Photo by Hans Eiskonen on Unsplash
Hello and happy new year, Pension Geeks!
Welcome to Known Unknowns, a newsletter in a world that gets less risky each day, but somehow we keep thinking it is safer than it is.
Secure 2.0?
The labor market is still going strong, showing once again that supply matters more than demand. And, there was lots of drama in Congress and probably more to come. Lots of the drama was unproductive, but I’d rather see intra-party warfare than mindless spending on everything. It is easy to agree when no one must make hard choices.
Take the $1.7 trillion omnibus bill—so much for restraint in response to high inflation and rising interest rates. But I am most offended by Secure 2.0, or the retirement parts of the bill. There are lots of nice things in it, such as making annuities more attractive and making it easier for small employers to offer retirement accounts. But increasing the age at which people have to take RMDs to 75 (and up to 73 this year) is just offensive. I assume the justification is that people live and work longer (though taking a RMD does not mean you need to retire or even spend—just pay the tax you deferred years ago). But, if that’s the case, why is the mere mention of increasing the Social Security normal retirement age likened to “gutting the program?” To be charitable, you could argue people with significant retirement savings tend to be richer and they are the ones who are living longer. OK then, so this is a tax cut for the wealthy? Why now?
The RMD delay may be small potatoes in a $1.7 trillion bill, but it shows how unserious anyone is about asking anyone to pay for anything, especially retirement. Maybe there should be more disagreement in Congress.
What we should learn from the markets in 2022
I hate investing gurus. I’ll admit I have a dog in this fight. There were many years of study and lots and lots of hard math involved when I learned finance. So, when someone comes along on TikTok with some secret to making lots of money in the markets I am, to put it mildly, skeptical. After all, what did all that time and sacrifice mean if it is all so simple?
Actually, investing is pretty simple. Even the most complex financial model (credible ones) come down to one hard truth: there is no free lunch. If you are getting a return above the risk-free rate, then you are risking loss. If you are getting a return that’s bigger than the broader market, it is not that you’ve made smarter choices, you’ve just taken more risk and odds are, when the market turns, you will face a bigger loss.
Now, this is really obvious. No risk, no reward is even a cliché. But why then does no one ever seem to remember it when the market is up? Pretty much everything that was beating the market in the last few years is now down much more than the S&P 500—tech stocks, crypto, SPACs—pretty much everything that promised a higher return. Except, maybe private equity is still doing OK, but who knows what that is even worth?
I am not saying taking more risk is bad. Even leverage isn’t necessarily terrible. What’s bad is when people take on more risk and think it is risk free because this time they’ve beaten the market.
Nope.Iif someone tells you they can beat the market without some cost (liquidity, fees, or bigger risk), they are selling you something, and it’s not anything you want. If you pay for advice, it should be risk management—which is hard and, if done well, worth money—but not extra returns.
Taking stock
The world has undergone a cataclysmic change in the last three years. Pandemics do that. You see it in history over the last 1,000 years, and even in the Bible. They have a way of changing the course of our economy or speeding up trends that were already present.
It will take decades for the dust to settle on what changes really matter. But in my Bloomberg column, I made a few predictions. I think people will go back to restaurants, conferences, and eventually even the office most days of the week.
But we did change the economy. The impact of closing schools may be felt for generations. Inflation and high rates are back. Rates probably would have risen anyhow, just because many of the structural trends that brought them down were reversing—except aging populations—though I think that was always overrated. But it came on faster because inflation is back, as it is when you shut down an economy and spend a lot of money. And that one is hard to get rid of. Because once you awaken people to a risk, they don’t forget it.
I think, on balance, the pandemic revealed the world is much less risky. As bad as it was, it was not as bad as earlier pandemics because the world is safer—we have more money and technology to throw at our problems. But it also made it clear that we are never truly safe, and things you don’t expect can always shake up your world. And that awareness won’t go away any time soon.
In other news
Don’t increase the inflation target. A moving target is not a target.
Until next time, Pension Geeks!
Allison
Regarding RMDs, I think the change that was needed was a simple one that doesn't stand a chance to pass Congress. Make RMDs optional if total of pre-tax accounts is less than than $100k (round number, could be something else but adjust for inflation over time). However, require total of ALL pre-tax and Roth retirement accounts to be less than $10 million (another round number) per person and require the excess to be withdrawn within two years without the 10% penalty for early withdrawals. The bottom end waiver lets people without a lot of savings pick and choose when they take money out. The top end cap limits the benefits to the mass affluent and below . It prevents the gaming by the very wealthy where they put penny stocks from pre-IPO shares into tax advantaged accounts and then let the value explode if the stocks are successful. This eliminates the $100+ million Roth IRAs some of these people have. They don't pay penalties; they just have to release the money into the taxable world.
Regarding investment advice: Successful investing is pretty simple as a diversified primarily equity low cost index fund based portfolio will grow quite well over a working life. The two hard things are figuring out how to budget and save during working years to put enough money into the investments; and then how to withdraw the money in retirement to not run out while still spending enough to enjoy life. Unfortunately, the advice industry is largely focused on portfolio management and less on the other questions, probably because they are complex and difficult. It is laughable that much of the professional retirement withdrawal advice is still Bill Bengen's original 4% rule that he came up with in 1994. He asked a brilliant question that nobody else seemed to have focused on and then did a good simple simulation to begin to answer the question, thereby reframing withdrawal advice completely from the haphazard advice before. Bengen himself has largely moved on from the original recommendation. The financial advice industry needs to focus on good advice related to the complex and difficult questions. A decent, effective investment portfolio is not one of them.
all good points, well said