 60 to 65. But yeah, he’s pretty close. And then, of course, it’s just a matter of if he’s not quite if there’s a little gap there, you can work part-time to fill that gap, or you can cut spending a little bit. Or maybe – he didn’t talk about whether he had a home or not, did he?

JA: He does not have a home.

AC: Does not have a home, so he can’t do the old reverse mortgage or anything like that.

JA: Yeah, the rent might kill him too.

AC: Go up with inflation

JA: People don’t get that. I’ve run projections. Should I buy a home or not buy a home? I’m 60. What do you think, should I rent? Well, it depends on what you want to assume for inflation on your rent.

AC: Yeah right. Because when you buy the home, it’s fixed.

JA: Who cares if you’ve got a big fat mortgage on it. The payment is fixed, 20 years later it’s the same payment. 20 years later your rent payments are not going to be the same.

AC: Correct. And you get a tax deduction. Currently, on the home mortgage, on the interest part. And in some cases, people are now getting 15-year mortgages and get a paid off in 15 years, or 20 years or whatever, and then you don’t have a payment after that.

JA: Everyone doesn’t have the big wallet Al, to do a 15-year mortgage. (laughs)

AC: But they should. (laughs)

JA: I don’t know. I’m in the, “Why don’t you call your boy up that was selling all that stuff on our program a couple of weeks ago? He was selling, what, debt consolidation? “You can pay off your mortgage in like 40 minutes!”

AC: That was kind of a convoluted thing it kind. It had a savings account along with the mortgage, and you just kept anytime your paycheck came in and went into the mortgage and saved interest.

JA: Every time you took money out it was a HELOC.

AC: (laughs) It’s interesting you don’t hear much about that because it probably didn’t work very well.

JA: (laughs) Exactly! It was so good why wouldn’t everyone do it?! “It’s a very little known secret that you could pay your mortgage off in like six years.” I got a $1.2 million mortgage, I make $150,000 a year. How am I going to pay that off? And live? “Oh, easy!

AC: You can do this in seven years.

JA: That’s it.

AC: The cat can do it. (laughs)

JA: For Big Al Clopine, I’m Joe Anderson. Thanks for listening. We’ll see you again next week right here. Show’s called Your Money, Your Wealth.

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So, to recap today’s show: save, save save, early, often and ASAP, it’s easier when you’re young, just like having your wisdom teeth pulled, and all the cool kids are doing it. Saving, that is, not having teeth yanked out of your head.

Special thanks to our guest, Apollo Lupescu from Dimensional Fund Advisors, who taught us don’t trade based on current events, protect yourself from market downturns with diversification, work with a financial planner to avoid letting your emotions run the show, and get yourself a Dutch electric razor to maintain your crystal ball.

Subscribe to the podcast at YourMoneyYourWealth.com, through your favorite podcatcher or on iTunes, where you can also check out our ratings and reviews. And remember, if you have a burning money question for Joe and Big Al to answer on Your Money, Your Wealth, just email info@purefinancial.com – we may even call you and put you on the air! Listen next week for more Your Money, Your Wealth, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.

Your Money, Your Wealth Opening song, Motown Gold by Karl James Pestka, is licensed under a Creative Commons Attribution 3.0 Unported License.