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Paul Harteg from DHG Wealth Advisors walks through a few strategies for retirees to keep a long-term perspective and first steps to consider during a period of stress in the stock market.



[0:00:09.7] JL: Welcome to today's edition of DHG's GrowthCast. I'm your host, John Locke. At DHG, our strength relies on our technical knowledge, our industry intelligence and our future focus. We understand business needs and are laser-focused on company goals. In this ever-changing world, DHG's GrowthCast provides insights and thought-provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace.

Thanks for joining us as we discuss tomorrow's needs today.

[0:00:42.3] ANNOUNCER: The views and concepts expressed by today's panelists are their own and not those of Dixon Hughes Goodman LLP. Always consult the advice of your legal and financial professional before taking any action.


[0:00:59.6] JL: Today's guest is Paul Harteg, DHG Wealth Advisors Chief Investment Officer. Paul has been a financial advisor in the firm's Greenville, South Carolina office since 2002. He graduated from Furman University at 1983 and has been a certified financial planner since 1988. Welcome, Paul.

[0:01:17.8] PH: Thank you, John. Glad to be here.

[0:01:20.2] JL: To start, we're all have watched the economy take numerous hits during the spread of the coronavirus across the world. Those with investments weren't sure of how to respond. If I'm a retiree living off my investments and I'm watching global markets decline, what's the first thing that you'd recommend, Paul?

[0:01:41.6] PH: Well John, I know it's hard to do when markets get volatile like they have been recently, but it's important for investors to remain calm and keep a long-term perspective. In most cases, their portfolio will only have a portion invested in stocks. The portfolio drawdown will not be nearly as bad as the negative return numbers that they're seeing in the media. Since most retirees are drawing a portion of their income from their investments, there are some first steps that you should consider during a period of stress in the stock market. Owning a diversified portfolio, including some cash reserves should allow you the flexibility to hit pause on withdrawals from your portfolio and draw on your cash reserves to meet your spending needs, while giving the markets time to recover.

[0:02:31.3] JL: Paul, what if I don't have the necessary cash cushion, and/or what if this market persists, this down market and I eventually need to go back and start taking distributions from my investment portfolio?

[0:02:43.3] PH: That's a great question. The answer depends on how your retirement portfolio is structured. Most retirees will need a portion of their – or fully invested in stocks in order to provide growth and the income will try to meet their goals for retirement. However, we know that stocks are risky and will occasionally experience negative periods like we are right now. The remaining portion of a retirement portfolio should consist of bonds. Bonds are a lot less risky than stocks and they act as a stabilizer for your portfolio.

Now everyone's situation is different, but during periods of weakness and stocks when drawing distributions from your accounts, you should first be taking dividends from your stock's interest and then consider supplementing that income with liquidations from the bond side of your account. This strategy can give your stock portion of your account time to recover. We offer a strategic life planning process to help retirees determine the appropriate allocation in their retirement portfolios, so feel free to reach out if you'd like to learn more about that.

[0:03:48.7] JL: Can you give us an example that some of our retirees out there might be able to relate to?

[0:03:54.4] PH: Yeah. Many times, the amount of income that you need to draw from your portfolios and retirement can help inform the allocation in your portfolio. For example, if you've got a client that that needs about $80,000 a year in income and let's say they have 30 of that coming in from social security, then that retirement income gap, so to speak, is $50,000 per year that's got to come from the portfolio.

Then, we look at history and we say, well, if you've held a portfolio diversified like the one that we would do and all stock mix like that, you may have needed about 10 years for that to be positive in all the rolling periods in the last five decades, okay? That might tell us that let's have at least $500,000 or 10 years' worth of that $50,000 retirement income gap need in bonds, so you could draw on that and give your stock portfolio time to recover. Does that make sense?

[0:04:58.5] JL: Yeah, that's total sense. Thank you. That's a great example. What are the tools that you as an advisor can use to benefit clients in a bear market?

[0:05:07.1] PH: Well, I'll tell you, as an asset class investor, portfolio rebalancing during periods of weakness can enhance the portfolio returns over time and allow portfolio to recover much quicker. For retirees, the strategy of drawing income from your bond funds that I just mentioned is a form of rebalancing, because if you're liquidating the bond side and using that for income, you're increasing the remaining portfolio allocation to stock funds, which should offer higher future expected returns from the pressed level.

Harvesting losses can be another effective strategy when stocks are depressed, but the benefit varies greatly depending on the person's personal tax situation, so we'd certainly coordinate this with your tax advisor before implementing a loss harvesting strategy. Harvesting losses involves selling a mutual fund or stock that has gone down in value since purchased and realizing a capital loss for tax purposes.

The nice thing about this is we can immediately purchase a fund that we believe will have the potential to rebound with the market, just as well as the fund we just sold, unless you're not really losing out on any growth. Once you realize that capital loss, it can then be used offset $3,000 dollars of ordinary income annually. More importantly, it can offset future capital gains. That may give you the flexibility to perhaps diversify a concentrated stock position, or eliminate a high-cost mutual fund that you've only been holding because you had a built-in capital gain.

[0:06:45.5] JL: Yeah. Well, we've all heard a lot about the CARES Act that's been in the news constantly for the last several months. A lot of the focus has been on what it means for business owners and their SBA loans and paycheck protection, etc. Is there also some provisions in there that benefit retirees? Can you address a few of those?

[0:07:08.2] PH: Sure, be glad to. The CARES Act includes a potential tax saving idea for those retirees making required distributions from their IRAs or retirement plans. You have the choice of waiving your required distribution for this year. Skipping that distribution entirely this year would save the taxes that the distribution otherwise would generate. It would also allow your portfolio some time to recover before next year's distributions due.

Now, each retiree situation is different and it should be evaluated on a case-by-case basis. For example, it might make more sense for many retirees listening today to take a lesser amount of the distribution and fill up a lower tax bracket, rather to skip the distribution entirely. Check with us or your CPA in order to make the best decision based on your circumstances prior to year-end.

I might just add too, John, that for those who are listening that are near or in retirement, you're in a period in your life when creating a coordinated retirement income distribution plan, which considers your goals and coordination with investment and tax planning can be a tremendous benefit. Your planning is more complicated now than any time in your life with decisions involving things like when to retire, whether to drawdown pre-tax retirement accounts early in your retirement, or utilize non-retirement assets, delay social security. Together, these choices can make a significant difference on the amount of lifetime income for you and remaining assets for your heirs.

[0:08:50.4] JL: Sounds like all of us need to be talking with our CPAs and our financial advisors at the same time as we head towards this retirement phase of life.

[0:09:02.3] PH: John, I couldn't agree more. You asked about the CARES Act. An important act that was passed just at the end of 2019 was the SECURE Act; I say an important act particularly for retirees. We did at DHG insights webinar on that and you can find that on our website.

[0:09:25.2] JL: Great. Well, after the 11-year bull, or I guess up market, many investors were feeling really secure about their retirement. Let's face it, going from the all-time highs in February to the lows we saw in March, wow, a lot of fear, right? I mean, people are really spooked by that. What words of wisdom do you have for those people right now to help them find financial clarity and some peace of mind?

[0:09:52.4] PH: We're in the midst of something that we've never seen before. Businesses are shut down, we're all wearing face masks in the grocery store. I mean, it's unprecedented. We're feeling that fear that we wouldn't have even dreamed of months ago. In my 35 years as an advisor, I haven't seen anything quite like this, but I have lived through a lot of other market downturns. Each time, they generate a lot of fear and uncertainty. For folks entering retirement now, I can promise you that there'll be many more uncertain times and unprecedented events over your 20-plus years that you will live in retirement.

The stock market has been resilient over time, and because people and businesses are resilient and they adapt. If you believe like we do that this will continue to be true in the future, then you're going to want to have some portion of your retirement savings invested in stocks. The long-term return for stocks, including all the down periods like the recent one, it's about 6% the rate of inflation annually. That type of growth is really helpful to achieving your retirement goals that you have for you your family, especially considering the low rate environment in which we find ourselves in once again.

[0:11:08.9] JL: Yeah. It's an unprecedented time of uncertainty, but your words of wisdom to just stay the course, stay connected with your financial advisor, your CPA and be strategic around both your tax and income planning here over the next few years is great advice. Thank you for sharing your insights on that.

[0:11:32.2] PH: John, I couldn't say that better myself. I might just add something that you don't hear often. I think staying the course is generally just such sound advice. I know we talked with Rick Kramer, who I have immense respect for and he talked about how you can miss out on rebounds and recoveries. I wanted to add one thing, it would not be uncommon for investors after formulating their retirement plan over the last decade when things were generally good and we were in a bull market as you mentioned, to overestimate the allocation to stocks that they should have in their retirement portfolio.

I wanted to mention that the thing about retirement is you've worked hard your entire life and you only get one shot at it. It's critical that you're honest with yourself, particularly at times like this. If this recent volatility in the markets has you seriously stressed out, you may need to rethink your strategy and find an allocation that'll allow you to be comfortable. It's not an ideal time to sell stocks, because prices are down, but hey, they were down a lot more in mid-March and they could fall again.

If you know from recent experience that you could not comfortably live with the volatility that could happen, then sell down to an allocation of stocks that you can stick with long-term, that may mean that you need a target allocation that is more conservative than what we might have thought just a few months ago at the height of the bull market, right?

I always tell my clients, for that portion of your portfolio that we invest in the stock market, we need to develop a plan that will allow us to stick with it long enough, so that you can reap the long-term benefits of stock ownership, which in my experience have been quite substantial.

[0:13:21.1] JL: Boy, that is great advice. Really take a hard look at your risk tolerance and your ability to handle volatility, because you should be enjoying your retirement, not being stressed out by watching all this go up and down. Great advice, Paul. Thanks so much for being with us today. It's been a pleasure having you on the show.

[0:13:39.8] PH: Well, thank you. I hope what we've talked about can be helpful to some of our retirees out there.

[0:13:45.4] JL: Oh, I believe it will be.

End of Interview

[0:13:47.6] JL: You've been listening to DHG GrowthCast today with Paul Harteg, Chief Investment Officer with DHG Wealth Advisors. We hope that you've learned a few tips from Paul that will help you with your investment strategy during the volatile economic time period that we are currently in.

I'm your host, John Locke, I look forward to reconnecting with you again soon on another edition of DHG GrowthCast.

[0:14:10.5] ANNOUNCER: The content in this podcast is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. The opinions expressed in this podcast are those of the participants only and do not necessarily represent the views of DHG Wealth Advisors.

The services, securities and financial instruments described in this podcast may not be available to or suitable for you and not all strategies are appropriate at all times. Any investments mentioned on this podcast may lose money. DHG Wealth Advisors makes no guarantee that you will profit from any investment or strategy described in this podcast.

Information in this podcast is believed to be accurate and reliable as to the time of the podcast and it may become inaccurate or outdated with the passage of time. Past results are not an indication of future performance. You should contact your financial advisor before making any investment decision.

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