Lessons Learned in 2023

Lessons Learned in 2023 – Welcome to the Webinar (0:00)

Scott Peterson: Hello, everybody. I’ll give it just a minute to have the rest of you come on. But, it’s good to be good to be with you today. I’m usually not the one presenting. I have a lot of other advisors that do this so I can see how it is in the real world.

But, I’m Scott Peterson and I’ll be hosting the webinar today. My partner, Jeff Lindsay, will be monitoring the chat feature. So if you have any questions throughout, he’ll be able to answer your questions. And then we’ll be hanging around for maybe 15 minutes or so afterward just to answer any questions that you might have.

So, let me just tell you about what we have planned today. I’m going to just give you a brief review of the recent history of the market and then I’ll share some thoughts about how we think you should consider managing your money during retirement. And then also at the end, I’ll give you some thoughts about investing in 2024. It’s kind of maybe a challenging year, and there’s a lot of things going on.

Anyway, it was our most quoted New York Yankee Hall of Famer, Yogi Berra, who came up with the phrase, it was like deja vu all over again. And I guess, you know, in my mind, that’s what we had. It’s just another cycle of the market that happened this last year.

And so I’m just going to take you again back in time just a bit and share with you kind of well, what happened. I’m going to take you back to when my career began back in 1986. If you don’t mind, I know a lot of you have been investing for a long time, so you’ll recognize some of these market incidents. But, I’m going to take you back, let me see here, let me get my highlighter going here.

Alright, I’m gonna take you back to 1987, 1986. I started my career right here, and within a year or so, we had the black Monday, 1987. If you remember right, what happened then, I mean, I remember thinking maybe I’d rather drive a truck than be in this business because I didn’t have anybody’s, I really was brand new to the business, but I saw the turmoil and the fear people had thinking that we’re starting the great depression once again, that kind of thing.

But you see the markets have been on a tear through the 80’s. And then during a three-month period of time, the markets went down. Well, actually in a day it went down 33%, but it only stayed down for three months. And then we had the 90s, the roaring 90s, where we see the stock market was up 582% during that time periods. At the end of the roaring 90s, then we had the .com bubble burst through these years here. And then 9-11 where the markets were down over that three-year period of time, a two or three-year period of time, about 50%. Markets started doing well again, they were up 100% for a five-year period of time.

And then all of a sudden, we had the financial crisis of ’08 and ’09, where the markets were down about 50%, a little over 50%, and only lasted for a couple of years. And then we had, of course, the big run-up from 2009 until the end of 2021 where the markets were up 400%. And then we had COVID come along. Markets dropped 33% in a month and recovered 33% in a month.

Then the markets went up as you see 114% after that. And then we’ve had our latest little hiccup, whatever we want to call that, where during this last year, during 2022, the markets were down 22%. And during 2023, they bounced back and now they’re up again.

And so I just like to point this out to you. It’s very difficult to time markets and to guess when these events are going to happen. But I also want to point out that these events, these downturns are just a part of the investment cycle. In fact, let me share with you a little bit more about this.

What I’ve done here is I’ve listed all the bear markets since the end of World War 2. And a bear market, again, can be defined as a drop in the stock market of at least 20%. And so here’s all the big bad drops since the end of World War 2. And you see, interestingly, the average drop in the market of a bear market, it’s 30%. So we lose 30%. I think an important thing to point out here is this number down here at the bottom right, 14. That’s how long they last, 14 months on average. And so, we have some really big bad drops in the market, but they only last but a short time, and then we move on and the markets go up again.

Now, fortunately, surely as bear markets will come along in the future and have come along, they’re always followed by a bull market. And so here, I’ve also listed all the big gains in the markets that follow the bear markets over time. You see the average gain of a bull market, you see the bottom, the bottom number there is 133%.

And so this is part of the cycle folks, and that’s what we’ve been through this last couple of years. It’s just, you know, we expect markets will go down, they stay down for a year or two, then they bounce back up. That’s just what they do.

And now, some of you might be thinking, well why do I subject myself to all of this? You know, this craziness. Why do I have to worry about it? Well, it’s because of this number right here that I want to share with you. The annualized gain from 1945 through all these market cycles to today is 11.2%.

And the problem is, if you ignore this and say, I’m just going to stick my money in some place safe that doesn’t have the volatility, then what happens is you’re denying yourself all this growth. And frankly, we have to be invested somehow in stocks with a part of your money just to keep up with the inflation. So that’s why it’s important to know this, but I also want to point out the cyclical nature of this. Like I said, it’s this deja vu. You know, we’ve seen this all before, and I promise we’ll see it again.

So now, you might be interested to know that since the end of World War II, this 11.2% return, the S&P has. If you would’ve put a thousand dollars at the end of World War II into the S&P 500, it would be worth over $2.5 million today.

So the question still remains, how should a retiree manage their money in an environment like this?

You know, we have the ups and the downs and it does get kind of crazy. So as I see it, the retirees have three options, or people retiring have three options. And so I just want to take some time and kind of go through what those options are and what you might want to consider doing.

So the three options are number one, a lot of people are frustrated. They don’t want to deal with any of this stuff, so they just go out and they buy an annuity. Many new retirees look at the complexity of managing their money and the complexity of creating a reliable stream of income during retirement, and they just flat out kind of give up, I think. That’s when they buy the annuity. After all, an annuity will guarantee you a stream of income for the rest of your life.

Now, Peterson Wealth Advisors, we don’t sell annuities. In fact, my advisors know the fastest way to get fired at Peterson Wealth Advisors would be to sell an annuity to one of our clients. In fact, we don’t even allow our advisors to receive commissions or to have licenses to receive commissions. So you’re not going to get an annuity from us.

But, you might be asking, well, why am I so against annuities? Well, there’s a lot of reasons, but I’ll tell you the underlying reason that the income streams that annuities provide will not, and do not keep up with inflation. That’s the problem. Inflation can be deadly if we don’t keep our investments up with the inflation rate. I just want to remind you of when it comes to inflation, inflation is the gradual, but nonetheless, lethal loss of purchasing power.

So $4,000, if you have an income of $4,000 a month today, it will only have $1,600 worth of purchasing power 30 years from now. And that’s just assuming the 3% inflation rate. As you all know, the inflation rate’s been quite a bit higher recently, but historically it’s been hovered around 3%. So unless you’re willing to take about a 60% cut in pay during your retirement, you have to figure out a way to keep up with inflation.

So, the idea, once we retire, we need to keep the magic of compound interest working in your behalf. And the only way that we’re going to keep up with inflation is to invest a portion of your money in equities or in stock-related investments. Now, certainly, not all your retirement funds should be invested in equities, but some of your investments should be dedicated to beating inflation. Then that brings us to our option number two. So, buying annuities is not going to work because we have to keep up with inflation.

Option two, managing the portfolio of your own investments. So I will tell you that the stock market and equities, they’re the right tool, and they’re a powerful tool that will help you to beat inflation. But they have to be, it’d have to be used correctly.

We see all the statistics, all the numbers. In fact, JP Morgan gives us a number that the average investor that invests in stocks, it’s about a 3% rate of return on the average, which is crazy because the stock market over a long period of time averages in the 10% to 11% range. But I think there’s just so many people that aren’t really trained in investing and are very reactionary, especially retirees. They think this is all the money I have, I have to protect it. So the first time the markets go down, they flee the markets and sell when stocks are down, which is not a good thing to do obviously.

So anyway, even though the stock market is your best long-term inflation fighter, it’s also temperamental. It’s unpredictable and even dangerous in the short term. So I think that’s the problem. We’re too emotionally charged as investors, so we don’t do a very good job.

So I find it interesting that the best educated, most experienced investment managers in the country can rarely beat the stock market average. You know, over a long period of time by implementing their market timing, stock picking strategies.

Now, many of you have heard about the investment legend Warren Buffet When anybody talks about investing, they say, well, Warren Buffett says, because he’s a good investor. But I want to point out that his mutual fund he manages, Berkshire Hathaway, has not been able to beat the stock market average for the past 20 years. I tell you this, to help you understand that you are delusional if you think that you have the ability to time the markets and to pick a superior investment mix that could beat the markets over a long period of time. I don’t think you can.

So the best of the best, the most well-funded, best educated, most experienced people can’t do it. I doubt that you’re going to be successful timing markets and so forth.

In saying this, I think some of you I’m sure have done a great job in saving for retirement. You’re disciplined, you didn’t get scared out of markets, and you’ve accumulated a lot of money for retirement, and I commend you, I congratulate you. But I also want to remind you that the distribution of funds over a retirement takes a completely different skill set than does the accumulation of retirement funds. See, when you retire, there’s so many questions that need to be answered. When you start, when you transition from accumulating to decumulating. Is this a different world?

So let me just throw a couple of these questions out to you. You still have to invest properly, right? So how am I going to invest? You know, you need the right mix of short-term less volatile investments, but you also need long-term inflation-beating investments.

Second question, how will I manage my money during market downturns? Well, you have the discipline to do the right thing and to make the right decision. How much money should I withdraw from my investments? How much do I dare withdraw? I mean, you’re going to be retired for a long, long time. You’ve got to figure this out.

And from which investments should I draw my income from? You know, there’s tax considerations to make. You want to pull your money from your Roth IRA or from your traditional 401K or from maybe a non-retirement account.

And then how do I coordinate my Social Security and my pension payments with my investment income for maximum tax savings? How do I manage my Required Minimum Distributions that I’ll have to take? Would a Roth IRA conversion be beneficial to me?

Now, here’s another question. I’ve heard that there are a lot of tax benefits that I could get by making charitable contributions directly from my IRA. Is this true? And how do I do it?

And here’s another one that I think people forget about. This question here I think is very important. Will I be able to manage all these issues throughout my entire retirement on my own? And then who is going to do this for my spouse when I’m gone?

The point I’m trying to drive home today is that investing and properly distributing is challenging, stressful, and it will consume your valuable retirement years and you probably won’t be too successful at it.

So, besides myself at Peterson Wealth Advisors, there’s nine CFP®s. We have a fully staffed operations team that does our trading for us. We have numerous CPA affiliates that we work with and a supporting staff. And it takes all of us to properly manage and know all there is to know and to do to properly manage our client’s money during retirement.

Now, I have 38 years of experience managing money, and I won’t be managing my own investments on my own during retirement. There’s just simply too much to keep track of. There’s tax laws, knowing how to invest, and interest rates. There’s just a lot going on.

This brings us to option number three which is to follow a time-tested retirement income plan. So following a plan is essential, and it’s the only way to maintain investment discipline. And we see very few investors end up retiring with an actual plan.

We believe that working without a plan is dangerous because without a plan, fear and greed will become your greatest influence. And emotionally driven investment decisions will never produce a good outcome. So we all need to develop a retirement income plan.

It was Benjamin Graham, he was a mentor, he’s a famous investor, but he is a mentor of Warren Buffett. He taught us, he said this: “The best way to measure your investing success is not by whether you’re beating the market, but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you need to go.”

I believe that is very true. I think we need to define, first of all, what it is exactly that we need our plan to do for us. And so, I think the goal of our plan should be this. We need it to provide an inflation-adjusted stream of income that lasts through retirement with the least amount of risk. In my mind, a retirement income plan must do four things.

First of all, I think it must be goal-specific. You know, there’s a big difference between a person who says when I retire, I would like to own a cabin at the lake. Versus a second person who says, I want a cabin by the lake when I retire in 20 years. I estimate it’ll cost me a million dollars. Therefore, I’ll need to save $2,164 per month for 20 years and get a 6% return on my investments to accomplish that goal.

Clearly, the first statement was a wish or a dream, I want a cabin by the lake. But the second statement is a plan. And any program that does not offer date and dollar specifics is a wish or a dream, not a plan. So in the world of finance, dreams rarely do come true, but plans usually do, or off times do.

So successful investing isn’t just buying the correct investment, but it also must include a plan as to when to sell that investment as financial goals are achieved. A goal-specific plan defines how much money will be needed, and then when it will be needed.

Second, our plan needs to provide an investment framework to minimize risk in our own situation. We should strive to meet our investment goals by ascertaining all the risks and choosing the least risky path that will help us get to where we need to be.

So before we go any further though, I think we have to answer this one question. What is risk?

Well, we believe that risk is the loss of purchasing power. So in this context, I think the two greatest risks that destroy purchasing power for retirees are first of all, in the short-term, and when I say short-term, I’m referring to maybe less than five years.

I think the biggest risk to your purchasing power in the short term is a market loss. For example, if you have $100,000 invested, the market slows down and it leaves you with $50,000. Well, you’ve lost 50% of your purchasing power. But there’s another risk again, that we have to talk about is the long-term risk, that of inflation. And when I say long-term, I’m saying maybe 10 years plus.

So let’s say you invest your money, but it’s not very aggressive, it’s really safe. So 20 years from now, you still might have that same $100,000 that you started with. But if that $100,000 only purchases 50% of what you can purchase today, you still lost 50% of your purchasing power.

So there’s just these two different risks that we have to be aware of. Short-term market risk, and long-term inflation risk. So I look at it this way, on our timeline, we have risk on the left-hand side, then time on the bottom.

The risk of owning stocks over a long period of time goes down. The risk of inflation over a long period of time goes up. So the way we think about it, we need a plan that will protect our short-term income needs from market volatility, while at the same time protecting our long-term future income needs from inflation. So essentially, we need to create a plan that matches your future income needs with your current investment portfolio.

Let me say number three here, that our retirement plan needs to provide a distribution framework. This helps you to know how much you can and should distribute from your money, from your accounts during retirement.

It’s interesting that in retirement, you’re managing the biggest sum of money that you’ll ever have, but it also has to last a long time. So the question of how much can I or should I withdraw from my investments is very important. This must be figured out if you’re going to have a sustainable income stream throughout retirement and if you’re going to be able to enjoy your retirement experience to the fullest.

It’s interesting, as we work with clients, we see different tendencies. And I’ll say at least when it comes to distribution, I see two tendencies. I see the first group of people which is thankfully in the minority, they feel quite entitled. They’ve been saving for retirement all their lives and they’re retired so they’re going to spend their money on whatever they want. And so they blow through all their retirement money in the first 10 years of a 30-year retirement.

On the other extreme, which I think is more common, we see people who are afraid to spend any money at all. They may have a bunch of money and their account looks very, very healthy. They’ve saved wisely over the years, but they also realize that this has to last a long time. So they’re afraid to do anything. There’s extremes that they won’t go out to dinner. They won’t visit their kids in a neighboring state or things like that. Just because they’re afraid of spending money.

So, a distribution plan will help you to have the knowledge and the discipline to withdraw the appropriate amount of income throughout retirement with a distribution strategy in place you can spend with competence during retirement and understand that you can understand how much money you can and shouldn’t withdraw from your retirement funds.

And last, number four, we need a plan that will help us to coordinate all income sources to reduce our income taxes. Withdrawing money from the right type of account, from an IRA versus a Roth IRA, and so forth in coordination with your Social Security and pensions. Pension benefits at the right time can really enhance your tax efficiency.

Now, there are tax reduction strategies available to retirees that can significantly reduce your tax burden. But these tax savings opportunities just don’t happen by accident.  Distributions must be carefully planned in conjunction with our current tax loss. So the question I guess is how are we going to put together a plan that covers these four objectives?

The Perennial Income Model™ (24:39)

Well, we’ve put together that plan. Let me just introduce you to this or remind you about this. On this webinar, we have existing clients as well as we have people kind of wondering what we even do here.

For existing clients, this is how we manage your money now. This is how we grow it. This is how we provide the income that you need. For those not familiar with the Perennial Income Model, I’m going to introduce it to you now, and it’s a methodology that might just change the way you think about retirement and show you a better way to retire. It might even enable you to retire now when you thought you couldn’t.

So, in 2007, the Perennial Income Model was born. And as you’ll soon see, it’s just a common sense approach to managing investments during retirement. When I say common sense, I mean common sense. Because in our industry, there are so many people who have dedicated their lives to trying to guess the future of the market or to know when to be in and when to be out, and so forth. This does none of that stuff. It’s just a common sense approach where we want to match our clients’ future income with their current investment portfolio.

So instead of explaining it all myself, I’m going to just turn it over to a three-minute kind of commercial or video that explains a little bit about how the Perennial Income Model works.

– Start Video –

Congratulations, you made it to retirement. Retirement’s different now than what it used to be. Like it or not, employer-sponsored pension plans that provided past generations a steady paycheck throughout retirement have been replaced by 401k’s and IRAs.

Now, you are responsible to create your own stream of retirement income. In order to successfully manage your investments, there are a few obstacles to be aware of.

Longevity, as life expectancies continue to rise, you need to plan on creating a stream of income that will last for 30 years. Inflation, assuming only a 3% inflation rate, your dollar today will have just $0.41 of purchasing power in 30 years. Market volatility, the stock market has always had its ups and downs. Expect this to continue.

You might be asking yourself, how do I invest to keep up with inflation? How much should I withdraw annually? How do I keep from making mistakes during volatile markets? It sounds like you need a plan.

Introducing the Perennial Income Model, the plan we created to match your current investments with your future income needs. It’s designed to provide an inflation-adjusted stream of income that will last the rest of your life.

Let me explain how it works. Using a conservative goal-based approach to investing, we separate the money you would use to provide a stream of income into different accounts. Each account is dedicated to providing income for a five-year segment of retirement. Therefore, each of those segments has different objectives.

Segment one provides income for the first five years. So safety of principle is its objective. This should not be subject to a lot of market volatility, so we use conservative investments.

Segment two grows for five years and then provides income for years six through 10, and so on. Keeping up with inflation becomes increasingly more important in the latter segments. So we use stocks and other inflation-beating investments that can meet this goal.

As each segment meets its target, we preserve our gains by moving aggressive investments into more conservative ones. This provides a steady stream of income for future years.

The Perennial Income Model is a common sense approach to investment management that offers peace of mind with the objective to provide a reliable stream of retirement income. It allows you to have confidence during turbulent markets and to focus on what is truly important during this stage of life, enjoying your retirement. Call us to receive your own customized Perennial Income Model. Click here for more.

– End Video –

Scott Peterson: Now, I’d like to introduce you to a family. We’re going to build a time-segmented distribution plan, build a Perennial Income Model for, now this is just a hypothetical family. I don’t know if any of our clients are this handsome as this couple right here, but they’re the people we’re going to build it for.

We’ll just call him Tony Smart and his wife Kathy. Now, Tony we’ll say is a 65-year-old engineer. He and Kathy have been diligently saving for retirement all their lives. Now they’ve come to the time where they’re really truly ready to retire.

And so, let me tell you, over time and together they’ve accumulated a million dollars in their 401k and IRA accounts and they want to know how this million dollars should be invested in the Perennial Income Model, and how much income they could expect to receive from that sum of money.

Now, they’d really like to pass the full million onto their kids if they possibly could. So, please note that I’m going to show you a distribution plan on how to manage and distribute $1 million.

Now, the plan I’m sharing with you today is not just for millionaires. It works with smaller amounts as well as larger amounts of money. I just use a million dollars because it’s easier to follow the example as I explain how this whole thing works. Now, what we’re going to do is we’re going to invest all of the Smarts money, and we’re going to build a 25-year income plan.

Now, we’re going to break their investments up into six different segments, six different accounts. We call them segments, but the first five segments are responsible for providing income for a five-year period of time. And then segment six is dedicated to leaving the original million dollars that they stated that they wanted to leave to their kids.

So, segment one, we’re going to take $220,000 of the million dollars and invest it in segment one. This is a very ultrasafe kind of boring account. You see that we’re only assuming a 1% growth rate here.

Now, will it do better? Should it do better? Well, yeah. In a period period when we get 5% guarantees in our banks, it will do better than this. But let’s just be conservative and show this 1%. So what’s going to happen? We’re going to spend that $220,000 and the Smarts are going to receive $3,774 a month each month for five years.

So, again, it’s very safe, it’s free from this. Money can’t be in equities, it can’t be volatile, it can’t be going up and down because this is where the Smarts will be getting their monthly check from.

So now again, we use a very conservative 1% growth rate. Let me show you all of our growth rates that we use. We’re the only people that I know that manage things this way.

And so we have zero incentive to try to plug in these very unrealistic growth growth rates. And so I just want to make sure you understand that what we’re showing you is a very conservative approach to things.

Here in front of us, I have a study from Vanguard over the years. This is from 1926 to 2021. So this kind of gives us an idea, but I just want to point out that Vanguard, as you look at the top, the capital preservation.

That’s a very conservative portfolio, very like what we’d use in our segment one. Historically, it’s got a 6.9% return. Again, we’re just using the 1%. So here’s the Vanguard historical returns, and then here’s the numbers that we’re plugging into the program.

As you see, we’re really underestimating what we think we’ll get. But the point is, if this Perennial Income Model works at the very low assumed growth rates that we’re showing you, it’s going to work better in real life.

So let me move on to our segment two. So while the money in segment one is being distributed for the first five years, the balance of the million dollars is growing. Now, of this balance, we’re going to take an additional $220,000 and allocate this to segment number two.

Now, segment two will take over the rule of providing monthly income to Tony and Kathy when segment one runs out of money at the end of the fifth year. So this money will not be needed since it won’t be needed for at least five years. We can be a little bit more aggressive on how we invest this money. So you see, it’s in a conservative growth portfolio, and we’re assuming a 3% growth rate. Again, according to Vanguard, the historical return for a conservative growth portfolio is 7.7%. But we’re just still going to stick with that 3%.

So you see built within the system, you see between the fifth and sixth years, the Smarts have a built-in inflation adjustment so they’re going to receive more income. And we build that in automatically every fifth year, the clients will receive more income.

So let’s go to segment three. Segment three is dedicated to providing income for the third five-year segment of retirement, or years 11 through 15. Now, because this money is not necessary to provide income for 10 years, this money can and should be invested just a little bit more aggressively.

It’s in a moderate portfolio, so it means we have about half in stocks and half in bonds. And again, we’re showing just I think a very conservative growth rate of 5%. Historically, this kind of account, a moderate growth account, according to Vanguard, has received about 8.7%. So again, we’re being conservative.

But you see now at 5%, we’re initially putting that, let me get my pointer out here. We’re starting with $181,000 and the idea is to have it grow to be at 5%, $298,000 in preparation for providing income in year number 11. And you see the Smarts every fifth year, again, they take a cost of living adjustment raise.

Okay, segment four. Now we’re in a moderate growth portfolio because we don’t need the money for 15 years. So of the million dollars, we’re going to put $141,000 of the original million here. And the 6% growth rate, we’re going to turn this into $346,000 in 15 years. Again, the Smarts get a little bit of a raise, the cost of living adjustment in the 16th year.

Now, segment five is given $99,622 of the original million dollars, and it has 20 years to grow. So, the target of segment five is to have this money be worth $402,000 in a 20-year period of time. And so, almost all of segment five needs to be invested in equities. Again, in the early segments, we’re worried more about market volatility. In these latter segments, we’re worried more about inflation. So, when I say equities, it’s going to be a diversified portfolio of large US stocks, medium-sized stocks, small stocks, international stocks, and so forth.

This is how it looks, the last segment as you see, we call it our legacy segment. The Smarts mentioned that they wanted to be able to replace or have a million dollars at the end of their lives to be able to pass on to their kids. So if $136,237 of the original million dollars is invested in the legacy segment, again, this has got to be an all-equity segment, we’re assuming an 8% growth rate. And remember, stocks over a long period of time average 10% to 11%. But at 8%, we will turn that $136,000 into a million dollars at the end of 25 years.

A couple of things I just want to point out as we look at this thing, the big picture here is this. I’m harping on this, but I think this is an important point. We use very low, and I think unrealistically low assumed growth rates. Again, we’re not trying to show you the highest numbers in the world. We just want to put together a plan that works. We believe you’ll be able to do better over time than what we’re projecting.

Another thing I want to point out here is this. You would think that we truly are spending all of segment one, that’s providing that monthly income and all of segment two is providing the monthly income.

But look what happens. This is the actual account balance. You see that over the years, the account’s really not going down, staying level. So that’s because as we’re spending segments one, segments two, all the other segments are growing for you.

And then last, I want to point out this here again. We start with a million dollars, we end with a million dollars. But by using this methodology, it spins off more than one and a half million dollars during a lifetime. So this is how it works.

Now, I present this at Education Week. And so this is where I see everybody grab their cameras and take a picture of this thinking okay, here’s their secret sauce, a special formula. This is how I could do it. And I know how to do a spreadsheet. I can do this myself. I’ll just copy this. But there’s so much more to this than the spreadsheet, I promise.

So I just want to warn you about this. You know, a distribution plan, it takes a couple of hours to create. But it takes 25 or 30 years of discipline to successfully implement. So those who create a spreadsheet, invest, and then forget about it or abandon their plan will not have a successful outcome. So when investor discipline fails, the plan fails. The essential step of harvesting a time-segmented program is really where the rubber meets the road. And I’m going to introduce that to you, but it’s not in the creation of the spreadsheet. That’s why we’re so willing to show this to you because the magic isn’t here. The magic is in the harvesting and the managing.

The Importance of Harvesting (40:50)

So let me explain what harvesting is all about. So simply stated, the process of harvesting in financial terms is transferring riskier, more volatile investments into conservative, less volatile investments once the target or a goal of each segment is reached.

So think about a fruit farmer, he toils throughout the year in his orchard, fertilizing, pruning, spraying, and irrigating his trees. All of this work is done because the farmer knows that in the fall, in a very, very short window of time, his trees will produce delicious fruit. Now, he knows that he must harvest the fruit when it’s absolutely ripe and ready to be harvested. Harvesting too early or too late in the season will ruin the fruit.

Now, just because the farmer has to harvest only on a select few days of the year, it doesn’t mean the fruit needs to be eaten then, right? There are many methods that can preserve the fruit once it’s gathered. It can be frozen, bottled, canned, dried to preserve its flavor and nutritional value.

So the means of preserving the fruit is not nearly as important as harvesting at the right time. So now, just as a farmer picks his fruit at the right time so it can be preserved for a future day, retirees should also harvest their investment gains and preserve them once the goals are achieved for each segment.

We believe that unnecessary risk is brought to the time-segmented plan if it’s not properly harvested when the investment has ripened. Or in other words, has grown to its target amount. So I’m gonna go back to the chart here and maybe take you through a scenario.

If I was my own competitor, I’d be looking at the chart saying, hmm, the only thing these guys are doing is they’re getting more aggressive with the investments as a person ages. That doesn’t make any sense at all, right? But that’s not how it happens because of the harvesting process. The success of monitoring and harvesting are imperative to the success of the time segmentation program.

I just want to point out how this harvesting works. Take a look at those green numbers throughout the page. Those are the goals that every segment must meet in order to have sufficient income and in order to be able to spin off sufficient income for the following five years for which they’re responsible.

So I’m going to take you through a harvesting process and show you exactly how that works. So I’m going to pick on segment number five. You see here, we’re assuming a 7% growth rate. We’re putting $99,000 in that, and we’re letting it grow for 20 years. So at 7%, we’re going to grow this to $402,000 in the 20th year, and then it’ll be ready to spin off income for years 21 through 25.

So, with all the peaks in the values, it’s going to be mostly in equities. But with all the peaks in the values of the stock market, the growth portfolios managed to get more like a 10% rate of return. And again, we’re illustrating 7%. But what would happen if we were to get a 9% rate of return versus the illustrated 7%, which is very realistic, and actually 9% is less than the average for a growth portfolio over the years.

What would happen is we would end up, let me get my pointer out here. So what would happen, if it got a 9% rate of return versus the projected 7%, in 16 years and two months, we would hit the goal of $402,000. We suggest to our clients whenever we hit that goal that we take risks off the table and we turn this column of investments into something more conservative.

Again, we’re starting now with an almost entirely 100% stock portfolio. And once we hit our numbers, if the markets are good to us early, then we hit that $402,000, then we recommend taking risk off the table. So I hope that helps you understand the harvesting process.

The question I do have for you, how important do you think harvesting was to our clients during these past 10 years? Let me remind you what happened. We had this big, big run-up in the stock market. The markets were way ahead of schedule as far as we’re concerned.

In 2021 and 2020, we were able to move a lot of our clients’ money out of equities because they’d met their goals and basically harvested the gains, and locked them into more conservative investments. Then we had the big correction come on this last year. So anyway, the program works if we just follow the program and harvest as needed.

So the bottom line is harvesting adds order and discipline to the investment process, which results in better investment returns, lower risk, and less selling based upon emotion. So you’re selling your stocks once you reach goals, not selling them once because you’re nervous and you want to get out of them.

So in real life, what we do with the Perennial Income Model, we plug in Social Security and pension benefit numbers into the equation which really provides a great projection on what your retirement income would look like. It also ends up being a valuable tool that we use to help minimize taxes during retirement. You can reach out to us, let us plug your pension, your Social Security, and your investment numbers into the Perennial Income Model to show you what a retirement plan can look like.

So, the question is, why doesn’t everybody do it this way? Many of you might be thinking, well, this is just a common sense approach to investing, and it is. I’ve thought a lot about it. Why doesn’t everybody do it this way?

Well, I’ll tell you, it’s more difficult to do. It’s more difficult to manage. We’re watching every segment. The returns we’re harvesting at the right time and so forth, so a little bit harder to manage, I think that’s one of the reasons. And you have to put in the infrastructure to do so.

We’ve also had computer programs developed to help us monitor, to harvest at the proper time. It’ll be very difficult, frankly, to try to do this on your own and to watch over every segment to harvest properly. But I think that’s why most other advisors don’t do this.

The other reason they don’t do this is when you turn on the financial news network, you listen to any podcast, webcast, you know, there’s so many people in our industry who believe that financial management is trying to beat the market. Guessing when to be in, guessing when to be out. The academic world’s already refuted the claim to be able to do so over long periods of time. But the point is, you don’t need a plan like this if you think that you know what the future is. You’ll just get in at the right time and get out at the right time and so forth.

But a plan like this is only for those that are intellectually honest enough to recognize that the market timing and beating the market through superior investment selection, all those things are illusions. That’s why everybody doesn’t do it this way. If you know what the markets are going to do tomorrow, again, which we don’t. You don’t need to plan like this.

So, a time-segmented approach to investing, or the Perennial Income Model, is designed for people who don’t know what the stock market will do next because we don’t know. We just don’t know.

What should you do now? (49:23)

So, my question for you now, just to kind of wrap this thing up, what should you be doing now? Well, if you’re not a client and now that you’ve seen how the Perennial Income Model model works, what should you be doing?

Well, I would suggest number one, go to our website, Petersonwealth.com, and get a copy of our free book, Plan on Living, which explains the Perennial Income Model in greater detail. It’s free, just catch up to us. You can ask for it online and we’ll send it right out to you. So that’s the first thing.

Second thing, if you have yet to retire, I’d say get to know your pension plan and your Social Security benefits, and maybe consider ways to enhance your income from these sources.

Third, I would suggest to contact us. This is free, to plug your Social Security, pension benefits, and your investment values into the Perennial Income Model. Let us show you how good your retirement could be.

Number four, I would suggest matching your current investments with your future income needs. That might be the money in your 401k. Maybe consider how much money you think you’ll need in the early years of retirement versus later. And then match it with your future income needs.

And I’d say, if you think you’re going to need the money in zero to five years, your money should be primarily invested into fixed income, short-term bonds, CDs, money markets, accounts, that kind of thing.

If you think you’ll need the money in between six and 10 years, maybe an equal mix of equities versus fixed income. And then 10 years and beyond, you should probably be invested in a very diversified portfolio of equities and keep it a hundred percent stock. So this is something you can consider now, and if you need help with that, just let us know. We’ll give you some guidance on that.

And then last, stay in touch. Let us be a resource to you as you prepare for retirement. Again, distributing retirement assets is more challenging than the accumulation of assets was during your working career. And I might add, it’s less forgiving.

So oftentimes, the advisor that helped you accumulate for retirement isn’t adept when it comes to helping you manage the retirement distribution phase. So you need a professional to help you develop and stick with a retirement income plan. Many of you will have Social Security questions, pension questions, investment questions, and tax questions before you retire. Again, I’m just offering our services, let us be a resource to you.

Now for just the clients that are watching this, our existing clients, my recommendation is, well, the plan works. I think this cycle that we’ve been through, the down market, now it’s come back up again. You know, you’ve had the steady income, you weren’t selling stocks at a loss. So stick with the Perennial Income Model, have faith in the plan. This was born in 2007. It was immediately tested right out of the gates, ’08 and ’09. We’ve had now three corrections since we started this. And the plan works this, just have confidence in it and stick with it.

There’s hundreds, many hundreds, I think we have 600 clients across America that have adopted the Perennial Income Model. And so we know what we’re doing. And again, this works out, But also, reach out to your advisors with any questions that you might have. And also, I’d recommend that if you have friends or family that are, they’re considering retiring, get them on our website. Let’s get a book for them. We could let them know how this whole thing works.

Now, I just want to end at this part right here and tell you the Perennial Income Model, again, time segmented. We kind of divide things up as you’ll need the money over your retirement. But it provides peace of mind. In 2007 and 2008, again, it was immediately tested. It was born in 2007. And I should say in 2008 and 2009 when the markets went down so dramatically, it was tested and we had the opportunity to only get about half of our clients converted over to the Perennial Income Model.

The half that were converted did so much better. And I wouldn’t say investment-wise, but they did so much better behavioral-wise. They didn’t make the big mistakes because they could see how their money was allocated and when it would be used at a future date. After that experience, we decided that the only way we were going to manage money for our clients was through the Perennial Income Model.

So in summary, today’s markets are cyclical and will continue to be. Equities will beat inflation over time, but you have to know what you’re doing with them. It’s difficult to have a successful retirement without following the plan.

And then the last thing, our recommendation, you must match your current investments with your future income needs. So normally I’d say, well, this is a wrap. But given its election year, I want to just address one thing because we get a lot of questions on elections.

Emotional Investing: Politics (54:58)

How should I be investing during an election year? We have noticed, and I’ve been doing this for a long time, that we often make emotionally charged decisions based upon our politics. And we work with very conservative clients, as well as we have a lot of liberal clients that are spread throughout the country. So it’s interesting to watch those whose party is out of favor, that they think that the end of the world is imminent.

Now, I’m just telling you, we can’t let our feelings about the current resident of the White House influence our investment decisions. And let me share with you a couple of examples that just drive this home, and then we’ll conclude.

Invesco Dynamic Energy, XLE, is an exchange-traded fund, and it holds 25 different oil and gas company stocks. So I think it’s very representative of the overall petroleum industry.

Well, which president was the most oil and gas-friendly in our history? Well, I would agree, you’re probably thinking it’s President Trump. Actually under President Trump, the United States became the largest producer of oil in the world, and we became energy independent.

Who was the unfriendliest president when it comes to the petroleum industry? Well, I agree with you what you’re thinking. It’s probably President Biden. He’s declared a war on the oil industry. It’s interesting to know that during the Trump presidency, XLE, now what you’d think that XLE, this oil and gas exchange-traded fund would do very well. But during the Trump presidency, XLE went down almost 37% during his four years.

During the first three years of Biden’s presidency, XLE has surged 150%. So it happened exactly opposite from what you think it would do. Now, it swings both ways. Let me give you another example. Here’s Trump’s presidency down 37%. And then up, and then Biden’s is up 156%. Now it goes the other way too.

Which president is the most environmentally conscious? I think you’re probably thinking, well, probably Joe Biden. With his Green Energy Initiatives, he’s diverted billions of our tax dollars toward green energy.

So this solar energy, or the symbol on this is TAN. It holds 51 different stocks that are all associated with the solar energy. Now, TAN during Trump’s presidency was up 538%. And during Biden’s presidency, then it was down 53% for the first three years. Excuse me, we have to update those numbers, but it’s down actually 53%.

So the point I’m trying to make is this happens all the time. We think, the markets are going to go one way because of who’s in the office, and it doesn’t happen the way we think. So just be careful. Every successful investor I’ve ever known was acting continuously on a plan, and every failed investor we’ve ever known was acting continually by following current events.

I guess the point I’m trying to make, if you want to sleep better at night, divorce current events and your politics from your investments.

Question and Answer (58:23)

So let’s go with a question and answer period. Let’s take about 10 or 15 minutes. Jeff, do we have any questions that we should address?

Jeff Lindsay: Sure, yeah. I’ve been answering some of these, but it’d be interesting to get your take on some of these as well. There’s a question about the inflation rate. What inflation rate do we kind of use, just in general? And why? Why do we use what we use?

Scott Peterson: Got it. You know, in the Perennial Income Model, correct me, Jeff, if I’m wrong. I think we use a 2.6% inflation rate within that.

Jeff Lindsay: 2.4%.

Scott Peterson: 2.4%, okay. So we used a 2.4%. Now you think, well, inflation’s been sky high, it was 8% last year or something, something crazy thing like that. Probably 5% this year, I don’t know exactly what it is. But the point is, over a long period of time, 3% is kind of the average inflation rate because there’s going to be periods of high inflation like now.

But also remember over the last 10 years prior to this last year or two, inflation was running about 1%. And so it does average out. So we used a 3% inflation rate. I see people driving themselves crazy when they start plugging in 8% inflation rates into their calculations, inflation’s not gonna run at 8% forever. In fact, it’s come down from that. So hopefully that answers your question on inflation.

Jeff Lindsay: So then another question about the Perennial Income Model. When is the best time to start into the income model? Thinking about kind of the end of your career, the market might go down right at the end. What would be the kind of the best time to start?

Scott Peterson: So we’re a little crazy, I would say because sometimes we talk to people and make recommendations inside their 401k. So we’re not actually managing their money, we’re just kind of giving them some direction prior to retirement.

But usually, unless you feel very uncomfortable with your own decision-making, usually we tell people to keep your money in your own 401k plan, but then you kind of match up within your 401k, the Perennial Income Model. So you could have part of your money in your 401k in a very conservative bond portfolio. Part of your money, probably the bulk of your money should be in more equity-related kind of things.

But the Perennial Income Model is built for income. So if you’re not taking income right now, I would suggest you don’t do the Perennial Income Model until you do need income.

Jeff, if you want to chime in on any of this too, Jeff’s my partner and my right hand, and actually was one of the developers of the Perennial Income Model. So he’s not just a pretty face, certainly, right? So if you have any recommendations, Jeff, please jump in.

Jeff Lindsay: So, the only other thing I’d add to that is with the last few years of retirement and thinking about how we operate and how we think about things, it might make sense to get a little bit more conservative with some of your investments, knowing that you might need to use those investments in the first five years of your retirement, right?

So there’s a little bit of kind of nuance to that, but yeah, for the most part, until you need income, usually people don’t set up the overall income model.

Scott Peterson: I’ll tell you this too, is the Perennial Income Model, when it’s all said and done, you’ve seen how we have stocks and bonds or a place for conservative investments. We find when we put this together for people, it usually works out to be about a 60% stock, 40% bond portfolio, kind of in that range. Like 50/50, 60/40, someplace in there. So if you’re a year or two away from retirement and you’re a hundred percent stock, now that markets are up, you might want to maybe take some risk off the table and be a little bit more conservative with part of your money.

On the inverse, if you’re a hundred percent in bonds because you’re retiring in the next year or so, you should have some money in stocks too, right? But usually, by the time people come to us, if they have about a 50/50 mix or maybe a 60/40 stock, 40% bond portfolio, that’s about the right mix.

Jeff Lindsay: So there were a couple of questions about modification of the plan. You showed one version of this for the Smart family. The questions are kind of around, well, what if I’m 75 or 80 when I retire and I don’t need 25 or 30 years of income? Or what if I’ve got Social Security that I’m planning on taking later in retirement or pensions later in retirement? Is it okay to modify the plan?

Scott Peterson: Yeah, in fact, I guarantee it. With what I showed you today, we didn’t even plug in Social Security numbers, pension numbers. We have some people that they retire and they have sufficient income from Social Security and pensions. They hardly need money out of their plan. Other people are very dependent upon it.

So yes, it’s modified. We look at this as not set in cement, it is suggested all the time. But what it is, it’s a kind of a living document that helps us to know how to manage money during retirement. And so there’s always adjustments to this. And I’ll tell you this too, I mean, it’s obsolete on day one, right? Because the markets aren’t going to do exactly what we’re projecting.

And so as time goes on, we have clients take more or less out of their plan, the investments do better than what we’re projecting. And so we have to adjust the plan. So this is just a guideline, and that’s why I’d recommend if you have any questions about us, let us run the numbers for you in your own situation. And you’ll see there’s a lot of modifications, a lot of things we can do with this.

Jeff Lindsay: There was a question about, does the model take into account taxes?

Scott Peterson: In the last chapter of the book, we wrote specifically about how to use the model as a tax guide. So the model itself that we showed you today does not take into consideration taxes, but let me just ask this question for whoever asked.

How would you know whether you should do a Roth conversion or not without projecting your income over a 25 or 30-year period of time? So, I mean, it’s a great tax planner. It helps us to kind of know how to recommend courses of action.

So the model that I showed you today doesn’t, but tax planning is just a central part, a very integral part of what we do here. And we do our tax planning based upon the Perennial Income Model.

Jeff Lindsay: Let’s see, there was a question about kind of our take on 2023, some things that we’ve learned there. I know that was kind of part of the expected presentation here. So do you want to give some thoughts on what we learned in 2023?

Scott Peterson: Yeah, well I’ll say the drop in the market in 2022 was pretty aggressive. But the rebound was equally aggressive. And we see this oftentimes with these market gyrations where markets go down, markets come up. And I think I showed that slide earlier on that I think the most important thing to remember is market downturns are very temporary. They last, on the average since World War II was what, 14 months I believe.

For those of us that do this every day, we think, okay, the markets are down. There’s some things we can do tax-wise. We can make some different moves here and there. We wait for it to come back up, And it always has. It’s never failed to not come up. And so I don’t think we learned anything new except it was, again, reiterated in our minds. Things are temporary when they go down, and these things are cyclical, and that’s just how it is.

Jeff Lindsay: There was a question on your opinion on gold and silver.

Scott Peterson: I think in the book, and if you want to have some additional information, reach out to us. But gold is never, we always hear on the advertisements on TV, it’s a great inflation fighter. It’s not. It’s barely beating inflation because of the recent surge in gold over a long period of time.

And so if you want to have gold and silver strictly as an insurance policy, that’s fine. But I don’t view it as an inflation-beating investment. Jeff, do you have anything to add to that?

Jeff Lindsay: Yeah, I mean, it’s interesting when you think about we like the stock market because these are companies that are out there doing something, putting something out into the world. You get a dividend, you expect the growth of the company, all those kinds of things. And gold and silver is something that’s pretty and we hope it goes up in value.

You think about the big rage lately has been crypto, right? So you buy crypto, so you can hopefully sell it for a higher price. And I think that gold and silver are very similar actually in that way.

Scott Peterson: Yeah, it is. Gold and silver never pay a dividend. When I invest money, I’ll give you an example. I go to Costco like many of you, and I see people, their carts loaded with very expensive stuff halfway to the back of the store.

I’m thinking, that’s the company I want. I want to own this company versus a chunk of metal because I know Costco makes a lot of money on all of us.

Jeff Lindsay: What’s our timeframe, Scott?

Scott Peterson: I’ll give maybe a couple more questions.

Jeff Lindsay: There was a question based on just kind of what we know with our clients, what percentage of our clients are meeting their targeted income or the PIM goals that we’ve kind of put out there? It’s a good question.

Scott Peterson: Yeah, that is a good question. You know what I would say, because we use such conservative growth assumptions, I think our clients over time, they meet them. And so we really don’t run into problems.

Jeff Lindsay: And obviously, that conservative kind of approach is good. I’d say when goals are not met, it’s actually more often because something else happened in a client’s life. They decided to buy something or they decided to live on more than they expected.

And these kinds of things that kind of mess up the plan. The market is always volatile and always does kind of crazy things in any given year. But over a long period of time, it doesn’t surprise you very much.

Scott Peterson: Yeah, you’re right. Over a long period of time, it doesn’t. So, I think that’s a point well taken. The investments don’t get messed up. The clients sometimes will do things differently than what we projected. But then again, that’s the beauty of the plan.

We can make adjustments within the plan when that happens. Because life does happen. You know, people get sick and die or people buy things that they weren’t expecting to buy or have expenses, and so forth. And so the Perennial Income Model is very adaptive.

Jeff Lindsay: Yeah, if you had a plan that’s not flexible, that’s not realistic to real life.

There’s a question about, Scott, what do you think about the infinite banking model, like bank on yourself using life insurance?

Scott Peterson: This answer will take 2 to 3 minutes, but I think it’s worth it. So, early in my career, I’m talking 1986, 1987. You could buy a life insurance policy. You could buy a $50,000 life insurance policy. You could put a million dollars into the policy, call it a life insurance policy for the IRS, and then you could borrow money out at one-half of a 1% return. And meanwhile, the money in the policy would be in the policy/investment portfolios also.

So you could put your money into stocks and then get the money out at half a percent rate return, I mean, half a percent loan rate and completely bypass the IRS. Well, I remember seeing an ad from Merrill Lynch, taking out full-page ads about this wonderful tax dodge. You call your investments life insurance and then you don’t have to pay the IRS anything. Well, that didn’t last very long as you can imagine. The IRS jumped into that, changed the tax laws.

Now you can still do the same thing except you have to buy a certain amount of life insurance for every dollar that you put in the plan. So basically, it made it a much more expensive thing. So you couldn’t just buy $50,000 anymore and put a hundred million into it. You had to buy $5 million worth of life insurance to put a million into it. Well, that really destroyed that wonderful tax dodge back in the 80’s.

But there’s still people that promote that. You can get your money out tax-free and all this stuff as long as you buy enough insurance. But what happens, you have to buy so much insurance that really detracts from the investment gains. So you’re never going to earn enough money to make this a viable investment because you have to buy so much insurance. I hope that makes sense to people.

Jeff Lindsay: Great, I think those are most of the main questions. Hopefully, I didn’t miss any of them. I had quite a few come through that I was able to answer as they came in as well.

Scott Peterson: Well, I’ll tell you what. Let’s just end right now, but I will tell you if you have any questions or you know, specific questions or you’d like us to run a Perennial Income Model for you, please reach out to us. Just email us or get on our website. And again, please order the book if you haven’t received that yet, I think that would be very informative to you.

Anyway, I thank all of you for participating today and for our existing clients. Hopefully, that was a good review for those who are not yet clients and wanting to know how this worked I hope that explains the Perennial Income Model and we covered things which are important to your own retirement.

So thank you very much everybody, and have a wonderful day.

About the Author
Founder & CEO at 

Scott is the founder and principal investment advisor of Peterson Wealth Advisors. He graduated from Brigham Young University in 1986 and has since specialized in financial management for retirees. Scott is the author of Maximize Your Retirement Income and Plan on Living: The Retiree’s Guide to Lasting Income & Enduring Wealth.

About the Author
Partner, Senior Advisor at 

Jeff is a Certified Financial Planner™ professional at Peterson Wealth Advisors and has also earned the Chartered Retirement Planning Counselor℠ certification from the College for Financial Planning. He holds a bachelor’s degree in Finance from Utah State University with a minor in Economics.

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