Paul Winkler: This is the Investor Coaching Show, Paul Winkler talking about money, investing, retirement planning. Somebody came in asking me a few questions. We specialize in income and retirement is what we specialize only working with people 55 and older.
Income specialists
And I said, well, that sounds really, really good. I tell me a little bit about, you know, cause it, it sounds like a sales pitch. All we do is work with people 55 plus, and, and you know that you must know them, these people like the back of your hand. And I said, well, who are you working with? And let me take a look at it. So I went and looked at the background of the company and I don’t talk about company names on here, but I think that it’s instructive just to talk a little bit about the education process just briefly, I won’t get into a lot because I want to really want to get into what was actually recommended for the investment for income in retirement.
I think that’s, what’s really, really important. That’s what I want to spend a lot of time on, but you know, it’s, it’s in the investment advisor choice that these recommendations come out and come about. So I think it’s important to talk about that. Well, the person was series 65, a rich investment advisor representative. And you know, when I looked at the website, looked at the designations and the educational background insurance was one of them, long term care was another, one of the things put in the person’s description and you know, what qualifies them to be a financial advisor.
Qualifications and certifications and designations
And I said, Oh yeah, yeah, I’ve got a guy that in here, all my guys, you know, have series 65. You know, they all have to have, unless they were grandfathered and they’ve been in the business so long, they didn’t have to take that test, but, and you have the knowledge just from the industry, from having been doing it so long, we didn’t need to take the test. A few of us, I didn’t have to take the test because I’d been doing it so long that when it became a requirement I already had all the knowledge from all the years of doing it for a living. And that’s extensively why they go and grandfather you, but I’ve had all, a lot of my guys around me are much younger than me and have been in this business as long.
And I said, well, one of my guys over here, he actually took the test, studied it and took the test in two weeks. Okay. So that was the test that had to be taken. And so the insurance test getting your licensing to be insurance it’s one of the toughest tests I ever took was in upstate New York. And that took quite a while to go through the research and the study, the study to actually take that test and pass it. Then I wanted to move to Tennessee. It was like, I didn’t even have to even look at the book or crack it open because it was way less intensive than the one that I had taken in New York.
So in reality, I dropped all my insurance licenses because I didn’t want the conflict of interest of getting commissions on selling investment products or insurance products. When I was making recommendations, those commissions can be super enticing, especially when, you know, you can have like, you know, 10% of the deposit amount go out to the commissioner with life insurance. It might be a hundred percent plus of the first year premium goes to the advisor and commissions. And there’s a lot of incentive to tell people to do things that they probably shouldn’t do when you have that kind of a payment.
And I thought, you know, what we ought to do is we’ve got to take all of the books from the designations. Cause you know, charter financial consultant, registered financial consultant, chartered life, underwriter, life underwriter, training counsel, fellow credited, asset management specialist, chartered advisor for senior living wealth management, certified professional, you know, and I can go on, I’m not even done with my own designation. I mean, it’s just the reality of it that there is a lot and each one of those designations has multiple courses within it. It’s not just one weekend class or something like that.
And I’ve got a designation. Some of the designations out there are just that, where you go and take a weekend class and you’ve got a designation you’re done that to me is not, not even worth putting those letters after your name, if that’s all you’ve done. But when you’re looking at the amount of process, the process of going through all of that education, the amount of study, and then going and passing the exams and, and, and even experiential requirements with some of these designations, it’s just no use comparing them in my humble opinion.
So one of the things that was recommended in this, I said, “well, you know, what, what is the person recommending you do for income and retirement, their income specialist, so to speak? What, what gives them that ability to say that their income specialist?” Well, there is no designation and just marketing. It would be like a physician or a person that wants to be a medical specialist being able to say to the medical specialist and you go, well, you know, where did you get your medical degree?
Well, what gave you that ability to do that one? Nothing. I just decided to name myself that medical specialist. Well, that’s great. It would be equally absurd to do that with another industry yet. You’re able to do that in the financial industry, which is mind boggling to me. So what do they recommend? Well, I said probably if they’re talking about being an income specialist, probably annuities, I don’t know.
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A problem with annuities: inflation
I don’t know. Well, I went through and I looked up right there, annuities. Oh, okay. Then they were recommending annuities and they probably didn’t call it that. But that’s basically what they’re talking about is doing that.
And we’re not worried about inflation. He goes, well, he’s 55. And I say, you’re kidding me. And he goes, nice 55. I said, let me show you something. So I went on the internet and I actually pulled up a quote for an immediate annuity. There’s a website, annuities.com. And nice guys I’ve actually talked to before, but he said, you know, 55 years old, let’s say, what if you had a million dollars, how much income that immediate annuity would kick out? The answer: 55-year-old male, a million dollars, about $45,000 of income per year.
Now that may sound good to you right now. He goes, well, yeah, it doesn’t sound bad. And I said, but you know, what’s the income going to be next year? Well, $45,000. What’s going to be the year after that, $45,000. How about the year after that? $45,000, 30 years from now, the guy’s 85 years old. I mean, it’s the percentage of people that will live to age 90. You’d be shocked how high it is. You know, when you get up to that age, because people are used to hearing that life expectancies from birth are maybe age 77 or 78. Well, that’s from birth.
I mean, you’ve gotten through auto accidents. You’ve gotten through, you know, being stupid, or, you know, all the things that can get you before the age of 65, just, you know, name it out there. And once you’ve reached those later ages, your life expectancy is fairly long. So I said, so 55, $45,000.
So 30 years from now, what’s his income? $45,000. I said, look, 30 years ago, what did a house cost? He goes “$30,000.” And I said, “right, what’s it cost now? Over 300,000. So this guy may need in the future $450,000 to live each year. And what are they going to be sending him? $45,000.” Now that may seem absurd, but you know, $45,000, 30 years ago was just fine.
Now try living off of $45,000 per year. Not per month per year. I said, so you don’t think about this and he’s no, didn’t really think about this. I said, “the insurance company takes your money and what do they do? They stick it in bonds. Why do we need the insurance company in between you and there, you know, at that age, forget your life expectancy, you’re looking at an investment.”
And you know, there’s a chart that I have. It’s really kind of fun to look at. And what it does is it goes all the way back to 1926, it’s two charts. One is fixed income investment, and it’s after inflation rate of return going back to the 1920s and basically the way you read it, it’s a matrix chart. So if I want to know the return in 1926, I look at the top line at 1926, I don’t know, 1927. I can look at the return 28, 29, 30, 31, 32, 33.
I can look all the way through history and the top line. I can tell what the return was in that year. But if I want to look at the return between two years, I go down a little bit further. So, you know, you’ll have on the left hand side, you know, on the vertical axis, you know, you’ll actually see the years and then you’ll have on the horizontal axis. You’ll also see years. So it’s a matrix chart. It looks like a, like a triangle going from left to right, going down. So if I want to know what the return was between 1926 and 1985, I just go down that first column.
I go down to 1985 that tells me the number between them. Now, if I want to know, what’s what it was between 1945 and 1975, I go to the right on the horizontal axis. I go find 1935 or whatever year I said. And then I go down until I see 1985 and you know, where they intersect. And I can tell you what the average annual return was between those two years, helping you, hopefully you’re getting a visual of what I’m talking about.
So in essence, I can see, you know, what the return was between any two years. And what you’ll see is if it’s in black, the return was positive. If it’s in red, it’s negative. Well, if you do that with large US stocks, for example, you see the chart is basically black. You’ll see that, you know, in any, any of the stock market asset classes, we have data going back that far. You’ll see that the chart is black. You’ll have returns that are positive after inflation.
Annuities and Fixed income investments
But if you look at fixed income investments, it’s a bloodbath chart. It’s just basically red, red, red, red, red. In other words, you have negative returns after inflation. Now, if you took into account taxes, it’s even worse, but in effect, you’re taking insurance and handing money to an insurance company that puts my money primarily in bonds. And you’re looking at just pretty much guaranteed losses. And I said, now, if you’re 85 years old and you don’t have much life expectancy and you don’t care about, you know, all the money’s gone when you die, go ahead and annuitize, do an immediate annuity and annuitize the money and get as much income as you can each year.
If you live too long, you win. If you don’t live long enough, the insurance company wins. If you’re willing to take that risk. So he was like, “wow. Okay. All right. That has not sounded so good.” And I said, “Oh, it sounds really good to the advisor because commissions are really high, really good for them.” Now, what else did they recommend in this little chart? These income specialists? Well, a dividend paying stocks. And I said, “Oh, that’s really good. You’re going to buy dividend paying companies.” And I said, “so where’s the dividend income?”
Right? What’s the dividend part of, and he goes, “well, I don’t know.” I said “no. When a company has dividends to pay, where did they get that money?” And he goes, “well, I guess they sold stuff. So they got a profit.” Yeah. Okay. So, and I know what I want you clients to get this stuff. I don’t want to tell you, because if I tell you, I’ve told you, if you get it, then it’s yours. Now the information is locked in your brain. You’ve thought through it and you’ll retain it longer.
Okay. So the dividend comes from the company-earned money. Okay. Now they paid part of those earnings back to you. Now, if the dividend is high, what’s it high compared to, and you know, at first it didn’t quite hit him. I said, “if the inflation, if the unemployment rates are high, let’s say, if the unemployment rates are high, what’s a high compared to?” And he said, “well, the total number of people looking for work.”
And I said, beautiful, okay. So that’s a percentage of a total right now. This dividend is a percentage of what, ah, it’s the percentage of the price you paid. If the interest rate is high on something, it’s a high percentage compared to what you put in. So if you have a high interest thing that pays 5% interest, it’s 5% of what, 5% of what you invested. So if you invested $100, it’s $5, right?
That’s so it’s pretty simple. Now the dividend is a high percentage of the price that was paid. Okay. So yeah, if it’s a high percentage, then that number is high compared to the bottom number, which is what may be lower than normal. Okay. So that’s what made the percentage high. So if I tell you, I’m going to pay you $5, he said, that’s great on a hundred dollar investment. That’s great. That’s 5%. But if it’s on a $200 investment, now it’s down at two and a half percent.
Right. You know, if it’s so, what happens is the higher that bottom number goes the lower, the percentage, same thing with dividends, right? So in this case, the dividends can look high compared to the price. Now, if the price is low, why is the price low? If you’re an investor, would you, you know, and you’re in your, let’s say, you’re looking at buying something. If you don’t like it, you might pay less.
Right? Well, yeah. If I hate it, I think the company stinks. I’ll pay less. So therefore the price will be lower, right? So there’s your high dividend compared to a low price? The company could very well be a lousy company. And very often high dividend paying companies are lousy companies. You know, sometimes you have, you know, like real estate. I’ve talked about this last week where I was talking about these, some of these real estate investments and utilities and things like that, that everybody thought were just, you know, great and really, really safe. And these companies actually, if you didn’t get a chance to check it out, it’s on my podcast last week.
Marketing and investments
But it’s these companies that everybody said, and they were marketed as being safe, investments fell harder and came back at a much slower pace than other companies. So supposedly safe investment strategies didn’t work out so well, but they sold. And that is the key. When it comes down to marketing investments, what will people buy? They will buy safety. They will buy a marketing message that says, Oh, we’re income specialists.
And what do you end up with? Yeah. The advisor gets the gold mine. You get the shaft. That’s the problem. And the reality of it is this happens every day to investors. And you’ve just got to think critically through these things. You know, then when it gets down to it income, you know, it’s not that hard to get income, but you know, the old diversification model, you know, this, and the other thing that was recommended in this, in this presentation, the S&P 500. I said, “look at it through all the asset categories.” You’d have stock assets and large companies, small companies, large value, small value, international, large international, small, international, large about look at all the assets, emerging markets, large emerging markets, small emerging markets.
What’s the most pricey asset category out there right now, even though it’s had pretty bad returns? So far month to date, you know, as far as comparable to other asset categories, what’s the highest price, still large US, much, much higher. What has the least? And when you look at it from a percentage of least ability to grow, because it’s already pricey, it would be that area of the market. It doesn’t mean it can’t grow, but if you’re looking at it, the odds of this continue to grow.
And that’s what they’re recommending. What’s the first thing you hear me say on this radio show, don’t buy based on past performance. And that’s exactly what the investment advisors recommending could be a disaster when it comes to taking income in retirement. When you go buy things after they’ve done well. And then as they go down in value in the future, because you don’t know when it’s going to go down, but you know, markets do go up and down. At some point that downturn is going to come. Then all of a sudden you keep selling it lower and lower prices.
And you got a problem on your hands. Paul Winkler, this is the Investor Coaching Show. Buyer, be aware. Investors, be aware. You can’t go about investing, sticking your head in the sand and just hoping everything is going to go okay. It’s a disaster waiting to happen, especially when it comes to income. When it comes to income that you need for life, don’t fall for marketing pitches.
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