Early retirement today 'is a problem we will see in 20, 30 years': Expert

Jamie Hopkins, Managing Partner of Wealth Solutions at Carson Group, lays out how Americans should be planning and saving for retirement, anticipating unexpected market impacts like the pandemic, and where not to invest as cryptocurrency options expand.

Video Transcript

- From meme stocks to Shiba Inu and other altcoins, investors this year have been making and losing money in an array of new assets. We're bringing in Jamie Hopkins, managing partner of Wealth Solutions at Carson Group for more. And Jamie, thank you so much for joining us. With the kind of exuberance that we're seeing in crypto prices, the meme stocks, and newly public companies here, you know, I think a lot of investors have been feeling quite a bit of FOMO. But let's say you're an investor with a shorter term time horizon, you're someone nearing retirement, is there a place in those kinds of portfolios for these types of riskier investments?

JAMIE HOPKINS: Yeah, thanks for having me on. And I don't have a day that goes by now where I'm not asked about from somebody near in retirement, should I have some exposure to crypto, what other types of assets should I be looking at. Reality is when you start looking at shorter time horizons, as you brought up, the more risk we take on, we do run this sequencing risk also. That there's a lot of volatility in these assets. So if you have to spend down during a short period of time, pulling from them, it's not about the total return or long-term return at that point-- it is more about volatility.

Now there are situations where an allocation to crypto or another type of alternative asset can actually decrease volatility and increase returns, but in a lot of cases, it's a pretty small percent. We might be talking about a or two of your allocation. For most retirees, the five years right before retirement and right after, just from research, those are really the riskiest years from a portfolio performance standpoint. And again, it's not total returns, it's not average returns. It's the sequencing of those returns that really matter.

So for anyone out there kind of looking at those things, just understand what's your time horizon. If you have to sell in two or three years or next year, if those assets are down, what does that do to the longevity of your retirement portfolio. Because we really only get one shot at this, if we mess it up early, it's not that we run out of money three or four years in retirement. That's really felt 25 years down the road, and all of a sudden, we outlive our money, which is a terrible place for Americans to be.

- On the flip side, Jamie-- it's Julie here-- over the last year, we've seen a lot of people retire early, right? And I wonder if that has been the case with a lot of your clients. And if they do that, I mean, is that an eventuality that most people should prepare for that might have to happen if you lose your job because of an unforeseen event? And how do you manage around that?

JAMIE HOPKINS: One thing I've always taught people and talk to them about with retirement is that if you look at the data, about 45% of people retire earlier than they planned. About 45% of people retire when they plan-- or after they plan. And only about 10% when they actually plan to. So we don't have this great notion of people kind of retiring exactly on the day that they plan to retire.

2020, we had millions of people unemployed. We still have a lot of people out of the workforce. And we had a lot of people that just decided, if I lost my job, I was two years from retirement, then I'm going to retire early. We saw that in the Social Security data out there, that we saw more early claiming in 2020 than we had seen in trends leading up to 2020. Again, that has a really big impact on the longevity of your retirement. It's not a problem that we're going to see as a country in a year or two. It's a problem that we will see in 20, 30 years.

Staying in the workforce one year longer can often add two to three years onto the longevity of your retirement money. And that's a huge thing. There's actually some research out of Stanford that showed when you get close to retirement, working one more month is the equivalent of having saved one additional of your savings across your 30 year kind of working life.

That's a huge deal, right? Think about that-- one month when you get right near retirement is the equivalent of saving 1% for 30 years across your working years, because you get to stay invested longer. You don't have to start taking distributions. You can ride the market longer. And right, you're still getting paid to work. So the longer we can keep people in the workforce, typically, the better.

Now that's not reality. A lot of people, right, lost their jobs, and they had to make changes. But I think as we look at the gig economy possibilities, can we work part time somewhere, that's going to be very beneficial for people both emotionally, mentally, and for their finances.

- Jamie, do you get the sense now when you talk to clients that they are foaming at the mouth to get into this market, because it is seemingly on autopilot? And then when you talk to them, do they sound as though they want to take more risk and get involved with more parts of the market that you're not comfortable with them getting into?

JAMIE HOPKINS: Yeah, I'd say when we look across-- you know, we serve a lot of households across the country here at Carson. I think about 39,000 households. So we see a lot of different people in a lot of different stages of life, and I see both that. We see people that come in, and we talked about that recency bias, that fear of missing out of really long, kind of upward trend, whether it's crypto or the general markets that have been very positive.

I will tell you we get a lot of the people that come in today that we haven't been working with that feel very uneasy about it. Like it's actually the opposite. They've had all these gains, they've done really well, and they're kind of at that-- that moment, you know, do I need to de-risk a little bit. Do I need to take things off the table. And that's typically a risk tolerance or risk capacity question. You know, what are you looking to do.

The flip side, you might have 28-year-olds that are taking a tremendous amount of risk when it comes to their portfolio and really should. That-- that's where that individual planning comes, right? I often talk about like a thumbprint, right? It's unique to me, just like your risk tolerance and your portfolio should be somewhat unique to you. What are you trying to accomplish with it.

It is another thing about retirement-- I personally still believe too many people de-risk too much for retirement once they're into retirement. We've had that notion of-- everyone's heard this forever, right-- take 100 and subtract out your age, and that's your bond the stock portfolio. There's not actually a lot of good research to support that strategy. It's kind of a funny thing that when we actually go test that, a rising equity glide path to taking more risk later in retirement actually works better. But it's completely against what we've been taught for 30 years. It's things like Bogle used to talk about that. And it seemed to make sense, but as we've gotten better analytics, we've actually found out that some of those tried and true strategies are not great strategies.

- And Jamie, one of the things that you pointed out, of course, is that Social Security trust funds are on track to run out of the early 2030s. How has this potential lack of a retirement income source in the future inform the way that you're advising your clients?

JAMIE HOPKINS: So when it comes to Social Security, I take this almost as kind of a personal mission. I've been a professor now for 12 years too-- I teach advisors, I teach consumers, I help advisors here at Carson. I've written books on this, my latest book, "Rewirement." And what I talk about there is how important Social Security is. It is arguably the most efficient and best financial instrument that's ever been built. But it is on the course to run out of money. It needs changes, it needs help.

If you take a half step back and you look at the importance of it, almost 2/3 of Americans, it provides more than half of the retirement income. And if I'm in my room, I go around, and I say, you know, for 1/3, it's all the retirement income over 90%, for 2/3, it's more than half. We really do not have a system set up here in the United States where we can allow people to live comfortably in retirement without Social Security.

It was when Biden ran for office, and when he talked about his tax plan last year-- that was the single biggest tax increase or fix to Social Security was that. Now that hasn't materialized in the conversation through this summer. I was happy to see the trustee report-- I know a lot of people don't read those. I do every year when that came out this year. We only lost one year of funding through the pandemic for a variety of different reasons, but I was very worried we might lose three or four years of funding, because so many people were out of work not paying into the system.

The benefit of kind of this time window getting shorter is I always ask people, when's the last time the government fixed something 13, 14 years before it fully broke. I can't name anything. So when we look out and Social Security-- we have this cliff time period where if it runs out of money-- it doesn't mean social security stops making payments. This is a huge misconception out there. What it means is they only make as much payments as money that comes in through the payroll tax. So it's about 3/4 at the beginning, about 77% of promised benefits would be able to be paid.

But that's billions of dollars that are not being out into the public, not going back into commerce. So there would be a huge negative effect just on the economy if we ever got to that point. I do expect to see social security change eventually. So when we talk to clients about it, when you talk to family and friends about it, you do have to start with how important social security. Is it's an inflation-adjusted lifetime income option that allows-- it keeps seniors out of poverty in the United States. It does a great job at that.

We do need to support and fix the system. So you have to have those real conversations. It is underfunded today because changes in life expectancy and changes in the number of people in the workforce have put stresses on the system.

- All right, we'll leave it there. Jamie Hopkins, managing partner of Wealth Solutions at Carson group. Thank you so much.