The Path to Retirement

As a Certified Financial Planner and executive at CIC Wealth, Malcolm Ethridge helps clients figure out their own path to retirement. In this episode of MarketFoolery, he shares what he’s hearing about how they’re feeling, their relative interest in meme stocks, and what he thinks the rest of the year will be like for people trying to chart their own financial path.

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This video was recorded on June 22, 2021.

Chris Hill: It’s Tuesday, June 22. Welcome to MarketFoolery. I’m Chris Hill. With me today, I’m very happy to have Malcolm Ethridge, a Certified Financial Planner, executive vice president at CIC Wealth. He is also the host of the Tech Money Podcast. He joins me now from, where else? His home. Malcolm, thanks so much for being here.

Malcolm Ethridge: Happy to be here, Chris. I appreciate the invite.

Hill: There are a few things I want to get to, but I was saying before we started recording, people who are in your line of work, who are working with clients, with people who are trying to put together a financial plan for their lives, I’m curious how the last six months has affected the people that you’re working with because to say it has been a roller coaster ride. There are any number of reasons for that, including, but not limited to, widespread disbursement of the vaccine, the rise of meme stocks. We can get into that. But just in general, the people that you’re working with, how are they feeling about 2021 so far?

Ethridge: Yes, so I’ll break that answer into two separate parts. It will be the group who were either clients of mine or clients working with a financial advisor prior to COVID, and then the clients who started working with their advisor through COVID up to call it a week ago or whatever, because the clients who had already been working with an advisor are pretty much set in their plan. They’re pretty much knowing what their advisor is going to say, they’re pretty much knowing where they should be focusing and applying their attention. But then the folks who are just now starting to work with an advisor or just started working with an advisor post COVID, they’re getting rooted in what their understanding and their planning and their approach is. They’re still a little bit like jelly or a Jello, and you’re trying to mold that Jello still where it hasn’t quite set yet. It’s still in the fridge, it’s still curing and it hasn’t quite set yet because it usually takes about two years to really solidify in a person’s mind what their financial plan is.

You see the commercials, they tell you to get your plan, follow this orange line to retirement, the green line zig-zagging around the neighborhood is going to take you where you want to go. They leave out the fact that it doesn’t happen over a weekend. It’s really about 18 months to two years before it really gets entrenched and you really understand how to follow that plan. I say all that to say the folks who we were working with pre-COVID, that’s almost two years ago, God help us, they are a little bit upset by the fact that the meme stock phenomenon came and went. In some cases, frankly, some clients are a little bit disheartened that they see the returns that some people on TV made that they feel like they could have made too and have questions about that, but it didn’t go much further than questions. Separately from that, I think some people’s expectations who are just now coming to the table are being skewed by what they see happening in the media, friends talking about what they invested in Dogecoin, Bitcoin, God knows what else. Those are the people that it’s a little bit tougher to rein in. It’s a little bit tougher to set proper expectations. I think frankly, time will tell a year from now, two years from now, when the market gets back to reality and we start to see our average annual return of 7%, 8%, 9%, whatever the S&P or a balanced portfolio will do, how those people feel about those types of returns and how those people feel about that kind of performance. Then that will tell us what the effects of this moment in time really were.

Hill: It’s interesting because as I’ve said on the show before, it’s clear that people who started investing in 2020, and certainly people who started investing in the spring of 2020 really got their expectations out of whack. The reason I said that is because we’ve gotten emails from listeners and the questions go something like this, “I am looking at this stock XYZ, do you think it could 10x in the next three years?” Asking that as though that is a reasonable expectation to have and it’s just like, how? No, no. But it’s interesting to hear what you say about the meme stocks because part of me has hoped that what’s happened with the meme stocks has been contained in some way, that it’s contained to a small universe of stocks, so it’s GameStop and AMC and maybe a couple of others. But I’ve also been hoping that, well look, this is just a much smaller group of people and maybe even a much younger group of people who are just getting interested and I understand the attraction. It sounds like you’re saying like no, it’s investors and clients of all ages.

Ethridge: I’ve got 65-year-old pre-retirees, 70-year-olds in retirement sending emails, phone calls, asking, what do you think about AMC? So it’s not just what the financial media would have you believe that it’s 20-somethings who are sitting and swiping on Robinhood because they have nothing better to do because the world is underemployed right now and the world is understimulated. No, no, no. These are not yours necessarily, but some people’s grandparents who are sitting and agonizing over these decisions of, should I get in GameStop at $300 a share? Or did I lose my shirt in Lordstown Motors? Or whatever the hot topic of discussion is. No. One thing that we do as a practice to combat this, though, is we give our clients a second or whatever the number is, a sidecar account is what I call it, where those who are interested in trading in speculation have an account that’s separate and apart from their “real money,” if you will. I am doing air quotes here because nobody can see me. Their real money accounts we manage in a responsible way, we have a purpose, we have a goal in mind for the money that we’re managing. But then the sidecar account is $100, $200, $5,000 depending on overall portfolio size and their own net worth, how much they are willing to throw away literally is what the focus of that account is, and that’s where they have their fun.

In that account, they’ve got 100% discretion, they can go online and place trades at 2 a.m. if they want to. Obviously they won’t clear until the market opens, but you get what I’m saying. Rather than driving themselves crazy saying, “I know Malcolm is going to tell me I can’t buy GameStop, but I really want to get in just for the conversational purposes of it.” They’ve got that sidecar account that they can go and buy whatever they want knowing that if that amount goes to zero tomorrow morning, it’s not going to disrupt the plan one bit. We’ve already planned for that money to go to vapor and not exist the next day.

Hill: Was it helpful at all when AMC’s management basically came out and told everyone, “Our stock price is completely divorced from the reality of our business and don’t blame us”?

Ethridge: No. Because the stock price didn’t perform in concert with what you would expect from a CEO coming out and telling you, we are the riskiest stock you can go buy right now. That’s basically what he said. “We’re the dirtiest sock in the hamper. You pick us up at your own risk.” People still said that same day he made that statement, “I want more shares of AMC.” It’s completely divorced from reality and that’s why I always make sure the analogy I give them is, you and I are going to Vegas this weekend. We’re going to go to Caesars Palace, and I want you to pre-determine how much you’re going to take out of your bank account and walk into the casino with this weekend. Whether that’s $200, $2,000, whatever it is, you tell me how much that amount is right now and I’m going to stand next to you every time you go to roll the dice and remind you that that is your amount. The moment you get to zero and you talk to me about going to the ATM and doubling down and I think I can win it back, I’m going to remind you, no, 2,000 was your number, 200 was your number. We’re out of here. We’re getting on the plane, we’re going back home, this is it. That’s essentially the way I encourage people to think about adding these kinds of distractions to their overall portfolio because in essence, they don’t really accomplish a lot. If you bought AMC with $2,000 and you have a $200,000 portfolio, if that $2,000 goes to $2,050, how much of a proportional difference does it really have on your overall portfolio versus how much time and attention it really distracted you away from being a person and living life and being happy with everything else that we have to be thankful for coming out of COVID. It’s just a distraction. It’s really important to just help people put it in context and understand that you’re speculating here, you’re having a little fun, it’s entertainment, but it’s really not anything that’s going to help you go buy a second house or send your kid to college or anything meaningful. If you are risking enough for it to have that level of meaning in your life, you have taken on extremely too much risk at this point.

Hill: Well, let’s move off of the meme stocks for a moment.

Ethridge: Sure.

Hill: To stick with something you just touched on, which is housing, because that’s certainly one of the big macroeconomic stories of the past 12 months. What is going on with housing, how is that affecting retirement planning right now? Because we’ve seen people who have bought homes a few years ago and they’ve seen the value of their home go up 40% in some cases in just a couple of years. You have other people who are maybe looking to downsize and something that they would have been able to afford a couple of years ago is suddenly 40% more expensive.

Ethridge: I live in D.C., so not too far from you guys at the Motley Fool. In my neighborhood, my neighbor three doors down I think, they moved in after my wife and I moved into our house, and they literally just sold their house a couple of weeks ago and made $150,000 profit. We’ve been here less than two years to give it context. In the conversation my wife and I are having, it’s like, well, should we be considering selling? I immediately counter that with, if that’s what they’re selling for, where are we going to be able to move to where even with that $150,000 to apply to the new house, where are we going to be able to move to that isn’t also ridiculously inflated. Every action has an equal opposite reaction. More to your point though, the frenzy around getting into a house, I think has gotten to a point where it has derailed some people in the sense that I’m having conversations with more so friends and peers who aren’t necessarily clients, who have liquidated an old 401(k) plan to be able to have the cash to make up the $60,000 difference because they had to offer above asked three different times before they could secure the property. Now they cashed out that $100,000 401(k) plan, paid God knows how much in taxes just to get their hands on that $60,000 to make it happen. And so now that $100,000 for a 35-year-old would have been $300,000 by the time they got to retirement is now vapor. I can’t say it’s vapor, it’s in your house, you own it. At least it went somewhere productive, you didn’t just buy a Tesla or something.

But as far as retirement planning goes, you don’t have it there anymore. Because as a retirement planner, we don’t include the value in your home as part of your plan. If you tell me, my wife and I live in a house that has six bedrooms now and we know we’re going to downsize to a condo at some point and it’ll be half as much, maybe there’s something to plan around there. But for most people, the house you’re in is probably the house you’re going to retire in if you’re older than 50, so there’s no reason for us to plan around you extracting equity out of that house as part of your financial plan. Really I’m trying to help you figure out a way to get the house paid off before you retire if you’re already 50 plus. I say all that to say, I see a lot of younger people making the mistake of sacrificing their retirement savings to get into the house in an overly inflated market, where if we were to wait just another six months, this thing might have cooled completely because COVID has passed us by completely at that point, we can hope. At that point, people aren’t so focused on, “I got to get a house” the way they are right now, and that’s my opinion on it, is that at this point, if you haven’t already bought, you’re probably better off waiting six months or so, if it means that you’ve got to sacrifice your retirement savings to get into that house.

Hill: Obviously, the world has been turned upside down over the last 15 months because of the pandemic. But we’re obviously still feeling the ripple effects, and the word I keep using to describe what’s happening in a lot of different realms of the economy is lumpy. I just feel like when you look at employment and where we’re going to be maybe six months from now, it’s probably going to be better. But the path between here and there is kind of lumpy. It sounds like maybe the same thing is going on with housing. With that in mind, what do you think the rest of 2021 will be like for people who are trying to plan for retirement?

Ethridge: I think two things are happening and they’re both driven by fear. I think one, people are having this YOLO moment where they’re saying, I’m 50, 60 plus, I’m looking at how fleeting life really is. The last year-and-a-half has made me very aware of my own mortality, and I’m not willing to sacrifice or trade in the next 10 years of my life for a paycheck the way that I have. I want to retire early. Whether I have the money financially to do it or not, I’m just going to pull the ripcord, jump out the plane and hope the parachute opens. In some cases, people are significantly overprepared for retirement already as it is, and they have to make a few tweets here and there, they get to travel and live a life of luxury the way they had as an employee, but they’re going to be fine. But then there’s also the group that isn’t and it’s having the same reaction, and it’s completely driven by fear. What I’m afraid of is two years from now, that same person in that situation is going to say, “God, I wish I had thought a little bit more about this and put some pen to paper and really looked at the numbers before making this decision.” Because it significantly altered what I can and can’t do for the next, however many years retirement is for that person because applying for a job and getting hired at 60 is nowhere near the same as it is at 45, at 35, at 20. It’s just really important to keep those things in mind because people have been having some very knee-jerk reactions to what’s happening.

On the flip side, I’m also more hearing than actually having the conversation myself, where people are obsessively now saving money and are so concerned because the world went haywire last year, March, April, May. We just kept hearing on the news, economies tanking, the world is ending and that can’t get out of people’s mind. It’s similar to the Great Depression, where like my grandparents as an example, were born in the ’20s, so they were Depression-era babies. Their whole mindset around everything was to stockpile as much cash as you possibly can. Don’t invest anything, put it in cash, pay off debt as quickly as possible, buy everything, cash, your car, your house, your everything. I’m starting to see some more of that behavior. I’m starting to hear some more of that behavior as I talked to people who were like, “I’m not investing in anything, I’m putting it in cash.” These are younger people, these are not necessarily people who need to have a 20% allocation to cash because whatever. These are people who need that money working for them in the market over the next few decades to increase their net worth over time, and they’re stunted by what has happened to us in the last 18 months.

Hill: If you want to hear more from Malcolm Ethridge, that’s easy. You can check out The Tech Money Podcast, great conversations about money, all things money. Malcolm, really appreciate your time. Thanks for being here.

Ethridge: Happy to do it. Thanks for having me.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against so don’t buy or sell stocks based solely on what you hear. That’s going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.

Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bitcoin. The Motley Fool has a disclosure policy.