Financial Vortex: What Is it? Podcast #464

by | Dec 8, 2023 | Podcasts

 

Financial Vortex: What Is it?

A recent study from Goldman Sachs describes a financial vortex.  We call it “life in America, 2023.”

Soon-to-be retirees, and recent retirees are discovering they may need to navigate their own way with limited financial resources, but yet still need to pay for college costs for a family member and – or – help take care of an elderly family member.

Technically, this is not new.  But the costs of both ends of this financial vortex have been skyrocketing.  Tune in to episode #464 as Tim, Brendan and Tom discuss the points raised in the Goldman Sachs report and what folks in this position may be able to consider.

Links for Financial Vortex: What Is it?

Goldman Sachs report Managing the Financial Vortex
Catch all our Mullooly Asset Management Podcast episodes right here

 

Transcript for Financial Vortex: What Is it?

0:29
Welcome back to the Mullooly Asset Management Podcast. This is episode number 464.
I’m Tim Mullooly, and joining me today is Brendan Mullooly and Tom Mullooly. How’s it going, guys?

0:42
Good, so excited to chop it up about Goldman Sachs report. You brought this to our attention right.

0:49
Yes, Goldman Sachs calls us enough. We happen to come across an article talking about the findings of their recent survey, their retirement survey and Insights Report in 2023. So I think this came out in September, the middle of September.

1:09
That’s right, it talked about a financial vortex, not the thing that we used to throw out into the backyard.

1:14
The Nerf football that was actually really cool John. Elway made the whistling sound Very cool.

1:21
Thrown across the entire yard, it’s also not the vortex that RA Dickey used to talk about all the time.

1:29
OK.

1:29
So when the Mets were very bad, he used that term a lot, saying if you talk about losing all the time, you’re going to be in a negative downward vortex.

1:38
Different vortex not talking about baseball, but kind of similar in terms of what the vortex in this sense a negative, downward financial vortex. I think their definition of their financial vortex was just things that will negatively impact or drag down people’s ability to retire or use their retirement funds to the best of their ability. So that was the save for retirement, Save for retirement Right. And then live in retirement yet.

2:08
So that was the backdrop behind the data that came out of this report, this financial vortex that they’re referring to, that most Americans today who are in position to retire soon are facing what they felt was an unusual financial vortex of things, where they have to make sure that they’ve got emergency savings for themselves, that they are also in a position where they’re paying college costs for maybe some family members and they’re also being pressed into service to take care of older family members like a parent.

2:47
Yeah, it was interesting because they talked about how, right off the bat, how more people and workers in the US are saving more money and believe that their retirement is on track and they’re doing well, but at the same time, the factors from this financial vortex are also worsening. So I don’t know. I was reading and thinking are the factors actually worsening over the years compared to other people that have retired, or are people’s mindsets just more negative nowadays? I don’t know. What did you guys take away from that?

3:23
I mean, you’re right, you’ve always got competing interests when it comes to where your dollars are going, and that’s true whether you’re working or you’re not working, in terms of what life stage you’re at. So I guess it’s to me it’s always about prioritizing where your dollars are going and making sure that aligns with what’s important to you.

And so those are a difficult set of circumstances. I guess it’s a generation of people now maybe approaching retirement or in it already that feel like they’re supporting three generations in a way, and that’s challenging, but it doesn’t mean you can’t plan for it. I mean removing the spending categories let’s call them in terms of where the dollars are going.

I mean you can still break it down the same way that we usually do for folks, in terms of what resources are available whether it’s savings or earning money from employment or pensions, social security and assess how ready you are to handle that. I mean that’s what it boils down to. So I don’t know.

4:27
I don’t know if that’s any different than in the past.

4:30
If this is newer, I mean people are living longer, I mean there’s that. So I mean I don’t know. But I also don’t think that the roles have necessarily changed drastically from one generation to the next. I think the costs of putting family members through college has drastically changed.

I also think that, as you just said, people are living longer and so the cost of maintaining a lifestyle through more years has become more, but the obligation of taking care of your family I don’t think that’s ever changed. I just think that we’ve been conditioned I shouldn’t say we, as everybody, but I think many people are conditioned to think of oh, I have to go to this job five days a week.

I can’t wait for the time when I’m retired and I can have a margarita at three o’clock and Jimmy Buffett’s playing music somewhere. I think that mystical notion of what retirement is gonna look like is more fantasy than reality for a lot of people.

5:39
I was thinking maybe just the awareness has, like the reality is setting in and the anxiety around retirement is causing these people, even though they’re saving more money, they’re in a better position financially, but at the same time they’re worried about this financial vortex.

It’s like, well, maybe the financial vortex and all the factors haven’t changed that much and the roles and all of that hasn’t changed. It’s just that now retirement is on your doorstep and you’re starting to freak out about it. That may be pretty accurate, it’s just closing in on you now and you can feel the pressure of I’m not gonna be making money anymore, like do I have enough?

Ah, and as it gets into it, like there are plenty of numbers from people who do and don’t have plans, and how their feelings differ, so I know there are a lot of different percentages that they have listed out, maybe things are a little bit different or maybe it’s kind of reaching ahead for folks.

6:38
Because if you think about being the sandwich generation in this hypothetical, I guess if we’re talking about inflation and how things cost more over time, you definitely feel it more in two of the areas we just described costs for higher education and costs for healthcare and so I mean that’s just maybe thinking of pressure points.

Like maybe there is a little something to that in terms of those things have compounded at far higher rates of inflation than just the average basket of goods that CPI measures. And so maybe there is a little bit of truth there in terms of feeling extra pressure, because even if you’re making more over time presumably you are one of the things we forget about inflation is things cost more over time.

7:24
Usually as a result wages going up too.

7:27
You can’t have one without the other, or at least not out of thin as the world when you get to make more and everything costs the same or less. That’s not how it works, even though that’s usually how we think of it.

When we get a raise is like, oh, this is great, but in the aggregate, if we’re all getting raises, then companies can also charge more for what you need to buy, and that’s how it all works out. And if education and healthcare are costing much more and it’s surpassing your wage growth, then that can hurt.

I guess I know that when this topic has come up on other podcasts and videos, I still shake my head when I read stats like 36% of people that responded to this survey don’t have three months of expenses banked away as an emergency fund. I just feel like they are on the precipice of a disaster, and a disaster could be in the form of your car not starting tomorrow morning or something like that.

8:29
I feel like people if they don’t have the money just saved for emergencies in a savings account. I feel like a lot of people do have that money, but it was just put in the wrong place.

So it’s like they can get to that money if they need it when the emergency happened, but it’s not in the place that it should have been, like it’s in an investment account, or it was invested and it shouldn’t have been, or it’s in a workplace retirement plan. Now they have to either take a loan or take an early withdrawal, or it’s not easy to get to and you might have to even pay a penalty to get to it. But people have the money. It’s just they put it in the wrong place.

9:05
Yeah, I mean I feel for the people that genuinely don’t have the funds to do that as a result of just not earning enough, Like that is a problem. But to Tim’s point, if it’s just a wrong sizing, if there is such a phrase of where your dollars are going, that’s a fixable error. And one that we do unfortunately come across quite often, I think.

9:25
You see people with like 90 plus percent of their net worth, just like in retirement plans, and they can’t necessarily get to it right away.

9:34
Right, then they can’t get right down.

9:36
It’s like great.

9:37
You’re investing for the long term. You’re probably earning less than the interest you’re being charged on the credit cards and it would be better to have less in your retirement accounts and no credit card debt compounding and eating away your net worth Right. And that’s solvable with some planning work right, considering the numbers and where the dollars would be best channeled. Yeah Sidebar discussion to this. There were times where we would see participants taking loans from their retirement plans at work and typically the loan is charged prime rate plus 1%. Do you know where the prime rate is today?

10:12
Not off the top of my head, but I can assume it’s probably pretty high.

10:15
It’s 8.5%. So if you’re taking a loan from your 401k, you should expect to pay 9.5%. It’s interesting, though, because we think of it in terms of interest rate on other debt and it’s kind of dissimilar.

I would still advocate for not doing that, but if you’re paying the loan back at 9%, it’s actually better to your overall finances than when you were paying it back at 2 or 3, because 2 or 3 is short of what we would expect the market to do over the long term. So if you’re paying it back at 2 or 3, like five years ago, let’s say that would drag on your returns presumably not every year, but on average it’s going to.

10:53
It won’t be a punishment now.

10:55
Now it’s like you know, maybe that’s break even with the long term expectations for stock, so not so bad, but it would still be better to not be in that position in the first place. Sure because the problem is you still need the cash flow every month to pay, to make the loan payments, and you took the loan out because you didn’t have the cash flow.

11:15
Cash flow matters.

11:15
I know people want to speed along and hear our thoughts on, you know, whatever crypto whatever hot sector. There is or price targets or what we think of the market, and that’s cool, like I love talking about the market, but if you’re not doing the cash flow rate, there’s no point in even discussing the stock market. Yeah, 100%, right, yeah.

11:34
And I think you know. One of the sections that they talked about in the article was how unexpected events can lead to unexpected consequences in retirement and logically that makes sense. You know, if you have a lot of unplanned expenses coming up, yeah that’s gonna hurt your overall portfolio and your overall retirement plan. They said in this Goldman Sachs article, 44% cashed out retirement savings at least once upon a job change and that was up from 42%.

I think the big number that I saw was that 39% left the workforce to provide caregiving and that number was up from 22%. All the other numbers that they gave were up like 2% to 3% from the previous number. This one was up 17%. So that’s a pretty big increase from the previous report just to leave the workforce to provide caregiving.

12:34
And I think some people went from full-time to just leave to take care of a family member for health-related reasons, but a large number of people went from full-time to part-time. Both of these scenarios are going to impact your short-term cash flow and your long-term ability to save for your own retirement. It’s troubling.

Yeah, it’s tough. I mean that’s a full-time job or, like you said, if you’ve gone part-time at work, it’s at least part-time. So if you’re earning something, still, that’s great. But if you don’t have enough resources to make ends meet, it’s not like your time is available to earn money, like it is when you’re working during your career. So that is a difficult position to be in.

13:23
Yeah, they mentioned financial literacy in this article and people that either managed their own finances or sought out professional help, and it was interesting to me that they referenced like the big five financial literacy questions. I guess if you’re able to answer these five questions correctly, you have like a very baseline understanding of finances in general. The people that answered those questions correctly were more likely to not manage their own finances and ask for help, versus the people who couldn’t answer those questions correctly were the ones actually managing their own money? It seemed kind of backwards to me, but I guess I don’t know.

14:12
So if you’re not aware of what goes into properly managing finances, then it’s easier to just do whatever feels right, whether that is technically correct or not, I suppose.

14:26
I feel like that coincides with having just like an overall plan in general, especially for retirement, and they talked about that in the article too. The numbers that they shared we’ll link to all of this in the show notes, but the numbers they shared of people who actually have a plan and made a plan for retirement are not really feeling overwhelmed by this financial vortex, or less so than people without a plan, and that lines up perfectly with what we believe.

14:55
Yeah, my takeaway from that was that the stress levels were higher for folks that had not put together some kind of any kind of plan, and they really just didn’t know, from day to day or month to month, what was going on and what the future might bring, and that would make me uneasy for sure.

15:14
I agree, Flying by the seat of your pants. Going into retirement with things costing more than they have in the past is just a recipe for sleepless nights, I’m sure.

15:25
So there was some quote in there that I thought was pretty good.

15:28
Yeah, so the one that we had highlighted was saying that the difference between dreams and goals is action. So I think that makes sense. You know, if you have, dreams and goals are essentially the same thing, but when you’re actually taking action towards them, they become more attainable goals and less lofty dreams up in the clouds, right.

15:50
And kind of the act of what we do for folks. There’s two statements that come to mind. So it’s that a portfolio without a plan is just speculation, but a plan without a portfolio is just a wish list, Right? And so you kind of have to put those things together for either of them to have value or be appropriate.

16:12
Yeah.

16:13
And I think that you know that kind of goes along with that quote there. In terms of dreams, dreams and goals, I mean, the whole act of planning is quantifying them and, at least in the best terms we can, identifying how you can make them happen. Well, I think that’s a big part of what you guys bring to the table is discussing with clients the probabilities of these different outcomes, the probabilities of these different scenarios we’re often talking about.

Well, I should say we’re talking with folks about hey, should we? Is it realistic for us to afford a second place in retirement?

You know a condo in Florida or a lake house in upstate New York, or you know, is it feasible to get a boat in retirement? Is it feasible to do some of these things? And what you guys are bringing to the table is you’re showing people the probabilities. You know if you take this route, you have to be ready for this. If you take that route, you have to be ready for this different outcome.

17:22
Yeah, not really our jobs to say yes or no definitively, like, yes, you can do this or no, you may not do this, it’s their money, they can do what they want with it.

But we’re just providing the context and education to help them make the best decision possible. And we hope that all of our clients do make the best decisions possible. But, yeah, we’re not going to, we’re not going to tell you no, you can’t, unless they specifically ask like hey, but even then you know we leave it up to them to make the decisions.

Planning in general is extremely important and that was the main takeaway. As I was reading through this article, before it got to the point where they were talking about the percentages of people who do and don’t have plans, I was like, wow, this all just speaks to the point of like having an actual plane in place. And then it got to that section in the article and I was like, oh, there you go.

18:13
I mean, you just want to give your money a purpose, because if there isn’t one, I think it’s easy to get mixed up in whatever the heck feels good in the moment, and I don’t know.

That might be fulfilling short term, but probably not long term, and so just making sure you have at least a clear framework for how you’re going to operate, whether you’re still saving or whether you’re starting to draw it down, I think that’s the point of all of this. So Goldman Sachs does provide retirement plan administration, and so one of the things that they asked in the survey was what do participants want in the terms of help from or through their retirement plan?

18:56
Yeah, I think they were talking about how employees might need more services. I guess education and they called it financial resiliency and personalized planning services to kind of help, in quotes, navigate the financial vortex. I definitely agree. Obviously, more education and more planning help would definitely benefit people if they choose to take advantage of that. But I know we’ve talked about it in the past where it’s like how much of the responsibility do these 401k plan and employers have to educate their employees?

19:34
What do they have over their employees beyond the framework to do some of these things. So maybe there’s some adjustments in terms of the offerings that could be made to speak more to what people are saying that they want. But saying that you want something and then doing it are two very different things and we talk about that with folks too and as part of our planning process is saying you want planning help from an advisor is one thing, but then there’s a bit of effort to give the advisor the appropriate context to give you guidance.

20:06
Oftentimes we’re giving people homework, yeah, and that’s part of it.

20:10
I wish it didn’t have to be that way. I wish it could be simpler, but you can’t effectively give people advice and help if they don’t also participate. So if retirement plans offer some of these changes that the article here gets to, eventually, I wonder how many people, on a percentage basis, would actually do or take advantage of those new offerings if employers were to implement them, versus how many said that they would.

Yeah, it’s kind of funny to think. 60 years ago people thought of their employer as lifetime employment. Start, start from there and work your way back. Okay, well, now you’re not going to get a pension and now you have to save on your own for retirement. Now you have to pay for health care and chip, chip, chip, chip, chip.

They’re just one by one taking things away and and finally we’re getting to the point where people are starting to realize A small percentage of people are starting to realize that I can’t rely on my employer for all of these things. I have to prepare for my own retirement. I have to prepare for what my future is going to look like.

21:16
That’s one of I think that’s fair.

21:18
Yeah, not to go off the reservation, but that’s like one of the important elements of social security, I think is is just having a framework for people that like Don’t do anything on their own because you have to contribute up to a certain wage base and it saves some people in retirement from poverty.

Otherwise, because because left to our own devices devices, I’ll just say us, as in everybody we’re probably going to do as little as possible. So unless somebody makes it very clear to someone that they have A reason that motivates them to do something like, say, for retirement which is tough to say because it’s often decades in the future Then they’re probably not going to do it. And so it’s great to have one piece of Social framework in place.

That kind of Almost mirrors an age of the past in terms of like somebody is Doing something to ensure that the elderly have some income one day, and like we all grumble about having 7.65 of our wages plus, you know, go to social security, medicare. But I think it’s important for a lot of people.

22:20
I feel like if you were to try and force, like if your employer tried to force you to take Financial education course, like even if they were to offer it and and they made it, and they made you do it, people would complain about that too Sure, so you wouldn’t get the same amount out of it.

22:35
It’s like yeah.

22:36
It’s like how you got it back to do it back in high school.

22:39
You get assigned a book and it’s like I’m not going to read this thing, I’m just going to do the bare minimum to pass the test. And then in the future it’s like, oh, maybe I actually want to read this thing because it’s because it’s like a nice piece of literature and when you choose to read it, you might enjoy it.

22:52
Oh, this actually is a good book. Thinking of you “Animal Farm”!

22:56
Oh wow. I had to read that too.

22:59
Yeah, everybody didn’t read it in the air quotes, like I actually absorbed that in high school. But I don’t know right the, the whole idea of like wanting to do something and participate in it and what you get out of it, as opposed to being forced to forcing.

23:11
Yeah, there was a lot to unpack there in the in the Goldman Sachs article. A lot of it boils down to just having a plan and that’ll ease some of the tensions of the financial vortex. That’s going to wrap up episode 464 of the Malouli asset management podcast. Thanks for listening and we’ll see you on the next episode.

23:29
Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions in securities discussed in this podcast.

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