Business Innovators Radio - Interview With Chris Patterson, Retirement Income Strategist Discussing Sequence of Returns Risk

Episode Date: September 7, 2024

Chris is a CPA/retirement strategist/basketball coach/husband/father!He has been assisting clients with tax and retirement income strategies for over 25 years. He loves what he does and wants to assist as many people as possible.Learn More: https://innovatemyplan.com/Past performance is not a guarantee of future performance. All strategy recommendations must be associated with a full review of a client’s personal situation.Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-chris-patterson-retirement-income-strategist-discussing-sequence-of-returns-risk

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of influential entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have with us Chris Patterson, who's a retirement income strategist and we'll be talking about sequence of returns risk. Chris, welcome to the program. Mike, how you doing? Hey, doing awesome.

And I'm looking forward to talking with you because it's always neat to hear people's perspectives on unique topics because I would venture to say that if we stopped 100 people on the street and said what sequence of returns, they would say have no clue. So I want to hear all about this and learn myself. But before we dive into that, give us a little bit of your story and your background and how did you get into financial services in the first place? Yeah, absolutely. Thanks for asking. So my background is a little bit unique from the perspective that I kind of took a little bit of a winding road to kind of end up in the same place. So what I mean by that is I played basketball in college and basketball was sort of my life. It was all I wanted to do.

And as most of us come to the realization, you know, once we hit a certain point that basketball is not going to continue. And so kind of long story short, I graduated from college in 1997 with a degree in business management and went into professional life and fairly quickly realized that my degree was sort of generic and didn't really give me any real advantage on anything. So ended up going back to school and getting an accounting degree. and the reason I did that is my dad was a CPA and had run his own practice for years. And so I told my dad, hey, I'm going to go back getting an accounting degree and I want to come work for you. And after he stopped laughing, he said, you know, okay, that's great. I get your degree and then we'll talk. And so I did that.

And to his surprise, I think, after I got the degree, he brought me on and started working with him and his attacks. accounting practice, nothing to do with financial planning. But my original job out of college with my business management degree was working for an insurance company selling life insurance, mutual funds, that sort of stuff, and was not super fun. I liked the planning aspect. I didn't like the selling aspect, right? So anyway, got my accounting degree, went to work for dad, and really started working on the audit side of the practice, which is a kind of a painful, miserable experience, if anybody has ever done any of that work. And I realized fairly quickly, I did not want to continue doing that. So it got more into the tax side, which evolved into tax planning,

which eventually evolved into financial planning. And so around, I joined Dad in 2000. and around 2007, 2008, when everything was going kind of crazy, we started to get a lot of questions on, what should I do with my money, what's going to happen with the economy, the market, you know, questions that at the time we were comfortable answering, but we really weren't necessarily qualified because of licensing and all of that stuff. So I kind of realized, hey, there's sort of an opportunity here. We've got a lot of great clients that we have great relationships with. and I want to be able to advise them.

So we ended up forming our own registered investment advisory firm that was in around 2010 and kind of grew that on the RAA side or registered investment advisory side. We're still doing tax work, doing tax planning, doing the financial planning, managing money for clients. And basically, fast forward to about 2021, it kind of got to the point where it was really difficult for me to manage, you know, sort of individually with just a couple of people with me. So I ended up rolling my practice into LifeWorks advisors, which is where I am now, and love the work that I do. My focus is on, you know, tax and retirement income strategies and just absolutely

thoroughly enjoy the work that I do and the folks that I work with. Yeah, and I'm sure with that background and accounting and numbers and probably working with a lot of businesses, you've got a unique perspective to see how the backside of numbers and retirement and investing and returns come in. So I think that's going to play a lot in how you're serving your clients, don't you think? Absolutely. You know, I always tell, you know, clients and, you know, newer clients that we sort of begin with the end in mind. In other words, we'll kind of look at high level what we think a strategy should maybe be.

and then I work it through a tax return and kind of look what it actually looks like in terms of the end result and the actual tax impact to the client. And then we kind of tweak and adjust from there. So a little bit of a unique perspective, you know, in the advisory world. But I think it's really beneficial for clients. Yeah, 100%. So I know we're going to talk about sequence of returns. Why don't we go ahead and first before we talk about the risk of sequence of returns. Let's define it.

What is sequence of returns? Yeah, so the sequence of returns is kind of what it sounds like, where anytime you have an investment, anytime a client has an investment, there is going to be a sequence of returns. That's just unavoidable, right? Even if it's 5% in perpetuity, that's the sequence of returns, right? So it's basically, you know, if you're earning 10% and then 8%, and then 6% and then negative 4, it's the sequence of those returns year after year after year. And the sequence of returns really doesn't matter if you are not withdrawing money from the portfolio.

But when you're withdrawing money from the portfolio, that's where the sequence of returns risk actually comes into play. So sequence of returns is just literally the sequence of the rates of return that you're getting in your investment portfolio. Okay. So that's the, so every year, here's your return. You open up your statement and there's my return. So the sequence of returns is what was three years ago, what was two years ago, what was last year, and what is this year. So that's the sequence. And then where does the risk come in? Yep. So that's a great question. So the risk comes in in the timing and or the sequence of those returns. And to give kind of a real world example, again, if you're not. pulling money out of a portfolio, the sequence of returns is really kind of irrelevant. But I'll give you an example here. If you go back to 2000, 2001, 2002, right, three negative years in a row, if we took a million dollar portfolio, okay, and we started with the year 2020 and went in descending order, so 2020, 2019, 2018, 2018, 2017. If we used that sequence of returns with 2002, 2001, and 2000, being the last three years in the sequence.

Okay. So a million dollar portfolio. We're taking $55,000 per year out of the portfolio. And we're beginning with the 2020 returns and then going into the 20,000. descending order. So your sequence of returns would be 2020 would be 16.26 using the S&P 500, 2019, 28.88%, and on down the road with all of the returns year by year. The last three years, 2002, 2001, 2000 would be your negative years, 23.37, 13.34 and 10.14. Okay. So again, just to reiterate, a million dollar portfolio withdrawing $55,000 over a 20-year

period, if we started with positive returns beginning in the year 2020, we would end up with a little over $1.2 million in the portfolio. Okay. But if we flipped the sequence of those returns, and we started with the year 2000, right? So we started with negative 10.14, and then we had a negative 13.04 and a negative 23.37, right? Same set of criteria, a million dollar portfolio. $55,000 withdrawals, annual withdrawals, we would have run out of money by 2014. Okay. Yeah. So just to reiterate, okay, million dollar portfolio withdrawing $55,000 per year, okay,

sequence of returns using, beginning with the year 2020, going all the way back to the year 2000, beginning with positive returns. up a little over 1.2 million. Okay. Flip that sequence of returns. We start out with three negative years with a million dollar portfolio withdrawing $55,000 per year. We run out of money after 14 years. So that's the power or the danger of the sequence of returns risk.

Now, the obvious dilemma here is, well, how do you know? We don't, right? I have no idea that 2000 and 2002 would be three double-digit negative return years. I had no idea that 2003 would be over 26 percent to the good. So you have to mitigate that risk and sort of prepare for the unknown and protect the portfolio and try to help avoid that sequence of returns risk. So it seems to me, as you were describing that, it reminds me of like the analogy or the actual calculation of compound interest. You know, when you put money in and then it grows and then it compounds,

compounds, compounds, well, the compounding effect of taking money out because you need it, maybe you need it to live and market losses, it's compounding and amplifying the negative, negativity because, yeah, you see the market going down, but you need that money this year to live, right? So there's that compound effect. Absolutely. And there's actually a phrase for it. And most people are familiar with the phrase dollar cost averaging where you're putting in the same amount of money over time. We call it dollar cost ravaging when we see those negative sequence of returns and when that risk comes into play.

So if you're pulling that money out in down markets, you really are running the risk, especially if you've got to pull out 6, 7, 8% of the portfolio per year to live on, which a lot of people do. You're really running the risk of running out of money, you know, before you're going to put it bluntly. Now, on the flip side, if the market is doing great and you have to take money out and you're getting wonderful, returns, then none of this matters. But to your point that you said earlier, how do you know? When do you know the market can flip on a dime just because some world leader slept wrong last night? So you just never know that. And the volatility then amplifies that risk. That's it. And you nailed it. And it's really those first two, three, four years of retirement when you're pulling money out,

if we see positive 8%, 10%, 6%, 15%, then everything's fine, right, in those first few years. But if we see that patterning period of 2001, 2002, and you're pulling money out, yeah, we've got a real problem on our hands. Now, obviously, the obvious question is how does that impact your retirement? And we've covered it. It negatively impacts your retirement when you have to take money out and the market's falling and you're getting compounded negative, you know, amplification like we just mentioned there. But let's talk a little bit about the what I would say, the unthought of or the unsaid impact. Yes, it's negatively impacting your retirement because now you thought you had X number of dollars

and now it's going down in larger chunks that you're standing by throwing your hands up going, there's nothing I can do about it. My money's in the market. It's going down. I need this amount to live every year. And so doesn't that factor in psychological aspects of worry, fear, doubt, all of that? And maybe a client goes, we need to recover from last year. So let's move it into this and this and this.

And then there's the temptation that maybe you're going to take some extra risk to recover and get back on track. And then that's like chasing a falling knife, I would suspect. You're absolutely right. And what you described, there's sort of an opposite. scenario that we see more often where if a client hasn't planned and prepared for that sequence of return risk, and let's say they experience a year or two of those negative returns, and then they move to cash or they move to even right now where we're in a slightly elevated interest rate environment, if they move to something that's earning four, four and

have 5%. That's an even more dangerous scenario because you look at 2000, 2001, 2002, and then 2003, the S&P returned over 26%. Right? And so you, it's in the same thing when you look at 2008, you know, everyone was so fearful. And then 2009 was a great year in the market. But it's kind of like, okay, well, well, we had to get out because we were so scared and we're pulling money out of the portfolio and we didn't have a plan, well, what's our plan to get back in? When do we get back in? And how much of that upside now have you missed and created, it just exacerbated the problem even more. And that's why a structured plan, a structured portfolio is so important when we're talking about the distribution phase, you know, in retirement.

So obviously you want to say, how do you eliminate or lower or mitigate? Well, you can't ever say how do you, how do you eliminate the risk? Because it can't. Risk is there. But how do you mitigate it? And I think your answer is what you just said. They're a structured portfolio. So talk a little bit about what that does, how a structured portfolio can help maybe just smooth out that risk a little bit.

Yeah, absolutely. So really in that scenario, it all comes back to cash flows for the client. Now, that might seem a little bit abstract without kind of looking at a plan. but what I mean by that is you've got to structure kind of a bucket approach in your retirement, right? So you've got kind of your cash on hand, your safe money, call that bucket one. You've got some protected funds, right, which might be, you know, years, you know, three to 10 of the net cash flow need for the client. And then, you know, years 10 plus, you know, that's obviously long-term money primarily invested in the market. Well, that second bucket, that becomes the most critical bucket.

So whether you're using, you know, an option strategy or, you know, treasuries or CDs or, you know, an annuity, a fixed annuity to protect a portion of the account to avoid that damaging sequence of returns risk, you've got to build that out and structure it so that the client understands, okay, where am I pulling money from and when am I pulling it? And what if the market does go to hell in a hand basket? You know, what's my answer then? And that's where the structure comes into play because we're already accounting for those negative years. We're planning for the worst and hoping for the best. But if the worst comes, where we have three double-digit negative years of returns, we know how to manage through that. It's already built out.

You know, it's already baked into the plan, so to speak, you know, and the client, you know, can sleep at night. Yeah, I think that's the biggest piece right there is you don't want to open up that quarterly or annual statement and just have like your wind knocked out of you because, oh, my goodness, look at what happened. So having that peace of mind is just huge and massive. And what we were describing here with sequence of returns and amplification, this and balance. It's not something you can just go Google and say how to do that. this and then set it up. And, and, you know, Google and online and chat GPT is great for, you know, how do you fix my, you know, whatever device that just broke. Oh, you do this. But you can't do it when you're talking about your retirement. You need to have someone that knows what they're doing.

And even if it's just a check off in your mind that the plan you currently are on is a good one. So maybe getting that second opinion. So, Chris, if someone is listening to this going, and maybe I'm being, you know, subjected to secrets of returns. Let me take that second opinion kind of approach and reach out and connect with you. How can they do that and then have you take a look and see what their portfolio is looking like? Yeah, absolutely. They can call. They can reach me directly right on my personal cell at 904-3331960.

I'll just say it again real quick. It's 904-333-1960. they can call or text or if you want to reach out via email, my email is CAP at lifeworksadvisors.com. I know that's a little bit long, so I'll say it again, CAP at lifeworksadvisors.com. And again, call email text. I'm happy to chat with anybody that has some concerns around that. Excellent. Well, Chris, thank you so much for coming on.

It's been a real pleasure talking with you today. Absolutely, Mike. Thanks so much for having me. You've been listening to Influential Entrepreneurs with Mike Saunders. To learn more about the resources mentioned on today's show or listen to past episodes, visit www.com. Influential EntrepreneursRadio.com.