Influential Entrepreneurs with Mike Saunders, MBA - Interview with Edwin Mays with MaysGroup Advisors Discussing Sequence of Returns Risk

Starting point is 00:00:00 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 back with us, Edwin Mays, with Mays Group advisors, and we'll be talking about the silent killer sequence of returns risk. Edwin, welcome back to the program. Nice to speak with you, Mike. Hey, it's good to have you back, and I think that this is an interesting topic because I think people would scratch their head and go, what in the world is sequence of returns?

Starting point is 00:00:44 So I think, first of all, let's define it. What actually is sequence of returns, and why is that such a risk? Well, sequence of returns risk is, as they said, is the silent killer of retirement plans because the few market laws. losses early on in retirement can drain your savings years too soon. And see, when loss is hit early, your account takes a double hit. See, it drops from the market decline. And then again, when you withdraw from that smaller balance, so I compare it to walking across a frozen lake, you know, I grew up in Michigan, we've done that.

Starting point is 00:01:23 Yep, land of lakes. Yeah, you've prepared well, you have a warm coat on, you put your sturdy boots on. And you planned your route, but early in retirement, that ice is still thin. And one wrong step, a sudden market drop, for example, and all that preparation can shatter in seconds, you can just fall through before you even reach the other side. Because, you're, for example, the first three years, the 2000s, the market went down 47%. So imagine taking out money in year 2000 to 2000.

Starting point is 00:02:00 three and just the market is down almost 50% let alone your withdrawals yeah and and it's not like oh i shouldn't have pulled the money out it's like if you're in retirement and you needed x number of dollars this month this quarter you've got to take it out because that's what you planned to do yeah you need to do that for well number one um you need to do it just to put food on the table, but number two, you might have to do it because of required minimum distributions, right? So you're really up against it in those cases. And sometimes it's not a matter of, oh, I'll just take it out of this account because

Starting point is 00:02:42 that market's not down. If the market's down and you have to take it out, you're getting that double hit like you mentioned. That's correct. And it hurts pre-retirees as well. because let's go back to 2000 again. If you're six years of age and you want to retire in five years, for example, and that market goes down almost 50% in just the first couple years,

Starting point is 00:03:07 you've delayed your plans by at least five years. So it's a very dangerous phenomenon. And it's dangerous. The danger is accelerated because you feel like, you know, your stress levels are amped up and you're like, ooh, I've got to get to this certain number by this certain age, and now the markets are down. And I did take money out. So now I've got to get there quicker and recoup it. So then that means they could potentially take some extra risk that they shouldn't be taken and trying to get back to that ground zero. So it's just really an interesting concept there. Talk a little bit about the math behind it. Like if two investors wanted, you know, they get the same return. How can one, run out of money years earlier than the other, and they're averaging the same return. Well, it all comes down to timing. You know, average returns don't tell the whole story.

Starting point is 00:04:06 The sequence of those returns tells the story. So when you're retired and taking withdrawals, early losses hit twice as hard. So I always tell clients to picture two hikers on the same trail. They're climbing towards the same summit. One starts on a calm, sunny morning, and the other begins in a storm. It's cold, rain, the wind is strong, slippery rocks, but it's the same mountain, same goal. But the one fighting the storm early burns through his food, energy, and confidence, just trying to stay upright. That's exactly what happens when a retiree faces a market downturn early on.

Starting point is 00:04:46 And so they both had the same average return or same mark. a mountain to climb, but the storm drains your resources long before you can reach your destination. Similar to like when you watch in the Olympics, the sprinters versus the long distance runners. Well, in a long distance race, you don't start off sprinting because then you run out of gas and then everyone overtakes you. Exactly.

Starting point is 00:05:11 Same exact. Yeah, really, really good analogy. So let's think about something. I know that sometimes people think, oh, I'm going to get this return or this, a lot of times people have misconceptions about the average returns. Why averaging 7% isn't the same thing as actually getting 7%. But it comes down to that timing issue again, right? It's the timing. It's the timing. You know, if a 65-year-old man in the year 2000, who has a million dollars in retirement savings, if he's taking out 4% or $40,000 a year, which sounds like a small sum,

Starting point is 00:05:50 but by year 17 that million dollars would be zero his entire portfolio would have been wiped out just because of the sequence of returns now over the last 25 years since since 2000 the market has averaged 8% around 8% yet he was he ran out of money after year 17 that's how the math doesn't measure up to what prognosticators talk about when you're referring to averages. The realization of those, of your dollars, your retirement dollars, means everything. You know, a lot of people think that, quote, unquote, the market always comes back. Why is that dangerous when someone's taking distributions in retirement?

Starting point is 00:06:43 it. Well, it's extremely dangerous because the math doesn't work. If you have a 50% decline, for example, that requires 100% return just to break even. Who would have thought? Yeah. And for the average bear market, which the decline is 38%, that requires a 62% break even point. And that takes on average around seven years. You know, most retirees, they don't have seven years just to get back to where they were before a bear market. Right. Yeah. You know, the age old question is, oh, all of these things, you know, you're talking about timing, timing, you don't have time to get back to and recoup. Obviously, the answer to this question of when should I start planning for retirement is as soon as possible. But what are some, if as soon as possible is the little.

Starting point is 00:07:43 Vig, at what age should people really be sharpening that pencil and putting some of these things into place to make sure that they're going to end up where they need to be? At least 10 years before they expect to retire. And the reason we say 10 years is because of that break-even factor when it comes to bear markets. Bear markets, again, happened around every five and a half years. So if you're 55 and you want to retire at age 65, you could have two bears before you retire. Yeah, you could be struggling almost at one and then have two right in that 10-year time frame.

Starting point is 00:08:25 You just don't know. Yep. You don't know. And that's the whole point is the unknowns. You know, I think that this is a, this risk, the sequence of return, the timing of this is something. that a lot of retirees don't know about. Where do a lot of advisors go wrong when it comes to educating their clients about this risk? Because I feel like potentially some advisors are like, oh, I don't want to get into the weeds of this sequence of returns. That's a complicated thing,

Starting point is 00:08:56 but they're doing their clients a disservice if they're not. So where does that play in? Well, the main reason why the majority of advisors do not have this discussion about sequence of returns is because they have no way to eliminate it. Oh. You know, the only way to eliminate sequence of returns risk is to have a floor of zero, a guaranteed floor of zero. You know, you'd have the best advisor, financial advisor on the planet, but they're not going to have a floor of zero product if they're dealing in risk investments.

Starting point is 00:09:35 It's just not there. So they're not going to talk about it. it. You have to get on the other side of the mountain as we talk about of retirement planning, which is the distribution phase, which we focus entirely on eliminating sequence of returns risk by creating a floor of zero. So I think that that makes a lot of sense, meaning let's, let's eliminate that risk by putting most of our focus on that guarantee. That eliminates risk. because when you say it's guaranteed, risk is off the table. What are some of those strategies and what does it look like to make sure we're preventing that?

Starting point is 00:10:15 You know, floor of zero, what does that mean? You know, if you said to me, oh, I recommend having a floor of zero and the action would be what? If you have a floor of zero, your growth rates are much higher after a downturn. So, for example, you place in $100,000. You invest in $100, goes up 10% one year, then down 10% to next, and that pattern repeats itself for 10 years. Most people think they'd break even. But the math tells a different story. Again, the pesky math.

Starting point is 00:10:52 After 10 years, your $100 would shrink to $95. But now if we add a 0% floor where your account never loses in a down year, every gain is locked in. Every loss is avoided, and these gains start compounding. And after those same 10 years, your $100 grows to $161. Wow. That's the power of a floor of zero. And when you're retired, avoiding losses matters a lot more than chasing returns. You know, there's a couple things you mentioned there that makes me think of a couple

Starting point is 00:11:28 points where our human nature is we tend to be more motivated by the fear of loss than the prospect of gain. Like, you know, if I said to you, hey, I just took a thousand dollars out of your bank account, you would be way more upset than if I said, hey, I think I can show you how to get a thousand dollars. So I think what you just described there is, boy, I don't want to have any losses, if at all possible. So having that floor of zero, having that guarantee, that's really a huge, um,

Starting point is 00:11:58 strategy, but also a gift to your clients when you have them realize that this isn't actually a possibility. And don't you have times where clients have come to you saying, while we put that strategy into place two years ago, and I keep having my friends come to me griping and complaining about their losses and losses that I'm just smiling going, I don't experience that. Yes. We have that conversation, but we also have the other conversation. the FOMO conversation

Starting point is 00:12:30 where their friends I don't want to be too conservative Yeah Yeah Yeah Their friends will brag over Over a burger or something And say well

Starting point is 00:12:40 I've had my accounts grow By 10, 15% The last four years And you know The safe money guy is like Well I don't have that growth But I feel confident That nothing's going to happen to me

Starting point is 00:12:53 Yeah It's like the people on social media that only post their great vacations, their great hair day, their great meal, and they never post the bad things, well, that same person over the burger isn't telling their friend about the big losses they had the year before. Right, right. Wow. So if listeners can take one action after hearing this conversation to protect their retirement

Starting point is 00:13:18 from sequence risk, what should that one thing be? The one thing is to know the math that the only. way, the only way to protect yourself from sequence of returns risk is to have a floor of zero. There is simply no other mechanism of preventing sequence of returns without a floor of zero. You know, that is huge, and I think that so many times you just can't go, it was like Warren Buffett said, what, you can't go broke, taking a profit, meaning even if that profit is 2%, take it, because you're not going to go broke taking any profit. So having that floor of zero, having that guarantee of rate of return where you can't lose money

Starting point is 00:14:03 ends up in the long run to be that steady plotting success story. So Evan, that has been so great to kind of clarify that sequence of returns risk and the solution of the floor of zero. So if someone is interested and seeing what that could look like for them, what would be the best way they can reach out and connect with you? They can always call me at 917, 940, 5835. We'll provide a complementary evaluation of what they have and where they want to go. And they can also look at our website, maizegroupadvisors.com.

Starting point is 00:14:40 Excellent. Well, Edwin, thank you so much for coming on today. It's been a real pleasure chatting with you again. Well, the pleasure is mine. Thank you for having me. You've been listening to influential entrepreneurs with Mike Saunders, Learn more about the resources mentioned on today's show or listen to past episodes. Visit www. Influential EntrepreneursRadio.com.

Influential Entrepreneurs with Mike Saunders, MBA - Interview with Edwin Mays with MaysGroup Advisors Discussing Sequence of Returns Risk

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