Hello, and welcome to the Life By Design podcast, brought to you by Strategic. This podcast is all about helping you live your great life.

Each episode will feature insights from our Chief Investment Officer, Doug Walters. Hello, and welcome back to the Life By Design podcast.

I'm here again with Doug Walters. Hey, Jay, how are you?

I'm doing great. And so, Doug, what are we talking about this week?

All right. Well, we're gonna talk a little bit about the news from w- this week.

Mm-hmm. Perfect.

So, go that direction. Yeah.

A- and, you know, and I think this is something, um, as- as I've been learning and, uh, for those of you listening, if you look back, we had Aaron Evans on, and we kind of talked about retirement, but more on the front end of, like, what vehicles get you there. Right.

Like 401K, IRA, pension. Like, what- what are the different ways to get there?

A little bit about making sure you have enough for the long term. That's something Doug and I talked about.

Um, but today's- today's gonna be more focused on the investment side and talking about that and what's kind of happening behind the scenes- Right. Exactly.

of your 401K. Right.

Exactly. Okay.

So we had some news on inflation, so what was the news? Yeah.

So we have ou- our eye on inflation because, again, the Fed is focusing on trying to get inflation down to 2%. This week, we had consumer price index, which is one of the measures of inflation, and it came in at 2.7%.

If you recall, the Fed is targeting 2% inflation, so we're wanting to see that come down to that level. 2.7 is actually up from a month ago.

Okay. It was 2.4.

Mm-hmm. Now, 2.7 is what was expected, so no big surprise there, but it is going in the wrong direction.

Mm-hmm. And I think that's why it is newsworthy.

Okay. And I think it's also worth maybe just taking a moment to say, like, Why does any of this matter?

Yeah. Like, why is the Fed focused on it?

What does it mean to us? And then, again, getting into that longer discussion about retirement plans and what does it mean for retirement plans?

Okay. So we'll start with, um, you know, why is the Fed focusing on this?

Mm. Again, it is- um, excessive inflation is, uh, unhealthy for the- the economy.

2% is what the Fed feels is a, um, a sustainable- Mm-hmm. healthy rate of inflation.

And for you and I, I guess the question is, what does that mean beyond the price of eggs? Although, you know, you don't have to worry about that with your- Yeah, that's right.

with your chickens. Yeah.

Yeah. Wh- when our prices went up, we were like, What are you guys talking about?

Ours have always been free. Uh, yeah.

Um, but beyond the, you know, the price of food and things like that, what, um, you know, why does this matter? And I'll give kind of 2 examples.

Mm-hmm. One related to the Fed.

So the Fed is holding its r- uh, interest rates high because they don't want to stoke inflation, right? If they lower interest rates, the economy heats up a bit, people want to invest more, y- uh, businesses have access to cheaper capital, so they can put money to work more easily.

The Fed is worried if they bring rates down too low, that extra ec- economic activity is gonna drive inflation, um- Hm. higher from here.

Okay. So they're holding rates at a high level.

Uh, for you and I and for our listeners, um, what might that mean? Uh, well, it's- it's impacting the housing market, for example.

Yeah. Like, the housing market is really kind of locked up.

Um, there's not a lot of movement. There's not a lot of availability.

And that's because a lot of people out there have mortgage rates which are below 3%. And they know if they sell their house, they're gonna have to, you know, take on a new mortgage- Hm.

which is going to be 7%. And that makes a big difference in their monthly payments.

So it does have a real impact to, um You know, right now, to you and I, again, beyond, uh, the price of eggs. But a longer term impact is on your retirement because ultimately, what are we trying to do with retirement?

You're trying to save enough so you can pay for the things you need in retirement. Inflation means prices are going up.

then those things that you need to save for are going to cost more in retirement. Right.

And- and we've mentioned this, I b- I believe, a couple episodes ago where we talked about the power of your money- Mm-hmm. right?

And if- and why you- why you put it into, uh, a- whatever the vehicle is for retirement is because you need to earn on your money. You can't just have the cash because y- the dollar- you're worth today for your dollar will not be the same in the future because of that inflation over time.

Right. Yeah.

Stack- you know, stashing that money under your mattress is not a good strategy for retirement. If you think about the 2 biggest inputs that you have in a retirement forecast are going to be, what return do I expect to get on my investments- Mm-hmm.

and what are things going to cost? You know, how much am I going to need in the future?

And so, that inflation number is one of the biggest inputs. If what you expect to get on your investments doesn't change, but the inflation number goes up, your retirement forecast just took a step down.

Hm. So that's why it's important.

It's why, you know, it's important to see that inflation stay- rate stay at a, uh, you know, a low level. Okay.

So- so, uh, from my perspective, let's say I- I have a 401K. I've- I've done all my w- you know, HR work where I- I signed off that, yes- and I'm gonna put X percent or X dollars into my retirement or IRA or whatever that is.

Uh, it goes in there. They- they take the money out.

It goes into the- the retirement account, whatever that is. Uh, what's ha- what's happening now?

Yeah. Yeah, so let's, let's focus in on that example of, of the 401.

Yeah. And I will say, I am not our internal plan design expert, so we have one of those.

Yep. His name is Greg Dadone, and he is fantastic at what he does.

But my team, the investment team, does help Greg basically fill those, those plans with the investments, so I can talk to that- Yeah. with a fair amount of, uh, of comfort.

Um, and I would say you're going to see likely a, a few things in your options 401, 401s. We'll generalize here pretty significantly, but you may have the option for individual funds- Mm-hmm.

like a, t- uh, a small cap fund or a large cap, US large cap, an international fund. So you might see that menu of sort of pieces of a portfolio, if you will.

But you might also have an option that would be, say, an age-based option, uh, you know, a retirement age-based option. Let's say you're expecting r- to retire in 2035.

There might be a 2035 age-based fund in there. Mm.

We can talk in a minute about what exactly that means. And the third option, major option you might see in there is a risk-based option, which is a series of models where you can choose, Do I want to invest conservative, moderate, growth, really aggressive?

And so you'd see a series of models in there, and you can choose basically the risk that you want to target. Yeah.

So it's all So, so basically, and this was W- we touched on this, the different types of risk. Yep.

But one of the types is your tolerance for risk when you need to retire, how much money you're gonna need during retirement. Like, all these factors go into it.

Right. So now this are, these are the, the funds or the investment portfolios that are reflecting that tolerance that you selected.

Right. There is, you know, what you might need to take in terms of risk.

There is what you can take, your ability to, take risk, which might be different than your tolerance. Mm.

So that's why it's nice to have an advisor who can help sort of assess, you know, what your ability, uh, to take risk is. Right?

They have a aggressive ability to take risk. Whether or not that matches their willingness to take risk- Yeah.

is different. Um, but, you know, an advisor can help sort of marry those 2 views together.

Right. Yeah, and, and so when that, that marriage happens and, and they agree with, with me, let's say.

You know, my advisor and I agree on, uh, let's say I am aggressive. So now I go into the- my 401, and there's going to be a quote-unquote option - that is the aggressive option, right?

Right. And when I select that, the back end of that is h- the mixture and diversification of the investments that match that risk tolerance.

Right, right. So there's going to be a professional investment manager who has put together this portfolio that matches that risk.

They're going to be monitoring that portfolio and editing it on a, um, you know, on a regular basis- Mm-hmm. so you don't have to do anything.

They're going to keep it at the right level of risk. Depending on the type of fund, they might be tactically tilting one way or another to try to take advantage of, of market moves.

There's gonna be automatic re- rebalancing in there. Like we talk about the, you know, the, the benefits of opportunistic rebalancing.

There's gonna be some sort of rebalancing in there, so it's hands off. Mm.

So if, you know, if you and your advisor have decided, you know, Jay, you can afford to take an aggressive level of risk, you can find that aggressive portfolio and feel pretty comfortable that, you know, it's hands off, um, and I am, you know, where I need to be from a risk perspective. Yeah, and ideally, uh, depending on where you work and, and who they're using for their retirement plans, uh, you know, like for instance, we, we have a, a retirement plan section here at Strategic, that they're going to have probably, like, a workplace advisor that's gonna be telling you what's going on and, and what you should be doing.

And you can be able to ask them questions to, like, understand your specifics and the specifics with your particular account through your, your company. Right.

Right. Any good, um, retirement plan, uh, offering is going to offer that, uh, high-level advice to help make sure that you are pointed in the right direction.

They won't necessarily be able to do a full retirement forecast, but they can look at your situation and get you pointed in the right direction. If I could sort of, you know, go through those options- Mm-hmm.

a little bit and say, kind of lay out how I would think of them at a, at a high level, and again, this is gonna vary person to person. Yeah.

Yeah. So this is just very high level, the way we think about it.

If you's getting, you know, no advice whatsoever, okay, and you're getting 0 input from your workplace financial advisor or, and you don't have a financial advisor of your own, then the target date is going to be the best option. That's your- Mm-hmm.

age-based, retirement age-based option. Uh, that is likely to be the best option for you.

Why is that? Because as you're younger in your career, it's gonna start out with an aggressive allocation.

Mm-hmm. As you get closer to recu- retirement, it has what's called a glide path.

It's going to gradually reduce the level of risk as you get older and closer to retirement. And so, if you have no other input whatsoever as to what to do- Yep.

that is definitely the best place to start. If you have the benefit of an advisor who can help you assess your, uh, level of, uh, risk that you should be taking- Mm-hmm.

um, then, you know, that risk-based model is going to be your best option. What do I need to do to reach my goals?

You know, what sort of risk can I take, do I wanna take? And you ca- you can agree on what that is.

Choose the appropriate risk-based model and, um, and go forward. And I would say the last option, which I would only recommend to professional investors, is building that, you know, portfolio, uh, on your own.

Uh, that really takes a level, uh, of expertise that most individuals wouldn't have. You know, again, we talk about the importance of regular rebalancing.

Yeah. Uh, at least, you know, when we're talking in very general terms like this.

So, and, and there may not be a difference, but is there a difference between if I, let's say I'm contributing to that 401K, and it doesn't matter what, which one of those that I'm in, whether it's the age-based or risk-based, or w- you know, but if I'm in one of those portfolios that through, through my retirement and my company, how is that different from just, like, standard investing? Or, uh, or is there no difference?

It's just how the money is, is being allocated? Right.

It's really, for the most part, it's no different. risk.

So there may be moments where we might say, let's say, you know, Jay did an amazing job investing as, uh, uh, a, a young professional. I mean, you have a taxable account that has done very well, you invested in NVIDIA early, and you have, you know, low cost basis on NVIDIA, meaning there's b- big tax implications for you selling NVIDIA.

Mm-hmm. So you don't wanna do it, but you have this risk, this big exposure to US large cap.

It might be that we would look at your retirement count and say, To balance that risk, even though you are an aggressive investor, we're gonna tone down the risk in that portfolio a little bit so that your whole household has the right level of risk. So that's where you might see some, some minor differences.

Okay. Right.

And, uh, all of that sounds like I should definitely have a financial planner to help me work- Yes. through all of that.

Yeah. Yeah.

So it, so for me, it's, it's super interesting to hear, uh, the philosophy and kinda, like, the thoughts behind that and why it's important. Yeah.

Yeah. we've talked a lot about alternative investments recently.

There is actually a push currently to get private investments, more into 401s- Oh, okay. than the- there, there is a, you know, there are a- a little bit of, um into 401s today, but there's a big push to try to get more access to them.

To me, that sounds like a horrible idea. Yeah.

Um, you know, pushing these securities that are, uh, opaque, illiquid, have high fees, and then put them into the hands of people who probably are not investment professionals- Yeah. Well, I think that's it.

Thank you so much. All right.

You're welcome. Thanks, Jay.

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