Transcript:
Tom Vaughan: Hello, everybody, welcome to Friday. We are starting off our Go Live with Tom again. And again, the whole object of this is to be able to help you increase your Investor Education.
That’s one of our main objectives that Retirement Capital Strategies to help our clients build their net worth. We work on the financial planning, the tax planning and the investment management. Kind of the fourth piece is Investor Education. That’s what this shows for. And so your questions can be sent in to asktom@golivewithtom.com, you can see that right at the bottom here. And please send those in, Katie will get them she can ask me the questions. And we’ll just continue to go and have a really good time here. And again, we are posting all kinds of different educational pieces on the our YouTube channel, including pieces of these videos. So if you just want to see a part of it, and if you want to get the notification for those being posted, you just subscribe to the channel and hit the little bell. And you can get notified when we put out a video on there. So really looking forward to it. Thank you for coming. And let’s just start with the first question.
Katie Nealis: All right, Tom. So before we get into the very first question, it’s talking about risk. Can you explain what that is?
Tom Vaughan: Yeah, risk is an interesting term in terms of investing, there’s kind of two risks. One, of course, is just, you know, losing money. So if I put $100,000 into somthing’s that worth $60,000, that I took a risk and I lost. And so you can measure the risk of an investment by many different ways. A standard deviation is one method, or I like to look at how much it fell in different time periods. I’ll compare that to the market and see what has happened with that. So it’s kind of a volatility risk. But there’s another risk also, and that is not having enough money to pay all of your bills at some point in the future, especially in your retirement because of inflation. And so that usually means you need to take a little bit of risk. So there’s kind of this teeter totter that we all end up on in terms of what what we do with risk, but that’s essentially what risk is, in my opinion, the risk of loss and the risk of not having enough to keep up with inflation.
Katie Nealis: Thanks for explaining that to your viewers. So the first question we had from our question bank is, “How do I figure out how much risk to take during my retirement?”
Tom Vaughan: Okay, well, that’s a really good question. Actually, it’s very common, you got to think about somebody who is retired, they’ve gone through their whole life, built up, this assets worked and had an income coming in, and all of a sudden, there’s no job any longer and they’re living off these assets. And so it can be sort of feel like flying without a net. And you want to make sure you’re taking enough risks to have enough money for the long term, but not so much that you get wiped out. So actually, let me show you, I’ll share the screen here and show you some examples of kind of how we analyze risk. And it is it’s pretty interesting.
Alright, so what I’ve got in front of me here is a program called Money Guide Pro. And this is a financial planning program that uses a technique called Monte Carlo simulation. So I’m going to push this button, and it’s going to run through this sample plan. This is Joe and Jane sample that I made up for this. So when I push this button, you’ll see here, it ran through their life 1000 times, 960 times it was successful. So just means that there was still some money left, in this case by 2050, which is the target. And what it’s doing here, it’s the plan has everything in it, all of their assets, all of their incomes coming in Social Security, those types of things, pensions, and all of their outflows, what they’re planning on spending and travel, what they need to pay their basic bills, the gifting to the kids, whatever it might be that they’re trying to do. And so this is actually a very good number 96%.
So one of the things that we look at here is the structure of the current portfolio, how does it look overall? So not bad, 960 successes means that the structure is not terrible, but we do some additional pieces here, or we do a little stress testing. So this is called “What are you afraid of?” This is really fascinating, because it’s going to run through Monte Carlo simulation again, but based on different scenarios, so the first one I’ll click on here is just great recession loss. So what what the program is doing is it’s saying, “okay, tomorrow, the great recession is going to start which is what we had back in 2008.” You know, the S&P 500 dropped about 53%. It took five years to come back. What would happen to Mr. & Mrs. Sample in that scenario, so when I click this, we can see it’s running it 1000 times again, but the first thing it tells us is that their portfolio on a projection basis would drop about 14%.
So that’s not bad actually, considering the market was down 53% and obviously, they’ve got a fairly conservative portfolio. But their overall success rate went from 96% with all of their goals included back to 82%, that’s still actually pretty good still in the green, it’s not a real big problem as far as that goes. So that’s something that we look at as far as that goes. And so, but I also look at inflation, because inflation is the opposite is sort of the Ying and Yang. If you are doing poorly in this great recession loss, then you actually need less stock, because that was a stock market downturn. If you’re doing poorly versus inflation, you actually need more stock. And so look, if I pull this out to say 5%. So here we’re looking at a situation where Mr. & Mrs. sample, and up with a higher inflation than expected 5% a year on all their expenses. And now you can see actually drops all the way back to 54%. So they have some vulnerability here, in terms of inflation incurring into their portfolio, which means that they’re actually a little bit too conservatively invested, as far as that goes. So that’s, that’s a huge piece right there that we would want to look at.
But then you run into the other side of the scenario, this program will show you what risk you need to take. And so what it’s telling me is that they need to take a little bit more risk. But then each person has their own risk tolerance that they are essentially have developed over their whole lifetime. And so I’ll share here with a document that I made to kind of demonstrate, we use a program called Riskalyze. And I just took a couple of screenshots here, again, for Mr. & Mrs. Sample’s portfolio. And so Riskalyze, I think, allows the client to see what might happen in some of these kind of bad case scenarios, and how much money they might lose. And they need to be able to absorb that and accept that. So for example, it gives a risk number 45. So 100 would be really aggressive, one would be virtually no risk. And so it’s right near the middle, right, a 45. And so that kind of gives an overall flavor for where the risk is, in terms of total bond and stock market.
But what they’re showing here, and this might be a little hard to see, but you would have projected over the next six months 95% chance you’re going to be between negative 8.3% and positive 12.9%. So this is one thing I focus on. Look, if this if you got a statement, and you were down $279,000. In their case, they have about $3.2 million,hat would you think, how would you react because you can’t get, you know, the positive $431,000 that’s up on the screen side unless you can absorb and hang in there on these downturns. So if we’re going to move your risk up to handle inflation, we’re going to make sure that you’re not bailing out at the next big downturn. And then this actually shows some of the stress test pieces, you know, how it would do in an up market. So the S&P was up 32. In that same market, this portfolio been up 1.7. So again, pretty conservatively invested. In a down market, you can see here the 2008 bear market, or the full financial crisis, from top to bottom, you can see the S&P 500 would have been down 53%, they’re down 23, down almost $780,000. Again, they have to be able to internalize that.
So from a strategy of how we determine the risk that you should take, it’s using all of these tools, and then every quarter, the clients get these numbers from Riskalyze get an email that kind of breaks down the risk that they’re taking their portfolio, because risk tolerance changes over a period of time. So it’s, it’s not a super simple thing. I mean, a lot of people don’t have a very sophisticated methodology for figuring out exactly what risk they have. And that’s what you got to be careful with. Because you could be taking more risk than you think, or not taking enough. And it’s really nice to kind of know what you need to do. And maybe if your plan says I have to take more risk, what you maybe need to do is go in there and look and see what you’re spending and say okay, maybe we’d spend a little bit less, because we don’t want to take that much risk. So you know, there’s adjustments that you can make on either side, but but that’s how that’s how so very, I find that subject very fascinating. It’s super important to get that right. You know, when the next big downturn comes you got to have everybody’s got to be in the right spot, otherwise they’re going to bail out and probably lose money.
Katie Nealis: Well, Wow, thanks for showing that very two powerful tools and amazing visual with those. So another question we have is, “What is a wash sale?”
Tom Vaughan: Ah,okay. So this is actually kind of a hot subject right now, it’s come up a fair number of times in the news because of what happened last year. So essentially a wash sale just means that if I own Apple, and I sell Apple and let’s say I take a loss, I cannot buy back Apple for 31 days, or for 30 days I can buy it back on the 31st day without negating the loss that I took. So if I bought it at $100 and sold it at $90, if I buy it right back, I don’t get the write off, it becomes part of my cost basis, but I don’t get the write off. So I have to not be in that for 31 days, this is something they did way back. And you can go to another I can go into Microsoft during that period of time, without any problem. But what happens, I give you just one example.
So it was a great story wasn’t great for the gentleman, but it was a gentleman, first time investor last year gets excited $40,000 give or take opens up, you know, an online account is buying and selling, and literally hundreds of transactions even a month. At the end of the year, ends up with $50,000, I made $10,000. So at least it was profitable. But he kept trading the same security over and over again. And so we actually had basically $790,000-$810,000 worth of gains, and $800,000 worth of losses. But he did not get to count the losses, because he didn’t wait the 31 days. And so he was stuck.
By the time you got to do his tax return, he realized he was going to owe $160,000 in federal taxes alone. And that’s really hard to unwind. And it gets a little bit complicated. But it is super important to understand how wash sales work, so you don’t end up in that situation where you think you’re going to get a write off, because he should have just had a $10,000 gain ended up with an $800,000 gain. And that’s just because he wasn’t paying attention or didn’t know about the wash sale rule. Good question.
Katie Nealis: Great answer. We have another question in our question bank. “Should I have a different investment strategy for my retirement accounts versus my non retirement accounts?”
Tom Vaughan: And the answer is yes, actually. Because in your retirement accounts, you can make changes without any tax ramifications. And so you can do all kinds of different things. Matter of fact, that scenario that I just gave with that gentleman that was trading hundreds of times a month, he would have had no issue at all tax wise, if that would have been in a retirement account, like a 401k, or IRA or a Roth or any of those things, because there’s no accounting. He wouldn’t have had to put those, transactions on his tax return, which would have really helped. So you can be more active, if you want it to be inside of the IRAs, you don’t have to consider tax now.
On the other hand, a taxable account, so if I, if I have something that you know, put $100,000, it’s worth $150,000. And I decided I wanted to sell it, I’m going to have a $50,000 gain. So if I sell that in less than a year after buying it, that becomes ordinary income. Which can probably get to be in that 20 to 30% range in terms of the tax. If I sell it after a year becomes a long term capital gain. And a lot of my clients end up in about the 15% federal bracket on the long term capital gains.
So that’s one thing that would be different, you’d want to find holdings that you thought you could hold on to for a year. So generally speaking, we do a lot more broad market indexes in the taxable accounts, and things that we think have a good long term projection for growth that we’re not going to have to get out of in order to preserve our gains. And so that’s the difference, less volatility in terms of the assets that you want to put in there, and then less rotation, so less transactions inside those taxable accounts.
Because again, you pay taxes on that $50,000 even at 15%, that money’s gone, and now you’re going to have to kind of take the rest and put it in this other investment. The other investment has to do that much better, because some money just disappeared, because you made that transaction. So it changes the calculus, you can actually get out a calculator and figure out what the gain is and whether it makes sense or not, as far as that goes. You don’t want to hold on to everything until it loses money. But it is you have to think about it and be careful with your calculation on the taxable side.
Katie Nealis: Definitely. So, Tom, the restrictions are hopefully lifting soon. And I am so excited to get back out there, have a nice date night out at a restaurant and also spend my money shopping. Yeah, so a really great question we have is, “Are restaurants and retail stocks things to invest in right now?”
Tom Vaughan: Oh, yeah, that’s a good question. Well, they’re calling these types of companies like clothing retailers, let’s say for example, or restaurants or hotels or airlines, and they’re calling them Epicenter stocks. It’s kind of a new term. And obviously, what they’re talking about was that they were dramatically impacted by the virus. And so theoretically, as the virus gets under control, because the vaccine these companies can reopen. And the really big thing that I think is very exciting is that a lot of these companies had to cut costs in order to survive.
I’ll give you an example. So Chipotle just announced their earnings this week. And they matched the expectations on revenues, they matched the expectations on per store sales. So that was good, the expectations were fairly high, they matched them, but they actually almost doubled the expectations for earnings per share after all their costs. And that’s exactly what I’m talking about, Chipotle, they probably had to cut back substantially in order to survive. And now the revenue starts to pick back up and the earnings really start to grow. And that’s where you make money in the stock is where the earnings are higher than what was expected. Most of the times the stock is already a built in this expectation for earnings.
And then when you surprise to the upside, that’s where money can be made. And so yeah, I would say definitely retail, like The GAP has done well, so far. Ulta makeup is coming around, you know, because people again, it’s gonna go on date night, might want to do makeup, different makeup than you have now those types of things are going back to work or what have you. I think there’s going to be an explosion in all of those Epicenter stocks. And that includes retail and restaurants. I think those are good areas to take a look at. And right now as we speak, I mean, actually, the market is doing phenomenal today, even in those areas, especially but right now, what’s happening is because of the global situation, the situation in India situation, in Europe and what have you, with the virus not really being under control, it’s suppressing the gains that we should probably be seeing, and it’s not a bad time to be accumulating those Epicenter stocks, because they’re not flying yet about once this kind of global reopening happens.
And unfortunately, it kind of needs to be global. It’s not just here, it’s not just the as far as the stock market is concerned, it has a lot to do with our bond yields, which has to do with the global environment. So, but I still think there’s a great opportunity to kind of get in and nibble at those types of stocks. So yes, I think those are great areas right now. I think they could be great. Normally, I’m not a huge fan some of those areas, per se, but right now, I think it’s great.
Katie Nealis: So we have another question. Question in from Chris saying, “Cryptocurrency has been in the news a lot this year. Would you say this is a good investment? And how volatile is it?”
Tom Vaughan: Well, there’s a whole bunch of versions of cryptocurrency and so they’re all different in terms of their volatility. I’ve had several meetings, actually, with some fairly high level people general talking about cryptocurrency. And it’s, it’s really, really fascinating. Crypto currency is a digital currency. And the piece behind it is Blockchain. So Blockchain allows, you know, that line of code, that’s basically your currency to be secured. And so that somebody else you can’t replicate it. And that’s what keeps the you know, the Bitcoin going as far as that goes.
And Blockchain is a phenomenal investment arena, because it can be used all over the place, it’s just a new technology, fairly new technology, but they’re going to use it in financial services, they’re going to use it in medical science. So that aspect, I think, is a really interesting investment arena. Bitcoin itself is really kind of fascinating, the thing that really catches my attention on this is that almost everything that you buy is an investment has something behind it. Buying with the hope that you find somebody in the future to buy it at a higher price. So if I buy Apple, Apple’s behind it. They got a certain earnings and growth, number of employees, whatever it is, and I hope if I buy it at $100, that I can sell it for $110 or you know, whatever, it’s somebody else, at some point time will buy that.
And I buy in the US dollar. Well, the US government’s behind that, right? Because they’ve talked about Bitcoin, kind of replacing the dollar, or maybe some points in the future. So I think that’s really fascinating. If you think about Bitcoin, you’re buying it, there’s nothing behind it, there’s no US government, there’s just the hope of selling it to somebody else at a higher price. So that has caused a tremendous amount of volatility. And they’ve been really, really volatile. That’s why I don’t use it personally in the portfolios, just because the volatility is just too high. There is another vulnerability with Bitcoin that I think’s kind of interesting, that came out of a meeting I had.
So Bitcoin can only do one transaction every seven seconds. [Correction: Bitcoin can do seven transactions every second.] And if you look at like VISA, they do 65,000 transactions every second, right? And so really when you look at that, one of the things that people are talking about is Bitcoin is like Yahoo. So in other words, we all used to use Yahoo’s search engine before Google, and then Google came out with a better search engine. And our using Google, I think, is probably the biggest search engine. So is there another digital currency that comes along that has maybe faster processing rate or what have you, or whatever the issue is, that might replace that. So I think it’s very fascinating. It’s fun to watch, I worry that it is one of those things that could bubble and affect other things like the things we’re invested in. So that’s just a piece of what I watch for as far as that goes. But it’s a it’s an interesting area. That’s for sure.
Katie Nealis: Definitely. And a really hot topic right now.
Tom Vaughan: Yes, Very.
Katie Nealis: So last year, COVID created a high unemployment rate, and the market kept going up. I personally find that very confusing. So the next question we have is, “How does unemployment affect the stock market?”
Tom Vaughan: Yeah, that’s a great question. I got that quite a bit last year. Especially towards the second half of the year, unemployment was quite high. The pain was high food lines were long all these things are happening, and the stock market is going up and up and up, and may affect that a few places, it really went up incredibly. And so a couple of things. First of all, the market is not looking at today, for the most part, especially with employment, it’s looking more to the future.
And so with all last year, for example, with all the money that came out and stimulus, the future looked brighter, that turned out the market was right earnings have been fantastic. 2021, it’s going to be a good year for earnings, much better than probably 2019, which was a record year, at least on the S&P 500. And so again, the market is looking forward. And unemployment is a lagging indicator it happens after. So you know, the market is looking forward, it starts to fall because it’s these are recession coming.
And then the recession actually happens. And then people start to get laid off. And that’s way after the market had already come down or that way after, but generally way after, and so and then the market might start back up. Well, there’s still layoffs going on. So there’s a disconnect, mainly because of timing market is as a six to 18 months in advance, and layoffs are actually coming out at a later point as a result of a recession. So yeah, that’s a good question. That’s it comes up all the time.
Katie Nealis: So Tom, in your office, you have a few statues of bears and bulls fighting. “Can you explain what a bear market versus a bull market is?”
Tom Vaughan: Yeah, I’ve always found that kind of interesting. Because you’re supposed to like one in which one do you like, do you like the bear? I don’t know. You know, that seems kind of scary. Do you like the bowl, that seems kind of scary. But you should like the bull, because that’s the upmarket thing. Let me share my screen, actually, I can share it show you sort of a long term view here. So this is the S&P 500. For the last 25 years, each one of these little boxes is a month, but it gets a chance to see a lot of data.
And so here you can see the 2000 downturn, right, so about 45% drop from high to low and the S&P. Here’s the 2008 downturn, about 53% drop. So those are both bear markets, and a bear market is defined in essence, as a 20% or more drop, or both of those were, here’s at the end of 2018. This doesn’t look like much, but this was right at 20%. So very close to being what they consider a bear market. And of course, here’s the pandemic, which we forget how bad that was, that was the fastest 35% drop in history. So that’s a bear market also. So a bull market is just the opposite is the upward moving market. The definition for a bull market though isn’t as well defined, some people call it a 20% increase, just like the opposite of a bear with a 20% decrease.
I tend to use that also but I also use this 200 day moving averagem this blue line that I have here, is the every point on this line is the average of 200 days prior. And so when that turns up you can see here, that usually means to me things are moving in a bull market direction and that’s when I’ll usually start to get more aggressive if that’s what I’m doing so. I mean that’s in essence that’s what that is. So again, bear is bad down, bull is good, up, so that helps but yeah. I’ve been asked that a few times I do have these little statues in my office that I really like but with a kind of bear, bulls, wrestling and what have you.
Katie Nealis: Well, I definitely wouldn’t want to wrestle a bear or a bull!
Tom Vaughan: No, I know. Me either.
Katie Nealis: So we have another great question in here from Maude. “If clean energy has a bright future, why does it seem to go up and down and not just up?”
Tom Vaughan: Oh, that’s a great question. Because clean energy had a phenomenal year, last year all together. But it kind of suffered in the downturn of for the COVID piece had some downturns in 2018. So here’s what’s happening with clean energy, for the most part, it’s still a developing arena. And there isn’t a tremendous amount of stability there, partly because of the development of the solar panels, for example, or all these new technologies, and the acceptance of that. And clean energy has a lot of government tie ins where a state is trying to, or the federal government is trying to push through.
So we’re starting to see clean energy do really well because of it. Matter of fact, we’ve had a big downturn this year and clean energy, some of them are down 20-30% from their highs, and mid February. A lot of those are turning around. Literally in the last couple of weeks, clean energy is looking like a possible buy point here. And that has a lot to do with what’s happening within this current administration, they’re really pushing the concept of clean energy as a whole, making this part of this infrastructure called American Jobs Plan that they’re working on that was announced. Last month, so it just sort of a Herky jerky thing. Energy in and of itself generally is fairly volatile.
The future is most likely clean energy. We have entire countries like the US and China, declaring dates when they want to be carbon neutral. We have states like California and New Jersey that are pushing for the same thing being carbon neutral, or electric vehicle sales only. So the future is clean energy, it just gets ahead of itself. I mean, last year was up, most of the indexes I was looking at were up 100 to 300%.
You know, you’re not gonna get that every year, right? I mean, just not gonna happen. So, you know, it settled back down. And maybe like I say, we had these 20 30% downturns and I think people are starting to nibble now, because there will be some, I think some money coming out from the government. Even just in the subsidies, so that if you go buy an electric vehicle, or put solar on your house, you might get some tax breaks, which could help propagate the clean energy piece. So it’s just one of the things you have to be patient with, it’s still developing.
Katie Nealis: We have another great question here about your daily videos. “So in your daily videos, sometimes you talk about a green shirt day. What does that mean?”
Tom Vaughan: Well, that just comes from, I had only a few of these polo shirts, you know. And so I started to get some more, and like one of the most asked questions that would come through on emails had to do with the shirts, which I thought was really kind of funny, because I don’t really even recognize what I’m wearing half the time. But anyway, so I decided to have some fun with it, and so I wear a green shirt whenever the S&P 500 is up, one and a half percent or more for that day. So today, it’s up. Where is it? I don’t know, it was getting there, could be a green shirt day today.
But I also wear a red shirt, if the S&P 500 is one and a half percent or less. And then all the other colors that I have his blues and navies and whites in orange and yellow, those are just the in between days. And there’s not a lot of attachment to those. I didn’t want to get too complicated. So just green or red. That’s, that’s, that’s fun. And it allows people you know, to see the thumbnail and say, “Oh, this is what I want to watch.” Or if you don’t want to hear about down. Actually, we get more views on the down day ones. When I wear that red shirt, we get more views, but people are curious as to what’s happening and what I think about it. So anyway, that’s that’s where that comes from.
Katie Nealis: Definitely Well, I’d like to just stop it for just a moment and remind our viewers that it’s not too late to send your questions in to asktom@golive.com
Tom Vaughan: Yes. Thank you.
Katie Nealis: So another question that we have from Lisa is, “What exactly do you mean when you refer to support when talking about investing?”
Tom Vaughan: Oh, okay. Yeah, support is an interesting area. I talked about it a lot in my daily videos. And I think sometimes it can get a little bit confusing. Let me share my screen and I’ll try to describe it, I actually think it’s one of the more important things to understand. I found that it’s fairly useful. So this is a chart here of Apple, right. So most people know Apple, right. And this is daily, every one of these boxes is a day, this is the last one year, you can see kind of the channel. Apple’s going up overall, although it’s had kind of a sideways motion here for a while. But what you’re seeing over here, this green piece here, this is called a VolumeProfile.
This is a really powerful tool for figuring out support and resistance. So what we see down here at the bottom is the volume by the day, so you can see this day right here had a lot of volume, right? The volume is for every price. So currently it’s selling and it’s flashing right now, this is by the second, you know, $134.69, for example. And so this green piece here shows how many shares were sold at each price level. So if you look here, there’s not a lot of shares sold here at the top, because it didn’t spend that much time there, right?
Versus down in here, you can see there’s a lot more shares purchased at these lower prices. So this is about $120 a share. This red line here means this is the highest point in time, which is $115 a share. So when you’re at $134, then give me an example. So let’s say somebody bought here at $120. And it went up to $134, you’re thinking great, I’ve made some great money on that, I’m really happy, I bought that, and then it comes back down to $120, you might want to buy it again. And so that’s what that’s what support is called. And you can tell how much support is there by how much volume there is at every price.
You can see, for example, right here, once it gets to $108, it could fall all the way down to maybe $95. There’s not a lot of support there, right? There’s not a lot, it didn’t spend much time at those prices. And support is also important as to immediacy. So if you go back more than a year, you’re nobody really cares as much as you do sort of a shorter term timeframe where people can kind of remember. So that’s the idea behind support. It can go the other way, let’s say this price falls all the way down here. Now in order to come back up, all these people that bought it at higher prices are maybe going to try to get their money back. And they’re going to keep knocking down the stock as they kind of retake their money. So anyway, support and resistance is, I think an interesting thing, it’s a great thing to look at when you’re looking at a particular stock or even a you know, a combination of stocks, like an ETF like an Exchange Traded Fund.
Katie Nealis: Thanks for that visual, Tom, very powerful, really great tool you have there.
Tom Vaughan: Thank you.
Katie Nealis: So we have another question that came in from Otto and it says, “If I start a retirement account later in life, should I be more or less aggressive?”
Tom Vaughan: Oh, yeah, that’s a good question. Because here’s how I’d answer that. First of all, luckily, we already did the first piece. So, if you look at what I did with the Monte Carlo simulation, and you look at how we first put everything in the plan, we run the basic Monte Carlo simulation, that’ll give you a really good idea based on your current mixture, whether it’s going to work or not.
And then you do the stress testing and your stress test against the Great Recession, downturn, stress test against inflation, those will give you some idea as to how aggressive you need to be, because that’s what you kind of start with. And you might find that you need to be more aggressive if you’re have a shorter time period before retirement. But you have to be really careful because in the end, your own personality, and what you can effectively take on as risk is actually way more important than any program telling you what risk you need to take.
So if I run the program, and it says, “Oh, you need to have 80% of your money in stocks”, and then we go through Riskalyze, and really look at what that means and how much money you could lose, and you’re like, “No way, there’s no way I can handle that I wouldn’t sleep at night”, then we need to kind of go back and take a look at the plan itself and see what we have as outflows, and should we be making an adjustment? Should you retire a year or two later? How much difference does that make? We can do all kinds of what ifs to try to see what happens there?
Because so that I think the question isn’t so much, you know, hey, I’m closer to you know, retirement age, and I need to make more money, because you can lose more money to, you know, especially in short periods. It’s really what risks do you need to take, versus what risk you can afford mentally, in our own risk tolerance to take and finding that balance is really critical. So it kind of depends. There’s probably not a great blanket answer to that. And, as with most things in the financial planning arena it revolves around the plan. And that’s the tool, and it’s a very powerful tool. I’ve had very good success with that over the years. So I that’s what I lean on. But that’s, that’s a great question. It is something that comes up.
Katie Nealis: So I’m 25, almost 26, would you give the same advice or different advice to that question?
Tom Vaughan: Yeah, you could make a much stronger argument for you to be aggressive, because you’re actually looking at even if you wanted to retire early 20 years, but it could be more like 30 years, or longer before you’re actually going to need this money. And if you look at the stock market, there’s only been one 10 year period where the market had a had a negative rate of return, that was ending in 2009. And so if you have a long enough period of time you can kind of let time be your main absorber of risk.
Because if it does drop, like in 2008, and dropped, it came back in five years. 2000 dropped came back in five years. So, the Great Depression it dropped to came back in 14 years, but they did some things differently there that we’re not doing any more. But you know, things can happen. But, you still have to take a look at your own risk tolerance. And I have 20 some odd year olds who are very, very conservative. And that’s just the way they are and they don’t want to lose much money, if any at all. And so that again, it trumps everything else. So you know, if I was working with you on that I’d be we’d be talking about your own personal risk tolerance.
And I like to look at actual dollars. So hey, I’m going to put in $10,000. Okay, so what if it was down $1000? What if it was down $2000? Where’s the breaking point? What dollar amount to you get to when you say I got to get out there because then that portfolio was maybe too aggressive for you. So again, it does revolve back to your own personal kind of outlook on risk.
Katie Nealis: So I have another question from Sam, “Do you think you’ll do any more in-person seminars, now that more people are getting vaccinated?”
Tom Vaughan: Oh, yeah. So we were doing seminars, at restaurants, specifically, LB Steak at Santana Row at the beginning of 2020, for example. Our main subject matter was Social Security maximization. So that was very popular, lots of people that hadn’t taken Social Security yet that we’re trying to figure out, when to take it. And there’s lots of different details in terms of that. But yeah, it’s a great question, because I enjoy doing them.
They are great environment. But you know, when will Santa Clara County, in our particular case, allow us to have a group inside of a restaurant? So June 15, is the timeframe that California has targeted to, reopen, so to speak. And so we’ll kind of have to wait and see what happens. I don’t normally do these during the summer, anyway, because people are busy doing other things. But the Fall is a phenomenal time to do these. So if things are working out and the case count is low, and the county lets us and I feel safe, and Katie you helped me with these, you feel safe.
We do have a liability, in my opinion gathering a bunch of people into a room and having somebody gets sick. So I’d love to see some numbers and see some situations that have developed. So September, October might work, which actually, I’m kind of surprised. I didn’t think we would be able to do it that early. But we might. California went from one of the worst states to one of the best states in terms of the virus outbreak at the moment. So that’s kind of exciting. And Santa Clara County is doing quite well.
Katie Nealis: Thank goodness. That was pretty scary for a little bit.
Tom Vaughan: Yeah, it was.
Katie Nealis: So we do have a few more minutes left.
Tom Vaughan: Yeah.
Katie Nealis: We do have one more question, or a couple, but, let’s start with, “Why did companies stop funding pensions for workers?”
Tom Vaughan: Oh, yeah. So even in this valley, if you came here, and work at Lockheed, or General Electric, or IBM, they had pensions and you would go and work and basically the company was putting money into the pension for you. You retire, you would get what essentially is Social Security, you get a payment. Usually, for life, you could have some of it go to your spouse, or all over that your spouse, depending on which option you picked if something happens to you. And those have all disappeared from private companies.
You’ll still get that if you’re working postal service or fire police, teachers, those there still have pensions for those particular arenas. But the private company pensions have disappeared. The reason that this disappeared is pretty basic. I mean, people are living a lot longer than expected. So they have this amount of money that they’re putting into this pension, expecting people to live a certain amount of time. And they’re living longer, and the pensions are really struggling. And they’re having to be continuously refunded with dollars out of these companies. And they just don’t like that. I mean, it actually affects their earnings. These are public companies. And so what they have done, is they shifted in and they’re now putting money in on a match basis. And some of the matches are really aggressive and amazing.
But you put X amount into your 401k, and the company will match a certain percentage of that or all of it or depending on what what the company’s rules are. And so now we’re starting to see big 401Ks that are now replacing the pension. The big problem is not everybody does a 401k. So, if you worked at IBM, you had a pension, you got a pension no matter what if you work at IBM now, you get a 401k match. If you don’t do the 401k you can have some trouble in your retirement so that that’s kind of shifted. The responsibility of the retirement from the company to the individual, so, but it’s just monetary, there’s an awful lot of pensions that are kind of underwater, where they have so much money going out. Because everybody’s living longer than expected. So which is a good thing. But if you’re a pension administrator can be a bit of a challenge.
Katie Nealis: Here’s another great question, “I want to contribute to a Roth IRA, are there restrictions that I need to know about?”
Tom Vaughan: Yeah, so there’s two things with a Roth IRA, one is contributing money. And the other one is converting money from an IRA to a Roth IRA. So that’s a whole other concept, the concept of conversion, and that’s unlimited. You can do that as much as you want. But if you’re going to add to Roth, first of all, you have to have income. You have to be making some money, W2, 1099 type income. W2 predominantly income. But nonetheless, if you make up to $6,000, you can put $6,000 into the Roth.
If you’re over age 50, you can actually add another $1000 to that, do what’s called a Catch Up, which is $7000, total. But you also have an upper limit on income, so you can’t make too much income. So for a couple, if you make $198,000 to $208,000, you can still contribute to a Roth, but it phases down as to how much. So you might not be able to do the full 6 or $7000. Over $208,000, you cannot contribute to a Roth. And what they’re talking about with that $208,000 is what’s called Modified Adjusted Gross Income, which is a fairly complicated concept. It’s not even on your tax return, you have to calculate it, you basically take your taxable income and add some things back in. And so for a single person, the realm is $125,000 to $140,000. So if you’re in that range, then you would have just portion that you could put in of that 6 or $7000.
Above $140,000, you couldn’t put in anything. And below $125,000 you can do it no problem. And if you put money in, and you are not qualified to put money in because you make too much, they actually charge you a penalty. I believe it’s 6% a year right now, so you got to be careful with that and not over contribute to a Roth. But those are kind of the rules and pieces that you want to look at as far as that goes. So very, very good area. It’s important to kind of understand how those things work. And of course, they keep changing the tax laws. And we all have to keep track of that and keep up on that. But that’s, that’s where it is right now.
Katie Nealis: All right, so we have about three minutes left. So I’d like to ask one final question.
Tom Vaughan: Sure.
Katie Nealis: “What’s the vaccine rolling out and the restrictions lifting? How soon do you think you’ll have clients back in the office?
Tom Vaughan: Oh, yeah. Well, theoretically, we’re going to try to reopen the office, at least for ourselves on June 15. We all expect to be vaccinated and whatnot, shortly, within that timeframe. There’s nine of us in the company, most of us are already vaccinated. Today’s my two week anniversary, so I had my second shot two weeks ago, so theoretically, I’m vaccinated. But in terms of when the clients are going to come back, that I actually don’t know the answer to that, because it sort of depends, again, on all the situations that we’re talking about in terms of case counts that are happening out there what the county’s advice is.
We have a liability, you don’t want to have somebody come in and get sick. So you know, we’ll try to make the environment as safe as possible. We have been doing all the meetings on Zoom, and that’s been okay, too, for the most part. And I have a lot of clients all over the country that aren’t going to come in, no matter what. I mean, I have clients in 26 states outside of California. So you know. Zoom is already there for that.
But I have clients that live a little bit away, and they’re looking at maybe not driving in every time too. So you know, we’ll see how that plays out. I’m not positive as to the date. We’re still trying to figure out when we want to go back. There’s always been one or two people in the office at any point in time. But that wasn’t so much from a necessity standpoint, is that was just for people to get out of their house and have somewhere else to go work. But so that’s up in the air, but I would assume similar timeframe, kind of that June to September timeframe.
Katie Nealis: All right. Well, I’d like to take this moment to thank you for another amazing Go Live with Tom, and to also invite our viewers to hit the Like button and subscribe. And to join us again next Friday.
Tom Vaughan: Yeah, thank you everybody so much for coming. And I look forward to seeing you again on Friday. [DING DING DING DING DING] Thank you very much.