Ep # 93: Things That Make You Go Huh?
At Haas Financial Group we love statistics! We often play a fun game where someone has a statistic and the other person has to guess what they think it is. Oftentimes the actual answer is wildly different than what we were thinking. That proves the point that conventional wisdom is often not in line with the statistic and it leaves us trying to figure out why there is a disconnect between what somebody should be doing and what they're actually doing.
In this podcast episode, we highlight some surprising facts in financial planning and investing. Will you go "huh" after listening?
- Stock market returns and how they compare to historical averages
- The worst year for bonds ever
- Life insurance and death claims stats
- Retirement planning – ¾ retirees haven’t calculated what they need to live a comfortable life in retirement
Watch the full video on YouTube:
Benjamin Haas 00:02
Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!
Adam Werner 00:25
Hey there. Podcast time. Once again.
Benjamin Haas 00:29
How are you today, Adam?
Adam Werner 00:31
I'm doing all right. How about yourself?
Benjamin Haas 00:33
Well, I know you're doing just alright. Fender bender this morning. It's always something going on but rainy day.
Adam Werner 00:42
Look, it wasn't me. It was Amy and it wasn't her fault. She was sitting at a traffic light so it's the way these things go.
Benjamin Haas 00:47
These things happen, right? This is life. I actually thought about this yesterday, I think we talked about this, the percentage of people that just are going through stuff. We were talking about some heavy stuff actually with clients. But like, just think about it, the people you interact with every day, just the little nuances, all the way to fender benders to sickness, health, it's important. Public service announcement to all our listeners, it's important to be kind. Alright, let's, uh, let's get into podcasts. So, we had a kind of different idea for today that I hope people will enjoy. We read a lot of things. We're of course statistically driven people and sometimes we're trying to figure out why there is a disconnect between what somebody should be doing and what they're actually doing. So, the thought today was, let's go through a couple, I feel like there's six different stats or things that we know to be true. That if you think about it, they make you go, huh? Really? Take it away.
Adam Werner 01:54
So, I'll get into it, but I know you and I like to do this a lot where one of us will have a statistic, and we always go the other, just guess, what do you think it is? Then oftentimes, the answer just wildly different and that kind of proves the point that the conventional wisdom is often not in line with the actual statistic that kind of backs it up the actual reality of the situation, so the first of those
Benjamin Haas 02:17
Adam Werner 02:18
The first of those being, let's just talk about stock market returns and, in our view, that's S&P 500. That's our benchmark for stock market returns and when you think about the last three years' worth of returns, so 2020, COVID- 2021, and 2022. If you average those out, what would your guess be? Or I think the average person would think, yeah, it's probably not anywhere close to the long-term historical averages. But when we went back and looked at the long-term, historical average. I should, maybe it's not going all the way back to inception, we're talking in our terms, more recent 50 years. So going back to the early 70’s, a long enough runway, people remember the 80’s, there were some pretty bad markets in and out of that time period. The S&P has averaged just over 10% over the last 50 years. Over the last three years, it has averaged including January, just over 8% per year.
Benjamin Haas 03:22
Right, so I think we've said this and I kind of cheated because I did a little video short on this at the end of the year, but had I told you going into this year that like you could rewind and you get your choice. You can sit in some interest-bearing account or you can take the ride of the last three years, knowing now that there was a pandemic, there's contested elections, there was record high unemployment, followed by record high inflation.
Adam Werner 03:48
Benjamin Haas 03:49
Super horrible stuff. We're still not that far off of historical norm so it's that whole lesson that it's really important to like not just react to how you feel and it's really important not to drive looking in the rearview mirror. See what's in front of you, see that the average is still moving forward. They're always pretty good. I mean, 8% these last three years? 10% annualized last 50. I hope that makes people go wow. Really?
Adam Werner 04:02
It's a cliche for a reason, right? The saying it's time in the market, not timing the market. Yeah, if you can invest for the long-term and go along for that ride, historically speaking, you've been rewarded.
Benjamin Haas 04:39
I'll go to another one that's kind of similar and I had really been put through this when I was studying investor behavior and you know, kind of behavioral finance. If you break market returns, market again being this S&P 500 like you said, into four different categories, annual return was it a big gain? Which is defined by 12% or more. Was it a small gain? Small being zero to 12%?
Adam Werner 05:05
Yep, that's average.
Benjamin Haas 05:07
Kind of feels big, to small loss and big loss, what percentage of the time do you actually have that big gain of more than 12%? And it's 51% of the time. Versus what percent of the time do you have a big loss more than 12%? It's only 7% of the time. So, you go through a year like last year, that just really felt pretty horrible but based on that statistic, that's a very small percentage of the time that would be repeated with frequency.
Adam Werner 05:41
And when you shared that with me prior to this podcast, that definitely made me go, wow, that just, it doesn't feel that way. I think that speaks to, and we've talked about this in different iterations to where it really does reinforce that losses just have a more visceral impact on the way we view things and how it feels. When the big gains, they feel good temporarily but they don't stick. That positive feeling doesn't stick as long as the negative feeling from a big loss really does.
Benjamin Haas 06:17
Yeah, it's like, I remember being super excited when the Eagles won the Super Bowl and it was like, huge celebration. I don't remember that feeling as great or better than this week has felt to me after they lost to the Chiefs in that fashion. The loss just feels so much worse. So yeah, I get it but you put those stats together just to wrap it up in a kind of nice wrapper here. Small gain from zero to 12%. If the big gain was 51% of the time, it was another 20-21% of the time that you got a small gain. So that's 70%-72% of the time over the last 90 years. That's what the stat is going back to 1926 you've had positive return. So, it just goes back to your point, it may feel bad but statistically, there's a reason to stay in the market because statistically the market goes up more than it goes down.
Adam Werner 07:08
So, speaking of feeling bad about returns in the markets, let's talk about bonds. This was another and we've talked about this but now the data kind of reinforces it. But 2022 was the worst year for the general bond market. Ever. Full stop.
Benjamin Haas 07:30
Ever. So how many years of history do we have in bond investing?
Adam Werner 07:37
Just a few.
Benjamin Haas 07:39
Like few 100?
Adam Werner 07:42
Benjamin Haas 07:43
So again, I'm just trying to put this in context when my little five going on six-year-old, like doesn't get his way and the tears come out, I will often hear this is the worst day ever and that's not true. Maybe that's the way he's feeling at that time but what you're telling me is the bond market last year, literally, worst year, ever.
Adam Werner 08:10
Yeah, and by and by a fairly wide margin at least in recent history. Going all the way back to 1980 was the previous or worst year on record and that was down 9% for kind of the aggregate index. Last year, the aggregate index was down like 13. So even in that range, we're talking what, 30% more. 30 to 40%, more than the previous worst year. That just kind of puts into context really how bad 2022 was just overall from a market perspective.
Benjamin Haas 08:41
So, if this is the first time somebody's hearing us talk about this because I know we have in other spaces at other times, what's the key takeaway there? We knew while we were going through it that this was going to be a rough go when interest rates had to rise that quickly. But if the question is what do you do about it? How should you react to it? Should I be getting rid of these things? Again, you kind of have to recognize that if it was the worst ever, that there's going to be some rebound from that statistically speaking. I think we're already getting some of that. It's not to abandon what is supposed to be provided by those instruments to you whether it's hopefully some safety of principle and some income. But I almost want to use this as an opportunity to say to a lot of people, congratulations for sticking it out. It really was the worst ever and now we get ready to move forward.
Adam Werner 09:33
Yeah, until we experienced the next worst ever, whenever that may come.
Benjamin Haas 09:36
In another 250 years.
Adam Werner 09:39
Yeah, it's me being Mr. Brightside.
Benjamin Haas 09:42
That's you to a T. All right. We're planners. Let's get off of like investment statistics and talk about some planning things and I want to go right to estate planning because this is a stat that always stuck with me. When I say this, we're not estate attorneys but we have a lot of these conversations when we ask people, what are they looking to accomplish with their estate? No one wants to be a burden on their family, nobody wants to put their family in a bad spot having to settle in an estate that's completely disorganized, or not have documentations done because the defaults to the Commonwealth of Pennsylvania, wherever you live, they may not align with you. But what percentage of people actually have a will? 33%. That's it. One out of every three people has a will even though, I don't know, our small sample size of clients, I feel like it's close to 100% would say I don't really want to be a burden. I don't want to leave a sour taste in my family's mouth because I didn't organize anything or have any documentation done.
Adam Werner 10:48
Yeah, this one stood out to me too and I guess it shouldn't because we've seen it. But yeah, the disconnect and maybe you said this. It's the disconnect between what someone may want to avoid or what they would want to see happen and the formality of just documenting that. The time and a little bit of money that goes into that shouldn't be a super high hurdle. But sometimes, especially when you think about estate planning, I know we've talked about this before. It's just not a fun exercise, right? It's not a fun thought process to go through and that maybe it's the well, it's not going to happen to me. I got time, I'll figure it out. I'll do it later and you just kick that can down the road kind of in perpetuity. But yeah, this one definitely stood out to me as I didn't realize it was that wide of a chasm between people that have it and the people that don't.
Benjamin Haas 11:47
Yeah, and I won't stay on this rant and tangent for too long but I think that's where we have tried to figure out how we can help people with that and it's not just to introduce people to a good person to work with, you may help get that done. I realized that it sounds daunting but it is one of the things you have to do. But sometimes it's the how. How do I go about doing it? And that's where, like, in this day and age, technology really can help you. In the same way that look, if 33% of people get their wills done, 100% of people should be getting their taxes done, right? Like that's a requirement and how do people do it? They found a way through programming a TurboTax or something like that, to make it, hopefully, very simple. The same thing exists in estate planning at this point. There's a Legal Zoom and Ever Plans that we like to introduce to some people, depending on the situation that may be able to walk you through it. So, if you're a part of that 67% that sees it really valuable but hasn't done it. Let's figure out why you haven't and recognize how you can go about it in a way that's going to suit what makes you feel okay.
Adam Werner 12:54
Yeah, so I'll pivot to another one that is similar vein, but life insurance. We are strong proponents of not overpaying for insurance. It's insurance for a reason and when it comes to types of life insurance, term is one of the cheapest ways to get that coverage. But the statistic that we saw, was term insurance actually pays out a death claim less than 2% of the time. So, of all the people that have bought term insurance, I am one of them. I know you are too. They haven't paid out yet because we're here talking. But less than 2% of the time does term insurance actually pay a claim to a beneficiary because the account owner has died, which to me that just that blew my mind.
Benjamin Haas 13:55
Yeah, but I know that you shared and I'm not going to steal your thunder. I'll let go ahead. Oh. In a way that kind of makes sense. The whole point of a term policy is that it's supposed to provide you I hope, with some security and dare I say some peace of mind that if something bad happens, you've created some sort of financial backstop for your family. But the intent is to outlive that, right? That in this 10-year term, 20-year term. I'm going to live a long and healthy life and I paid for it but I didn't need it. But I think you found an even more crazy statistic on the details of why 98% of the time it doesn't pay out.
Adam Werner 14:38
Yeah, it was it was more than 90% of the time. So essentially, for anybody that purchased a term policy, 90% of the time before the end of whatever that term is. The policies were either canceled or they were converted to other permanent coverage. Either they were just cancelled, didn't pay for it anymore, just got rid of it, or it was converted to a permanent policy that hopefully will be there for that person for the rest of their life. But 90% of the time, something happens other than that person dying and using the proceeds.
Benjamin Haas 15:14
That baffles me. Maybe not the conversion part, I think that's probably really solid planning and we won't go into the details of why but you go through this insurance curve of life and why you have insurance. Maybe cover debts, replace some income, turns into different things, estate planning, maybe long-term care benefits when you get a little bit later into your different phases of life. But the whole fact that people let it just be terminated, I guess, in some cases, we've told people like, hey, you're nearing the end of this. You don't need it anymore. Don't pay for it. But yeah, gosh, that's a really high number 90% for those two things.
Adam Werner 15:15
Yeah. I couldn't find this statistic but I was curious. I wonder if your car insurance had a term to it. Say you had a 10-year term car insurance? How many times statistically, do people actually file a claim on their car insurance in a 10-year period? It's probably a fairly low amount when you think of, you know, the millions of people with car insurance in the country. So, all that said to me and maybe this is my insurance cynic coming out, but it's insurance for a reason. They wouldn't be in business and be profitable if it didn't ultimately work out for the insurance company in the long-run. The house always wins.
Benjamin Haas 16:36
Yeah, well, again, the difference between it paying out, I mean, I think we made this joke, as we were prepping for this. If 2% of the time these term policies pay out, but 100% of the time people die. You have to reconcile that somehow. So, if you have term insurance, let's talk about it. Maybe converting makes a little bit more sense. Let's end then, kind of on our bread and butter, just retirement planning, in general and I know that we will often read these studies. This one came from an Edward Jones. I think it was actually maybe a year or two ago, they probably do it every year. But we did a podcast on some of these statistics at that time and the one that I found somewhat shocking, made me huh, was that three out of four retirees, so 75% of the people who were ready to retire, had not done any calculation on what they were going to need in retirement. The whole premise of our business, helping people recreate paychecks and find out am I going to have enough money to last my lifetime? Only one out of four people have done it.
Adam Werner 17:45
That one stunned me too and the questions just start coming to mind. Like, why? Like, why haven't people even tried to explore that? And I think there's a multitude of reasons but I think one of them is, maybe they just don't want to know the answer.
Benjamin Haas 18:04
Yeah, I think that's part of it and I know, we didn't mean to go here, but let's just keep going. The first thing that pops into my mind is, again, some of the problem with our industry. We have a bunch of licensed advisors in this industry that have made that, not a partnership. It's been well, I don't want to go to somebody who's going to sell me something or not tell me all the details or not educate me the way that I kind of want to understand this stuff and that would be a shame, too.
Adam Werner 18:31
Yeah, there's definitely a trust issue in the financial industry. It's not what it's known for - being incredibly trustworthy.
Benjamin Haas 18:42
But I want the takeaway to be alright, so for those 75% that haven't done it, here's why it's important to do it. In the same way we're talking about insurance and estate planning with these wills, people are living longer. The number of financial issues that can pop up in retirement are hurdles that they can have to go over from taxes to health care to withdrawal rates. There's a lot to be figured out so it really is important to start with that simple calculation and rely on a trusted source to give you some of that education and understand your options.
Adam Werner 19:18
Yeah, so that's where if you haven't kind of calculated what you may need to live off of, then whatever you retire with, you retire with. That's the pot of money but then there's a huge difference between withdrawal rates and how long that money is going to last. There's a lot of assumptions and variables that go into a calculation to kind of determine that the future time value of your money. But for our quick hypothetical, that we kind of put together, the difference between taking 5% withdrawals every year, and 3% withdrawals every year, can be as much as 15 years' worth of your money lasting. So, the difference between maybe your money running out at age 80 or 90. That could be a huge, huge, huge, impactful moment in your success in retirement.
Benjamin Haas 20:39
And that's why I think we're put in that position to kind of answer some of those questions, can I afford to do this? And I think that, I don't know, if it's a great analogy, I'm actually not very good at these analogy things but I told you earlier today, think about planning on a very small scale. If I was going to take my family on a vacation and all I had was the money in my pocket, I'm going to try to plan out how far can that stretch me? What are the things that we can do on this vacation or can't. I don't think you just put some money in your pocket and, well, when I run out of gas, I run out of gas. If we can't sleep in a hotel, we can't sleep in a hotel. Like, that's it. I don't think we innately as humans work like that. You do kind of have to treat your retirement the same way. What can this pot of money do for me? And is it going to meet my needs or not? And if it's not, what are the variables that I can move around to get things better aligned to hopefully give me a higher percentage likelihood of success.
Adam Werner 21:34
Yeah, because without that information in your mind going on that road trip, the more money you have in your pocket, the better. It gives you that flexibility but if you know what you need, then you can plan. You don't necessarily have to dedicate more of your time and resources to putting that money in your pocket for that trip if it's more than what you actually need.
Benjamin Haas 21:57
Bingo. I don't know, I hope this was fun. I really do feel like these are six different topics within our regular day to day with clients that show that, I used the word there is often a disconnect between what people really say is important or what they think or feel, and what we need to like, work with them on, and actually getting things done because ultimately, that's what a lot of this list is. It's one thing to like stand beside you and tell you, here's what we think you need to do and help you come to those conclusions. It's another to just get those things done. Keep in the market, just document the will, and let's calculate your retirement.
Adam Werner 22:40
And then take the rest of your time and focus on the things that you want to do.
Benjamin Haas 22:44
There you go. That's why we got a job.
Adam Werner 22:46
Benjamin Haas 22:47
Adam Werner 22:49
Well, thank you.
Benjamin Haas 22:50
Hope you have a bumper soon.
Adam Werner 22:53
Benjamin Haas 23:03
Hey everyone, Adam, and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!
Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.
Historical S&P 500 Returns
S&P 500 Return Calculator
Bonds worst year ever
Lack of wills
1993 Penn State University study (https://www.term-life-online.com/term-life-insurance-death-probability.html)
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