CONSUELO MACK: So, there's something called a zeitgeist, and that is kind of what the overall feeling is, I mean, among all of us. So how has the zeitgeist changed as well? I mean, psychologically, has there been a shift?
MARK CORTAZZO: Absolutely. I think that people's ability to make a big, fundamental change has dropped dramatically. Over the past 12 months, it's actually a very noticeable difference in how quickly someone comes in, does a plan, and actually executes plans. Looking at things that are very straightforward, easy decisions to make.
We had someone come in with a six-figure sum of money in a money market, earning .2 percent. It wasn't FDIC insured. And we said to them, "We have an FDIC-insured money market that's earning 1.25 percent. It's safer, with a higher yield." And, it required a fair amount of additional dialogue to get them to make that move. And, you know, a year ago, that would have been, you know, just easy. Check the box, this is safer, higher yield. Let's move it. And even simple things have gotten to be more, you know, difficult decisions for somebody to actually make a change.
CONSUELO MACK: So there's a paralysis, kind of, that's set in? And is this from the trauma of the financial meltdown? Is that essentially where this comes from?
MARY BETH FRANKLIN: Oh, I think people are so focused now on not so much ROI, return on investment. It's reliability of income. People are looking for guarantees. They're scared. But what they have to keep in mind, we are all so many victims of recency. Just because the last few years have been terrible, we project that forward, that it's always going to be that way, and therefore we need the guarantee of an insurance product or a CD or whatever. Which is fine for maybe the first five years of your retirement money, you should have lots of cash. But even at 65, you're a long-term investor, and you have to keep a chunk of your money invested for growth.
CONSUELO MACK: So, Mark, run us through a conversation that you have in explaining to your clients, for instance, exactly, this is what we've just been through, traumatic. But, this is not going to last forever. And in the meantime, this is what you need to do. How do you do that?
MARK CORTAZZO: We do a financial plan for every client. And I think when you can show someone a blueprint of, here's where you are, here's where you need to go, and we can map out a route, and the pieces fall in place and you understand why you have what you have, it's an easier process for them to get to, because they see out five years, out 10 years, out 20 years, where right now, they're focusing on what happened today.
And, when things are going great, and the market's doing well-- the first time I was on your show was September of 2007. We were talking about providing protection. It wasn't a very popular topic, because the market had just been on a five-year run. Everything was great. And, a very short period after that, after we were talking about setting up protection, that protection would have been very, very valuable. I think we're just the opposite now, where things have gotten hit, and things are bad, and people are dialing all the way back. And they’re forgetting about the growth and the fact that there's a good likelihood that 10, 15, 20, 30 years from now, they're still going to have a financial need. And they're just worried about today.
CONSUELO MACK: You know, retirement strategy. You used to retire, supposedly, if you were lucky, with a lump sum. And then you put it in a balanced, you know, an asset allocation model, and you'd re-balance at the end of the year, or whatever it is, and that was it for your entire retirement life. That's changed a lot, Mary Beth. Right?
MARY BETH FRANKLIN: Right.
CONSUELO MACK: Now there are kind of multiple phases of retirement planning? So tell us about how that has changed.
MARY BETH FRANKLIN: Well, for so much of the population in the past, they didn't even have to worry about the investment factor, because many of them had pensions, many of them had social security, and that defined how much they had to live. As we've moved more into this 401(k) climate, people took their personal savings, and the idea was, as long as you are invested in a reasonable mixed portfolio, and took out just four percent the first year in retirement- so if you have a million dollars and you took out $40,000 the first year, and adjust that for inflation, we were told that in 90% of the cases, you'd never outlive your money. Unfortunately, we just lived through the other 10%. So even that, you know, gold standard of a conservative way to draw down your investments, that has changed.
I'm seeing a lot more emphasis, and I think Mark may too, of segmenting money, to have cash for those first five to 10 years in retirement that is not subject to market whims, and then keeping the rest of your money invested for the long term. So it gives you the guts to stick to your investment plan. I don't have to worry about what the market's doing, because I have cash today.
CONSUELO MACK: So phases.
MARK CORTAZZO: Can I just--
CONSUELO MACK: Yes, go ahead.
MARK CORTAZZO: When people are looking at this 50/50 mix of stocks to bonds, and you look at what happened over the past 10 years or 15 years or 20 years, it was able to support a five percent a year withdrawal. Part of that, why that was the case, was interest rates in the '80s were double, high teens. If I have 50% of my portfolio in bonds and 50% in stocks, and my bond piece is thrown off seven percent, and I have a 15 percent hit in the equity markets, and it stays down, within two years, that bond coupon is bringing me back up to zero. If I have a one percent or two percent coupon on my fixed income, and I get a 15 or 20% hit, because we're seeing more volatility on the equity piece, it's 10 years before that coupon is bringing me back to zero.
CONSUELO MACK: Which is what's happened.
