Michael Kitces on the Myth of Retirement

JPMorgan CEO Jamie Dimon was sounding the alarm last week. He said, going all the way back to 2010, the major buyers of U.S. Treasuries have been central banks, foreign exchange managers, and banks who had to own a certain percentage of treasuries for regulatory reasons. And all of these buyers are topped up, as Dimon puts it. Their plates are full. And that’s a massive change in the flow of funds around the world. Diamond says his bank is preparing for a hurricane of volatility. That’s not the kind of tune we’re used to hearing from Jamie Dimon.

Behind that hurricane is a massive wave of global debt, about $305 trillion worth as of the first quarter of 2022. That’s an unfathomable number, I know, but let’s understand what that means. Global debt covers everything from borrowing by governments, businesses, and households. All the debt that’s out there on the record. It was but a mere $226 trillion in 2020. But then COVID-19 hit and the spending was set free. It was the second largest percentage increase in federal spending since World War II. But with rates rising, inflation persistently high, and interest on a lot of that debt coming due, belts are going to tighten and the risk of default rises. The poorer you are, whether you’re a country, a company, or a person, the harder it gets to pay those loans. To meet those debt payments, at least 100 countries will have to reduce spending on health, education, and social protection, according to the International Monetary Fund.

And we’ve got to keep our eyes on the dollar. Remember what J.C. Parets told us a few weeks ago? A strong dollar is generally a headwind for U.S. stocks, and so many U.S. companies generate a lot of sales overseas. Companies like Microsoft, Salesforce and Coca-Cola have all talked about it, and you can see it in the charts. The Dollar Index, which measures the dollar against a basket of 16 currencies, is around 2% off its May peak and fell 1.1% in May. That little uptick we saw in the stock market over the past couple of weeks was pretty tightly correlated with the dollar’s drop from record highs. J.C. and I got into this in a recent one-hour chart deep dive, looking at some of the most important technical indicators in the capital markets today.

Meet Michael Kitces

Michael Kitces is a financial advisor and the head of planning strategy for Buckington Wealth Partners. Mr. Kitces is also the co-founder of the XY Planning Network, AdvicePay, and fpPathfinder. He is also the publisher of the e-newsletter The Kitces Report and the popular financial planning industry blog Nerd’s Eye View. Mr. Kitces is a Certified Financial Planner (CFP), Chartered Life Underwriter (CLU), and Chartered Financial Consultant (ChFC), among other designations.

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The heart and soul of the financial services industry lives inside financial advisors. These are the people who help us sort out our financial lives, plan for our futures, and solve the money problems that cause so much stress in our lives. Investopedia is proud to honor and celebrate financial advisors with the Investopedia 100, our list of the most influential financial advisors who use their platforms to educate their clients, improve the industry, help other advisors grow their businesses, and spread the gospel of financial literacy and education. At the top of our list every year is Michael Kitces, and there’s a reason. He’s a learner and an educator, and every time I see him, he has dozens of advisors around him listening to every word he says, and he takes every question they ask. Michael is the founder of the XY Planning Network. He has several podcasts and the must-read Nerd’s Eye View newsletter, and he speaks at up to 70 conferences a year in industry gatherings, and we’re at one right now at the ETF Exchange conference. Michael also happens to be our special guest this week on the Investopedia Express. Welcome, Michael. 

Michael:

“Thank you. Good to be here. Appreciate the opportunity.”

Caleb:

“Good to see you. And the conference circuit is back after a couple of years of pandemic hiatus. And you and I are here at an ETF conference here in South Florida. Somebody has to do it. How do you find the financial advice and planning industry today? Coming out of the pandemic, the market’s well off its highs, lots of concerns about a recession, lost gains, etc. What’s the temperature from your point of view of the industry and of the services part of it as well?”

Michael:

“The industry overall, I find, the mood is very, very good and positive, frankly, for where we are. If I reflect over the past… both the past two or three years and the past ten years. If I go back ten years ago to 2012, Betterment and Wealthfront had just launched their robo-advisor offerings and all financial advisors were supposed to be dead approximately now, slain by robots. And instead, what’s happened, Betterment and Wealthfront are still mostly around. They never grew all that big, relatively. There are literally individual advisors who just made a firm and grew it and are larger than any robo-advisor is. Like Ric Edelman was here speaking this morning. He alone made an advisory firm that generated more revenue than Wealthfront and Betterment ever did as he grew and scaled his firm. We’re still here. We’re doing well.”

“Businesses, by and large, are doing better than ever. Recent market pullback notwithstanding. The pandemic, then, was another big wrinkle for us over the past two or three years and lots of fears and concerns going into it. But like a lot of industries, it turned out we went virtual just fine. It turns out we were able to do most of our client work just fine. It turns out the advice business wheels keep turning just fine in the virtual world. Nice to get back together and break bread with some clients in person that we hadn’t gotten to see for a little while. But it’s an interesting place to me for the industry that we were supposed to be gone from robots, and this was a business that was only supposed to survive because we do everything in person and instead we’re more technology enabled than ever, more virtual than ever. We’re running bigger, better businesses than ever. And things are going amazingly well to me. I guess not amazingly. I’m not surprised. I’ve long been upbeat on what we do as advisors, but kind of relative to the industry naysayers, it was not supposed to be going this well for the advice business, and it’s going amazingly well for the advice business right now.”

Caleb:

“You see a lot of clients, Michael, and you talk to a lot of advisors. What’s the biggest concern they share? Is it retirement now? And not having enough is at the end of this bull market? And where do we go from here? What are the top concerns that are bubbling to the surface in 2022?”

Michael:

“So, a little bit depends on… I mean, at least from the client end, who you work with and where your clientele are focused. At a high level, there’s a subset of folks who are still struggling financially and trying to get their heads above water. And so, a lot of that focus at the end of the day is really about how can we lift our income and our earning power in the first place so that there’s more dollars coming in than going out? Because that’s ultimately what starts building financial foundations.”

“When we get to a point where that’s going well, and we’ve been doing that for a while, and we start accumulating a little more wealth, which is usually where most of us are as advisors, we do tend to skew towards the folks that have accumulated some level of wealth and then get the complexity that goes with it and want to make sure they make good decisions that go with it. I find most of it really comes down to a couple of core issues that we get worried about.”

“One is we worry about our health. Can we meaningfully engage with and enjoy our lives? We got a lot of that in the pandemic scare in particular. But for most people, as their finances get to a good place, you start worrying about some other things. One of the first thing you start worrying about is your health. So, we see retiree surveys, number one concern most often is something related to health. Sometimes it’s ‘medical expenses,’ but it’s just literally health. A lot of us, even as we get into our forties and fifties, that starts to become a little bit more of a priority. Average advisor is in their fifties, so that’s an advisor conversation as well. Beyond health, am I able to do the things that I want to do in life?”

“The second big driver and the big theme to me is figuring out how to align our dollars and finances with what’s meaningful and purposeful in our lives. First, I’ve got to be able to live my life and enjoy it. It’s a health issue. And assuming I can do that and I’ve generated some financial means, how do I make sure the dollars are lined up with what’s important to me? And it’s one of those things that it’s easy to slip and lose focus of that, right? I mean, I talk to clients like, ‘Well, it’s really meaningful to give back to my community,’ and, really, that’s cool because I’m looking at your tax return, you donate like 1% of your income every year. Obviously, I’m gonna say it that way a little bit nicer. But I’m hearing you say one thing, but I’m looking at where your dollars are going, and it’s something different. ‘Family means a lot to me.’ Cool, but I don’t see you doing a lot of saving into college plans for your kids. Tell me about the blocking point because you’re saying family’s priority, but your dollars literally aren’t lined up that way.”

“So, when we start having those conversations now, they’re even morphing into portfolios as well. So, we see rises up ESG, values-based investing, direct indexing as expressed into, ‘How do I make a portfolio that’s customized? Not just my investment goals per se, but what’s meaningful, important to me. I just don’t want my dollars in savings and capital to support certain types of companies, and I want to see it support other certain types of companies.’ And so, I see this cropping up from how we spend our time, how we spend our dollars, where we save and invest our capital. It’s kind of coming from a lot of different directions at once, this fundamental question of, ‘Are my dollars really actually aligned to what is meaningful for me? And am I even clear in my own head what’s meaningful for me so that I can make sure that I’m aligning my dollars appropriately?’ And those are powerful conversations from the advisor end as well because it’s not something most of us sit around thinking about. That’s often a conversation you’ve got explore with someone and be prompted on to figure out what what really matters to you, and is that really reflected in how you spend your time, how you spend your dollars, and where you put your dollars?”

Caleb:

“Those are such great points because I think the last couple of years have helped us realize that we have to focus on those things. But I also feel, and I’ve been following this industry and in this industry a long time, it used to be… the end game is retirement. We’re all saving for the end game, but I think now it’s more… and Ben Carlson brings this up and others have brought this up, it’s about what does it cost to be you? It’s about affording your time, whether that’s post-work, post-paycheck work, or that is just ‘I want to be able to afford my time so that I can be with family more or that I can do the things that I enjoy.’ And then Joe McClain, another advisor who’s here I believe as well, says, ‘What does it cost to be you?’ And that’s what you won’t necessarily get from an app or from a robo-advisor. That’s the benefit of advice. And I think those are the conversations at least that I’m hearing more of. Are you hearing more of that in practice and in talking to other advisors?”

Michael:

“Yeah, I… I’ll admit, when I have conversations with clients directly, I don’t I don’t even like the ‘retirement’ word anymore. I’m actually a much bigger fan of the framing of financial independence, not necessarily the whole FIRE movement. Like not the RE, which is the Retire Early part of FIRE, but the FI, the Financial Independence part that, if you move away from the concept of retirement for a moment, what it really boils down to at the end of the day is if you didn’t need to earn money with your time, how would you want to spend your time that would be meaningful for you?”

“Now, some people like doing things, they like being busy, they like building things or creating things or doing things. Often that has economic value in the marketplace, which means they end up doing things that make money right. And you see a huge number of people right now that work in retirement, which is supposed to be a non sequitur, but because retirement is broken, all it really means is, ‘Even when I’m financially independent and don’t have a need to work, there are things that I enjoy doing that create economic value. So, why would I not keep doing them? Because I enjoy them and they also happen to create economic value so I can get a little extra spending money.’ Moving away from retirement and into that framework of financial independence, and just asking the question, ‘What would you want to do with your time if it didn’t matter how much you make?’ Not what do you want to do with your time when you don’t work anymore or when you retire?”

“‘What would you want to do with your time if it didn’t matter how much you make’ still leaves open the possibility that you do things that make money. Some people do, some people don’t. Some pick volunteer work. Some people pick paid work. Some people start businesses. Some people start foundations. Some people just want to enjoy a lot of television or a lot of beach time. To each their own. But thinking about it from that financial independence frame, I think, really changes the conversation. And I’ll give a shout out to Joseph Coughlin at MIT Age Lab, he published a fantastic book a couple of years ago about this called The Longevity Economy and essentially documents the rise of the modern concept of retirement. And what you find when you really actually look at the history of the whole concept of retirement is basically the financial services industry manufactured it. It’s not a normal thing. It’s not a natural state of being. It was something that came about in the 1950s after World War Two, when people started… we’d gone from farm to factory. Retirement planning was no longer have enough children who can farm the farm when you can’t. You would go work at a factory for a while, eventually you would reach a point where you couldn’t do the work right? Our bodies became obsolescence, like factory equipment, couldn’t physically do the manual work anymore. So, I would save financial resources to be able to afford to take care of myself when I couldn’t generate income from my labor anymore.”

“Now, that was a really morbid, dismal picture like no one was managed to sell. ‘Hey, wouldn’t it be great to save some money when your body’s obsolete?’ We had to come up with a new way to frame it. And what the industry eventually did in the ’50s and ’60s was we started reframing this away from retirement to something to plan, and you need to plan for when your body can’t work anymore. And we turned it into, ‘You know, what would be great? It’s called the golden years,’ because who wouldn’t want to save for the golden years? And we painted this picture of like leisure and luxury and accumulating enough dollars that we can just enjoy the dollars not need to do anything. And granted, there are a few folks that enjoy that. More power to them.”

“But turns out that’s really only a subset of people. But it narrowed us into this mental filter of ‘I’m trying to save for the golden years when I never work anymore, and I’m just living a life of idleness.’ And that’s really challenging because that’s not actually a natural state for a lot of people. So much so that you see suicide rates spike after retirement. You see divorce rates skyrocket after retirement. There’s unfortunately a lot of unhappiness that comes from it, and not because it’s bad to accumulate dollars and not need to work, but we take ourselves from work that for a lot of us is very meaningful. It’s part of our identities, it’s part of our social system. It gives us a reason to get up in the morning. And suddenly we take all that away, and it really takes a very negative emotional toll for us. So, to me, the big shift is away from retirement in a direction of financial independence. ‘What would you want to do with your time if it didn’t matter how much money you made,’ and then that exploration take you wherever it’s going to take you?”

Caleb:

“That’s a great place to start and people don’t ask that question of themselves enough. I don’t care if you’re 22, 32, 72. People don’t ask that a lot. And I know my folks are in their eighties. If they stop working, they’re just going to stop. That is part of who they are. And I love the way you frame it, although retirement does make for some great commercials on the Golf Channel, and you’ve seen them all, right?”

Michael:

“It does!”

Caleb:

“Great-looking guy with better hair than me and a dog and a beautiful family running on the beach. Looks great!”

Michael:

“Well, and there’s a subset of people who really want that. The villages in Florida have made an amazing business for the people that want to retire into the golf community and do that. So, nothing negative for for the folks that want to do that. But it turns out, at best, that’s a relatively small minority group that actually… that’s how they want to live their retirements. And so, it happened to line up for them, and it’s been great for them, and they’re enjoying themselves. But for a lot of other people, we see rising suicide rates, rising divorce rates, a lot of other negative stuff that comes when we artificially subtract some of the purpose and meaning for our lives.”

“And just when you get to the conversation of, Well, what would you want to do with your time if it didn’t matter how much money you made?’ All sorts of things start coming up. Some people start new businesses. Some people start new career. Some are like, ‘You know what? I actually love where I worked. If I could just dial it back about half the time and get rid of a whole bunch of stuff that I don’t like doing and just keep a few of the things that I do like doing.’ It’s like, ‘Well, cool, let’s talk about what it takes to get you there.'”

“And in fact, little hint, if you actually do that, you’ll make enough money that you could do it now. You don’t even have to wait five more years to when you are trying to ‘retire,’ because retire… you needed five more years if you were going to stop earning. Turns out when what you want to do that’s meaningful also make some money, you can actually accelerate that timeline. And to me, much of what you’re seeing in the growth of the FIRE movement really is a whole new generation that’s saying, ‘I don’t even buy into this vision of retirement, so I’m not even going after that. I’m going after financial independence. And the fact that’s so appealing? I’m going to get there as quick as possible. Why would you wait until 65 if I can get there faster?'”

Caleb:

“Right. It’s the ability to afford your time and then making those decisions, which is why planning is so important. Let’s talk a little bit about the 60/40 portfolio. There’s been a lot of buzz, and we’re in an ETF conference, and they’re offering all kinds of different products. You mentioned a lot of the self-directed products or the direct indexing. It’s kind of a ‘Have It Your Way’ Burger King-type of moment for the industry. But 60/40, let’s just start with the basics, things that a lot of us grew up with. Is that notion dead, the 60/40 portfolio, or does it work for some people? And does it depend on market conditions? Because folks are looking at these really terrible returns in the bond market right now. The stock market looks on ice. What’s your take?”

Michael:

“It’s the boring answer that so many of us give as financial advisors: At the a day, I don’t look at this in six or 12 month time horizons. I look over the past ten years. ‘Okay, you want to run the market from 2012 to 2022?’ The pullback’s a blip. If you go all the way back to where the market was ten years ago, and almost any time you zoom out on the market that way, you end up seeing the exact same thing. Yes, the financial crisis was terrifying when it ran. But you know what? If you ran the market from like 1998 to 2008, you still did okay.”

“And so, if you really need to spend all your money right away, then yes, this is a problem. But that’s not what we do. I mean, even when you retire that’s not what we do. We… aggressive retirement spending in the modern era is like, ‘Maybe you spend 4% or 5% of your portfolio.’ And so, if you had a significant market pullback, what might have been 4% or 5% of your portfolio ends up being like 5.5%. Because you’re always drawing off of a deeper base, the extra 0.5% is not going to break your retirement.”

“Now, if the market gets clocked and stays down for a decade, that hurts. But markets tend not to stay down for a decade. I don’t have the perfectly functioning crystal ball to know that this decade will be anything magically different. But we do have a lot of other challenging decades and challenging market pullbacks to look at over time and not a lot of scenarios where the markets get knocked out for a decade. And even at worst, if they do get a significant decline, by the time you’re through that, realize a significant decline, from that point forward it’s just the growth, if only to get back to where you were. But once the damage has happened, it’s happened.”

“So, when I look at this environment from a long-term perspective, where people are saying, ‘Well, I need to get out 4% or 5% of my portfolio for the next 30-odd years, or ‘I’m not even retired yet and I’m hoping to retire in the next five or 10 years, and then I need to get out a couple percent a year for the 30 or 40 years after that.’ Like, there’s not much in today’s market volatility that makes me worried about where the market’s going to be in the 2060s and 2070s any more than the crash of 1987 had any material impact on your ability to retire through the ’90s and 2000s, where the answer was, ‘It went just fine.'”

Caleb:

“We’re as close to 2060 as we are to 1987. It puts things in perspective. Perspective is everything, which is another reason why financial advice and planning is so important. Michael, you know we’re a site originally built out on our investing terms. Wondering what’s your favorite investing term and why? Which is the one that just makes your heart sing when you hear it, when you see it, when you’re reading you go, ‘That’s why I’m in this business. That’s why I love what I do.'”

Michael:

“Oh, man. A favorite investing term? That’s a hard one. So, well, I like… there’s two that are just coming to mind offhand. One just is financial independence. I love reinventing terms and getting away from retirement. Oh, for a number of clients I sat across over the years, having retirement conversations and realizing like, ‘This is an artificial goal, and it’s not their goal.’ I really have found the financial independence conversation to be very freeing. And honestly, the other one that’s coming to mind? I am a numbers ambassador at the end of the day: bond duration. It’s a glorious thing. It’s a really cool financial concept for anyone who’s ever nerded out on the mathematics of bonds. So, for some weird reason, bond duration and calculating bond duration makes my heart sing, and I have no rational explanation as to why that would be the case.”

Caleb:

“We love it. And you’re the first person in 88 episodes to bring that one up. So, that is yours and yours alone.”

Michael:

“Fantastic. I have staked my ground on bond duration.”

Caleb:

“And we’ll probably put a quote from you in our bond duration term on Investopedia. Michael Kitces, such a good friend of the industry, founder of the XY Planning Network, across multiple podcasts. And I’m telling you, there’s a reason that we call you one of the most influential advisors out there. It’s because of the giving nature of what you do. You’re so willing to share knowledge with people, help lift up the industry and help your fellow advisors and your clients. So good of you to be with us on The Express.”

Michael:

“My pleasure. Thank you. Appreciate the opportunity.”

Term of the Week: Automated Customer Account Transfer Service (ACATS)

It’s terminology time. Time for us to get smart with the investing term we need to know this week. And this week’s term comes to us from Sebastian in Miami, Florida. He’s my nephew, and he’s a recent high school grad on his way to college, making us all real proud. Sebastian wants to know about transferring common stock from one brokerage account to another, a process that goes through what we call the Automated Customer Account Transfer Service (ACATS), which is our term of the week. According to my favorite website, the National Security Clearing Corporation, NSCC for short, developed ACATS, which allows for the transfer of stocks, bonds, cash, unit trusts, mutual funds, options, and other investment products from one brokerage to another. However, only NSCC-eligible members and depository trust company members can use accounts.

Both the firm delivering the stock and the firm receiving it have individual responsibilities in the ACATS system. For example, if a shareholder like Sebastian wants to transfer their share of common stock from Firm A to Firm B, then Firm B will initially be responsible for contacting Firm A to request the transfer. Once Firm B has submitted the transfer request with instructions, Firm A I must either validate the instructions or reject or amend the request within three business days. If there is no exception, then the transfer will settle within six business days. No fee to the shareholder, you’re just transferring stock from one to the other. You just have to do the right paperwork through ACATS. Good suggestion Sebastian. We’re sending you some socks and a little more stock for your brokerage account.