Rate Hike Déjà Vu & “Airbnbust”
by SGL Financial
Our 2 Cents – Episode #133
Rate Hike Déjà Vu & “Airbnbust”
The Fed’s efforts to curb inflation have continued this week, and that’s our first segment on this new episode of Our 2 Cents. Then, Steve and Gabriel are taking a look at some major shifts in the vacation rental industry and wrapping up the show with listener questions.
- Rate Hike Déjà Vu:
- What does this latest move by the Fed indicate about the banking industry?
- What do the continued rising rates mean for consumers?
- Are there any positive benefits to rising interest rates?
- Vacation rentals are facing new challenges, even as the industry continues to grow.
- An oversaturated market is hurting individual owners/hosts while short-term rental demand has never been higher.
- We’ll explain what could have caused the run up in costs and the oversupply in the market.
- Plus, the unique impacts being felt across communities and neighborhoods.
- Listener Questions:
- “I just paid my last tuition payment, so my kids are officially off the payroll. Is it safe to cancel my life insurance at this point? – Tom
- “I’m not retiring for another five years, so I don’t feel the need to be ultra-conservative with my money, but my wife keeps insisting that she wants to be more secure. Just how secure do I need to be at this stage?” – Jim
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Announcer: You’re listening to “Our 2 Cents” with the team from SGL Financial, Building Wealth for Life. Steve Lewit is the president of SGL Financial and Gabriel Lewit is the CEO. They’re here to discuss all the latest in financial news, trends, strategies, and more.
Gabriel Lewit: Good morning, good morning, and welcome to “Our 2 Cents” with Mr. Gabriel Lewit, myself, and Mr. Steven Lewit, my partner in crime.
Steve Lewit: Oh, in crime.
Gabriel Lewit: Well, for the show here.
Steve Lewit: We’ve gone over the crime border.
Gabriel Lewit: Well, that’s just a phrase, I should take that back.
Steve Lewit: Didn’t Katie give us a great countdown this morning with her-
Gabriel Lewit: The best, of course.
Steve Lewit: Her shiny finger. You have a different color today. How was your trip to Mexico?
Producer Katie: Great.
Steve Lewit: She says it was great, folks.
Gabriel Lewit: They can’t hear her.
Steve Lewit: They can’t hear her. You got to get headphones, Katie.
Gabriel Lewit: Headphones?
Steve Lewit: Headphones. Oh, I’m so excited this morning because I don’t know why. I’m just really excited. I think it’s the warm weather that we’re starting to sniff up.
Gabriel Lewit: It feels more spring like.
Steve Lewit: Yeah, I’m really excited about it. I’m-
Gabriel Lewit: Actually, producer Katie, can you Google the official first day of spring?
Producer Katie: That was on Monday.
Gabriel Lewit: Monday?
Steve Lewit: She knew that right away.
Gabriel Lewit: She did know. Folks, it’s officially spring.
Steve Lewit: Monday.
Producer Katie: This past Monday.
Gabriel Lewit: You said, oh, oh, past Monday or upcoming Monday?
Producer Katie: Yeah, past.
Gabriel Lewit: Yeah, past Monday.
Steve Lewit: Oh, it is spring.
Gabriel Lewit: Yeah. It’s officially spring.
Steve Lewit: I wish I had known that last Monday. I would-
Gabriel Lewit: Apologize for our confusion here.
Steve Lewit: I would feel better.
Gabriel Lewit: Yeah. That’s what I thought. I thought we were officially now in spring and this is our first spring show for you.
Steve Lewit: Yeah, well spring ahead.
Gabriel Lewit: I will tell you; I really hope the lawmakers decide to cancel daylight savings… Or keep daylight savings, I forget, permanently because it just drives me nuts.
Steve Lewit: I think something was passed but not finally passed. I’m going to go back and read that.
Gabriel Lewit: Yeah, they kicked this around a lot, and it’s never been formalized. But I will tell you, I would be very, very happy if it just never had a time change again because it just throws everything off in my family with the kids’ bedtimes and wake up times and all sorts of things. It’s no good.
Steve Lewit: Yeah, it does. Some people have a real problem adjusting their rhythm.
Gabriel Lewit: Yeah, I think I’m one of them. I was really, really sleepy for a week.
Steve Lewit: And I actually prefer the light at the end of the day than the light in the morning.
Gabriel Lewit: I think the vast majority of people are with you there. Yeah.
Steve Lewit: Yeah. But our government is not listening.
Gabriel Lewit: I don’t know. Yeah. Well, guys and gals, hopefully you’re doing great out there. Hopefully you adjusted to the spring forward and the official spring weather. Hopefully you’re having some of that as well and enjoying that too.
But we’ve got a good show lined up for you here. Of course, the news yesterday that just broke, we’re recording this here on Thursday. News yesterday was the Fed raised interest rates.
Steve Lewit: Again.
Gabriel Lewit: Again. Okay. That’s been a recurring theme for us here over the last year basically.
Steve Lewit: And there will be more.
Gabriel Lewit: And there’s very likely to be more. And of importance to note here is Mr. Lewit.
Steve Lewit: Yes.
Gabriel Lewit: The man, myth, legend was on TV yesterday invited by WGN, right? WGN?
Steve Lewit: WGN, right.
Gabriel Lewit: Yes. Talk about the Fed raise hikes. Because we’re in the midst of a TV star over here, I’m going to let him take point on this topic.
Steve Lewit: Yes, thank you. And my autograph pricing just went up from 2 cents to a nickel.
Gabriel Lewit: I think it’s at a quarter now.
Steve Lewit: It’s at a quarter.
Gabriel Lewit: Yeah.
Steve Lewit: Better than bitcoin. Yeah. The deal is that the Federal Reserve, despite having two weeks ago, the worst bank failure since 2008, and a lot of people were speculating, “Well, maybe they won’t raise it because the banking system is under question,” and all of that… Which would’ve been the worst thing for them to do was would be not to do anything because that would support that theory that there’s a problem in the bank system.
They said, “No, we think that inflation is the number one problem. And we’re going to solve this problem short term and long term because that is the most important thing for the economy.” And I happen to agree with them because inflation is a bad, bad thing. It’s very-
Gabriel Lewit: You don’t want to let it get on a runaway train.
Steve Lewit: If it gets out of hand, it rocks everybody. It’s bad. It’s hard to solve. Back in the 80s, inflation was at 16% and things were a mess. I think they’ve decided that that’s their goal. They’re going to get inflation down to 2%. And they forged the head, they didn’t blink. Now the problem is that inflation is still running at 6%.
Gabriel Lewit: Which is down.
Steve Lewit: Which is down.
Gabriel Lewit: Year over year, from the prior month.
Steve Lewit: Not nearly down enough. And-
Gabriel Lewit: It’s still three times the level they like, the Fed would like, to see inflation be at.
Steve Lewit: Right. And the problem is you still have rather strong employment numbers still rather strong. It’s not going away so fast, which is why I started earlier and I said, “There’ll be more raises.” I think we’re going to see raises right through the end of the year at least.
Gabriel Lewit: Yeah, well at least till probably quarter three. We still are waiting for more data month over month for inflation to see that that’s cooling. I think that’s going to be one of the main factors.
I know we’ve talked about this before, it’s been a recurring theme, so maybe it’s not something we want to hammer too much here today. But with this new rise in rates, what does that mean for consumers and investors out there, dad?
Steve Lewit: That they asked me that last night too.
Gabriel Lewit: I was putting my news hat on. What do you think, Steve?
Steve Lewit: You sound like a reporter, “Steve, what do you think about that?” Well here, rising interest rates mean the cost of borrowing is more expensive. And if the cost of borrowing is more expensive, credit card interest rates now are at the highest level ever. The average rate over 20%, I believe. Student loans become more expensive, mortgages become more expensive. Already the housing market is suffering. The housing market is two and a half percent negative year over year, February. You’ll start to see unemployment happening because that’s what happens when you have high interest rates. Companies-
Gabriel Lewit: Car loans might be more expensive.
Steve Lewit: Car loans, absolutely. Financing automobiles is going to be more. I was looking at-
Gabriel Lewit: HELOC rates, so people won’t fix up their house.
Steve Lewit: Everything. And you lose services because people then have to choose, do I buy food or do I fix my kitchen? Well, I’m going to buy food. We lose services. That’s what inflation does.
Gabriel Lewit: All of these things then ripple through the economy and slowly start to slow everything down, which is part of what’s going to bring inflation down.
Steve Lewit: Right. And the price you see here, there’s a price of inflation and there’s a price of raising interest rates to control inflation. And what the Fed decided is that the pain or the hurt that comes from rising interest rates is far less than the mess that would be created if we had runaway inflation. We know people are going to get hurt, but the way they put it is “for the greater good” because we’ve got to get inflation at 2%.
Gabriel Lewit: The other thing it impacts, of course, your savings rates, your CD rates, your other fixed rates on the earnings side of things, which is arguably speaking, a good thing. And there is a window where if you do believe the Fed will eventually reduce and lower rates again in the, say, the next year or so after things start to-
Steve Lewit: They will.
Gabriel Lewit: Get under control. Then it’s also an opportune time to explore locking in those higher rates before a year from now if they go lower, you may not get the same rates in a year as you would get today. But that’s only if you have money that you’re okay keeping in three, five, et cetera term CDs or MYGA.
Steve Lewit: Yeah. If you buy a five year MYGA, folks, which is a multi-year guaranteed annuity, which is just like a CD, the rate is 5.65%, which is really good. And some people are saying to me, “Well, should I wait three months? Maybe it’ll go higher.” And no, just lock it in then.
Gabriel Lewit: The other problem too is if it’s in cash today, so you lose three, four months of it sitting in cash just to get a higher rate later, you actually you can wait too long. And then the money you lost from waiting actually won’t make up for the higher rate. You have to earn the calculations on it.
Steve Lewit: That’s exactly right.
Gabriel Lewit: Yeah, it’s interesting.
Steve Lewit: Yeah, it cuts that way too, that you can earn more interest. But at the same time it’s costing you more to live. So it balances out. But bottom line, they’re not going to stop until there’s no inflation or 2% of inflation.
Gabriel Lewit: Yeah. Standard.
Steve Lewit: Standard.
Gabriel Lewit: Standard target inflation. Anything else that you think of if is important here, Pops? I know you talked about this on the news. You’re the economist of the two of us.
Steve Lewit: Yeah. I think the other piece of this is if you’re going to go out and buy a house or you’re going to finance, it’s going to be harder to get loans than it was in the past. Because of the SVB failure, all the banks are looking at that Silicon Valley Bank.
Gabriel Lewit: And we did talk about that on the last show. If you didn’t catch in or tune into that last podcast, it’s there for you on the site to go listen to if you’re curious.
Steve Lewit: Because of that failure and what happened on their balance sheets, all the banks are looking at their balance sheets and making sure that they’re not in the same position. Now, the big banks are fine. They are strong and healthy. There’s not going to be a run on the banks. All of this fear that’s going around… The regional banks are more problematic. And you could see that in their bank stocks that all of their bank stocks are down some as high as 67%. So it’s going to be harder, I think, to get financing and loans than it was in the past.
Gabriel Lewit: Yep. Guys, if you have questions on this, if you have any concerns about SVB, about the Fed raising rates, the impact on you, on your planning, any questions at all, of course, call us (847)499-3330 or email us firstname.lastname@example.org.
But I think with that in mind, I think that’s all we wanted to talk about, just a quick update there for you on that.
Steve Lewit: Yeah, I don’t think there’s more to go into. I can get into what the future might bring and will there be a recession. We don’t know. We don’t know. But just keep that in mind, folks, that it might be harder to get loans. And watch your credit card debt. Please pay off your credit card too.
Gabriel Lewit: Don’t let that snowball the wrong way.
Steve Lewit: 20% is ridiculous. Pay it, pay your credit cards off.
Gabriel Lewit: Yep. All right. We’ve got another topic here lined up for you, just to switch gears, a little bit different, a 180. And this just is interesting. I got spurred by an article I was reading online here just the other day, and I said, “Hey, this would be a good topic for the show.”
And you’ve all heard of Airbnb, I assume. You’ve all heard of VRBO, V-R-B-O, that’s competitor to Airbnb. Well, there’s a new term that’s being coined out there that I hadn’t heard of yet. But I’d heard of the concept of it, but I liked the term here called the “Airbnbust.”
Steve Lewit: Yes, I love that too.
Gabriel Lewit: It caught my eye when I was reading it. It’s saying that there’s currently an “Airbnbust” scenario that’s going on around the world, or really, especially the U.S., of course. Basically people who have Airbnb rentals are not making nearly as much money as they used to make before. And it’s really interesting because it’s actually a very long article as I was diving into it. It really helps showcase some of the impacts of really low interest rates that we had a few years ago. There was travel issues with the pandemic weaved into this. And then there was this massive saturation of oversupply, which we’ll get into here. And then the net result now is all sorts of people are busting on their Airbnb rentals.
Steve Lewit: It’s interesting because you have “Airbnbust,” and then you have another part of that world, which is “Airbnboom.” Because there there’s a whole group of people that are not doing well. But yet those bookings are up, Gabriel. I think that’s what the article said.
Gabriel Lewit: Well, no. Yeah, let me paraphrase.
Steve Lewit: All right.
Gabriel Lewit: First and foremost, Airbnb is still incredibly popular, and the overall number of bookings is indeed still up, okay? Because ever since the pandemic when, of course Airbnb’s busted for a different reason, nobody was traveling. But ever since the pandemic, it’s been booming back the number of bookings. Now, if you’re Airbnb the company, that’s great because the more bookings there is, the more money you make.
But imagine you, Mr./Mrs. Smith, you go out there and you say, “You know what? I’m going to rent my other house in California. And I’m going to put it up on Airbnb. And I’m going to charge 200 bucks a night.” And that’s been working for you. All of a sudden, you may not be getting nearly as much interest. You may not be getting nearly as many nights booked. And the dollar amounts that people are willing to pay you may not be nearly as high as it used to be before. And you have to lower that to entice more visitors. That’s correct.
This is what’s called the “Airbnbust.” Because individual Airbnb property owners that are renting the property are facing substantial competition. Because there’s a vast number of oversupplied options available for people on Airbnb.
Steve Lewit: It’s like everybody wanted to get in the game. I’m going to buy a place and I’m going to Airbnb it and I’m going to make a lot of money. First of all, it’s not that simple, keeping Airbnb. There are fees involved there that are higher than they were originally. And now the competition is so keen, there’s a boom of places that you can go to. So the prices are going down.
Gabriel Lewit: Yeah. And how does this impact you out there? Well, a couple ways. One, we’ve had clients that tell us they have properties, they Airbnb them. We’ve had clients that say, “We are thinking about renting or buying this property and then Airbnb’ing it to people. And we also have clients out there that go on vacations and they rent Airbnbs. So there’s a few ways this might be applicable to you.
But it’s interesting to give you the evolution of the timeline. When Airbnb first came out, of course their number one goal is they had to get properties on the platform. And so everybody at that time was like, “Oh, I’ve got an extra room. Or I don’t use this here and there, and I’ll just rent it out.” And it was all very grassrooty. And it was great.
Steve Lewit: Very homey.
Gabriel Lewit: Yeah. Homey and not very businesslike. Okay? Well, fast-forward a couple years and people realize, “Oh, this is getting more popular. I can buy a home and turn this into a mini business of Airbnb’ing it. And because they were one of the few people doing that at the time, and they were facing competition from small little mom and pops, what did they start to? They started acting more like hotels. Okay, we’re going to get fresh towels and we’re going to put fancy things here. And we’re going to have people come clean it. And we’re going to have perks. And so then that property becomes more attractive than that room in somebody’s home.
Steve Lewit: That’s correct. That’s right.
Gabriel Lewit: Right. And so prices go up, of course, because it’s a nicer property. And that company, because at the time, or that house was the only one doing it, they were cleaning up, making lots of money.
Steve Lewit: Definitely.
Gabriel Lewit: So, guess what? People get wind that people are making lots of money doing this. And they say-
Steve Lewit: “I think I’ll do the same thing.”
Gabriel Lewit: “I’m going to do the same thing.”
Steve Lewit: Definitely. Yeah.
Gabriel Lewit: And so, everybody flooded to this. And this was exacerbated, most notably in the last couple years by ultra-low interest rates. So big businesses, companies, with billions of dollars realize we can go out there and buy properties everywhere with ultra-low interest rates-
Steve Lewit: Like a hotel chain, but it’s an Airbnb chain.
Gabriel Lewit: And we can rent these out. And this was also part of what spurred the runup in property values most recently. Because there were companies literally buying houses above asking in cash pricing out Joe and Jane, 30 year olds trying to buy their first home because they wanted to use this for an Airbnb.
And then fast-forward to today, now you’ve got vast amounts of oversupply where you can go on Airbnb and see 200 options. Right? And so the individual owner now is really struggling.
Steve Lewit: Got a problem.
Gabriel Lewit: Got a big problem. What’s going to be the result of all this is there might be a true Airbnb bust where this can all come crashing down. And what’s also interesting is if you really start getting into the weeds of the reviews of people… And I’ll tell you this, actually, I’m on the same page because I just recently booked a VRBO for next week. And I’m doing it predominantly because I do want a house for my kids. But I will tell you, it was way more expensive than a hotel. And the sole reason I was doing it is because I wanted a kitchenette in a house.
Steve Lewit: It was more expensive.
Gabriel Lewit: But if I didn’t have kids, I would absolutely go to the hotel route. And people are starting to say that. They’re saying, “If Airbnbs and VRBOs are going to be more than hotels and they’re going to charge higher fees, and I’m going to have to take out the trash before I leave-”
Steve Lewit: I feel like I’m at home.
Gabriel Lewit: “I might just go to the hotel.”
Steve Lewit: I can’t relax right here. I got to clean up.
Gabriel Lewit: Yeah. Airbnbs are like, “Clean up the towels before you leave, take out the trash, put the dishes in the dishwasher,” do all the stuff, otherwise they charge you oodles and oodles of fees.
It’s just quite interesting because of course, anything that cycles, new businesses come out, they start to mature, they go through growing pains, they evolve, you’re starting to see that now in the Airbnb and the VRBO industry. It’ll be interesting to see where that starts to shake out.
Steve Lewit: Well, the other side of that is our greedy governments, local governments or state governments or city, I don’t know which ones they are, here’s an opportunity for them to make money by staying, “You need a license to do your Airbnb. And we’re going to limit of licenses.”
Gabriel Lewit: Oh, actually, that’s good. You’re right. I meant to discuss that. What’s also happening though is people that aren’t Airbnbing their homes, and neighborhoods are starting to get upset that they have a lot of transients…. Anywhere around them, you could have random people coming and going because Joe neighbor decided to Airbnb their house. And a lot of people don’t like that.
Steve Lewit: Yeah, I don’t like that.
Gabriel Lewit: And so, there’s now a lot of discussions in neighborhoods and associations. And I think it was somewhere in Hawaii. I think they had some big restrictions on Airbnbs. I have to go back and look into that. But there’s now a lot of, because of the supply issue here and the popularity of this, now it’s spurring government discussions and community discussions.
Steve Lewit: Yeah. It’s going to be like taxis have medallions. Medallions go up in price, or they used to. It’s going to be the same thing. You have to get a license because our government. Now, I don’t particularly like that. I think the government should stay out. And if people fail in their Airbnbs, that’s their problem, not mine.
Gabriel Lewit: Well, I feel very fortunate I don’t have a neighbor Airbn… But I’ve got young kids. If I had a neighbor that was just renting his house out and nonstop. I would not be happy.
Steve Lewit: That would be very upsetting. And I think there needs to be community… You’re in a community. That community feeling needs to be protected.
Gabriel Lewit: How do you do that? You can’t do it without regulation. People will just-
Steve Lewit: You have to get regulated.
Gabriel Lewit: Yeah. That’s the tricky part about it.
Steve Lewit: But you can get regulated without licensing fees.
Gabriel Lewit: Yeah, that’s true. Well, and then there’s some communities that are really restricting the numbers and then not everybody can do it. And so they’re only giving it to the ones that are going to make the most money.
Steve Lewit: But it goes to show you, Gabriel, that everything moves in cycles. The stock market moves in cycles, businesses move in cycles. Here’s a whole industry that is moving in a cycle. It’s not going to go away. But it’ll cycle downwards and then something else will happen, and it’ll cycle upwards again. Yeah.
Gabriel Lewit: So folks, if you’re out there, if you’re Airbnbing your property, I’d be curious to see how your experience has been. Are you experiencing the Airbnbust? or are you still booming?
Steve Lewit: Did you know your brother Christopher has an Airbnb?
Gabriel Lewit: I do.
Steve Lewit: Yeah. I wonder how… I’m going to call him, find out how he’s doing.
Gabriel Lewit: It’d be it. Yeah, it’d be interesting research and reconnaissance for the show.
Steve Lewit: Yep.
Gabriel Lewit: Well, if you have questions on that, of course call us, and we’d be happy to help. And if you’re thinking about using that as a rental source for yourself or planning that out in your retirement plan, also give us a call.
Steve Lewit: Please check with us. It’s not as simple as you think.
Gabriel Lewit: Before you go out and buy the property to do that, let’s run some numbers for you. And otherwise though, we were going to end our show here today. We finally have some time carved out here for some listener questions. I know. Thank you for your patience, guys.
Steve Lewit: Imagine we’re actually making it a priority.
Gabriel Lewit: We kept having things pop up. We had SVB, then we had interest rate hikes, we have… My goodness. We’ve got a few questions lined up for you here today that have trickled in here over the last couple weeks. Let me just find my list here because I’ve got them somewhere. Okay, so we’ve got Tom. Tom, you wrote in. You said you finally paid the last tuition payment for your kids. And in your words there’s-
Steve Lewit: Congratulations, Tom.
Gabriel Lewit: Officially off the payroll.
Steve Lewit: Whoa, that’s a big deal.
Gabriel Lewit: Congrats. And Tom, you’re asking is it a safe or is it a good time now to consider canceling your life insurance policy?
Steve Lewit: Maybe. It depends on what kind of a life insurance policy you have. I don’t think that’s a clear yes or no answer.
Gabriel Lewit: Well, let’s break it down because we don’t know. Tom, you might have a term policy, which many people buy to cover income replacement and college costs while their kids are younger in the home and also going through college. And I think that that’s what I’m guessing you’re probably asking. Because a lot of people have term life policies for that reason. And now that the kids are out of college, I think you’ll say you had a term life policy. The question is it safe to cancel that?
Steve Lewit: And my answer would be probably, but I can’t say definitely. If it’s costing you $1,500 a year or something like that, yeah, spend it someplace else if you don’t think you need that money.
Gabriel Lewit: Yeah. I’d say if your health is really good and if you’re approaching the end of the term, the chances of you passing away prematurely and collecting on that might be pretty low. So you could weigh that cost benefit analysis there on that. But yeah, by and large, if the purpose of why you bought it was explicitly for that, then probably safe to cancel it.
But again, you’d have to keep in mind how many years are left on the term. If it’s a 30-year term that you bought when you were 40 and it’s going to go through 70, there’s a higher probability something could happen to you between then and then. You might also consider how much your retirement plan has for coverage for your spouse.
Steve Lewit: Exactly, yes.
Gabriel Lewit: There’s a few other considerations there, Tom makes that… As you mentioned, that little less of a quick yes or no.
Steve Lewit: Yeah. So what if that’s not a term policy, Gabriel? What if it is a cash value permanent like a universal life insurance policy? It depends.
Gabriel Lewit: Yeah, no. Most people I run into that have some sort of cash value policy, they’re still paying premiums for it. That might be an opportunity to do what’s called a reduced pay up premium. So you basically decide to lower the death benefit coverage in exchange for no longer paying premiums. And that might be an option for you to explore on that side.
Steve Lewit: Yes. Or you could roll that into different kind of life insurance policy, maybe a long-term care alternative life insurance policy that’ll cover your long-term care expenses. And use that 20,000 or 30 or whatever it happens to be, for something that is more meaningful for you.
Gabriel Lewit: Yeah. But anytime you have life insurance guys and gals and Tom, just keep in mind, if you’re older, you may not get underwritten again. So you always want to be cautious and be a little more diligent. Review your options first with your planner, with us, before you’re rush into that decision. Don’t just cancel it and then realize later on, “Oh, no, I shouldn’t have done that.” And then you find out you can’t get a policy.
Steve Lewit: Yeah. Just another thought, Gabriel, Tom, that a lot of term insurance policies have conversion privileges where you can convert that into permanent insurance. So before you pull the plug on that, if you would like us to review it or have somebody review it so you know what you’re pulling the plug on. Yep, yep.
Gabriel Lewit: Okay. So now we’ve got another one here, Jim. Jim said that you and your wife aren’t retiring… I’m paraphrasing here… for five more years. You don’t feel the need to be ultra-conservative given that it’s five years away. But your wife is wanting to be more conservative because it’s five years away.
Steve Lewit: Yeah, Jim, so we do marriage counseling Sundays at one o’clock. I’m only kidding.
Gabriel Lewit: Jim, your question, just the actual part that I will read word for word is, how secure do you guys need to be at this stage, five years away from retirement?
Steve Lewit: Totally secure. As far as I’m concerned, you should know at five years before retirement, what’s going to happen at retirement. You should have that planned out. It should be thought through because five years before retirement and five or 10 years after retirement are your most dangerous risk taking areas of retirement. If those five years don’t work out well before and after, you have big problems when you’re 70. You might have big problems or lose a lot of money when you’re 70 or 80 or 90 years old.
So yeah, absolutely, if you don’t have a plan and you’re not sure, and especially if you’re having a disagreement between, you’re the odd couple… Remember we talked about that?
Gabriel Lewit: Yeah. We were talking, yeah, the investor personalities.
Steve Lewit: The investor. You’re the odd couple, one person’s conservative, one person and is aggressive. We deal with that all the time. And you can build a plan that will satisfy both of you and feel safe about going forward with your risky money.
Gabriel Lewit: Yeah. This might be a topic for a deep dive that we sometimes do on the shows here for a bigger chunk of a show segment. But core satellite is a concept that we use with investing.
Steve Lewit: We should do that.
Gabriel Lewit: And core, the way we explain it here is your core investments are money, that as you build your plan, you identify, you don’t want to risk losing these. This is money that you need for retirement. And if it were to go through big swings or losses and short, it would jeopardize the security of your retirement.
And so those funds, if you earmark… Let’s say you do a plan, you got one and a half million dollars, and you conclude that you need about a million 2 of that, no matter what, you can’t risk losing that. That would be core money. We have lots of options to invest that in a lower risk manner or even a safe manner to help ensure that your retirement will be on track no matter what the market does.
Steve Lewit: Yeah. And that could be in the market, it could be insurance products, could be in bank products, it could be in government products.
Gabriel Lewit: Risk managed portfolios where-
Steve Lewit: Structured products.
Gabriel Lewit: All sorts of options. But the goal is that it’s not speculative. It’s not going to have huge chances of booming or busting. It’s going to be more predictable, more reliable, more dependable so that you can count on that money lasting you through retirement when managed the right way. We call that core investment money.
And then on the other hand, you’ve got satellites. Now, if you’re a very aggressive investor and you like individual stocks or you like highly concentrated stock mutual funds in certain sectors, whatever it is… Once you determine how much core money you need, then all the rest of that money, if you want it to be aggressive, you could do that, and now feel a lot less worry that that’s going to impact your retirement. Because we’ve already carved out your core money.
Steve Lewit: Exactly. And Jim, you have to ask yourself what is the ultimate goal? The ultimate goal is that you and your wife retire and have enough money to sustain you at the current standard of living or better for the rest of your life. So you two, even though how you get there might be a difference between you and your wife, the goal is the same. So there are different ways of achieving that goal investing. And you can be conservative and aggressive at the same time as [inaudible 00:29:43].
Gabriel Lewit: And back to the original, I think, key point here, timeline five years away from retirement, yes, there’s a study called the retirement risk zone.
Steve Lewit: Yes.
Gabriel Lewit: Okay. Which said basically the first five years before retirement and then the first 10 years after retirement is the collectively known as the retirement risk zone.
Steve Lewit: Yeah. Some people will say the first 10 years before retirement.
Gabriel Lewit: Yeah. And what that’s saying is the risk of you losing money in that time period is greatly going to impact your retirement versus if you were to lose money 15 years away from retirement or 15 years after retirement. Okay. So that risk zone is important and to manage and reduce that risk and to come up with a core satellite approach or whatever other structures we use to help ensure that your money will last you both for forever. Yeah.
Steve Lewit: Yep. Good question, Jim.
Gabriel Lewit: Yeah. That’s what we got for you today. We’re up against our time here.
Steve Lewit: Only two?
Gabriel Lewit: Well, I don’t want to rush our-
Steve Lewit: We had about four.
Gabriel Lewit: Yeah. I don’t want to rush to the other ones here, which we would be rushing them if we started doing them just now.
Steve Lewit: All right.
Gabriel Lewit: We’ll make sure we do those on the next show.
Steve Lewit: We’re going to make sure. We’re going to keep our promise.
Gabriel Lewit: Of course.
Steve Lewit: Of course.
Gabriel Lewit: Although I won’t be here next week because I’m on vacation for spring break.
Steve Lewit: So, I will not do this solo.
Gabriel Lewit: I was going to say, are you going to do the solo show?
Steve Lewit: Would you want me to? No, no.
Gabriel Lewit: You can’t do “Our 2 Cents” with 1 cent.
Steve Lewit: I’d have nobody to pick on. No, that’s no good.
Gabriel Lewit: You could talk to yourself.
Steve Lewit: I could pick on myself.
Gabriel Lewit: “Well Steve, what do you think?” “I don’t know, Steve-
Steve Lewit: “I don’t know.”
Gabriel Lewit: “That’s a good idea.”
Steve Lewit: “No, I don’t like that idea.”
Gabriel Lewit: Oh, that actually would be an entertaining show to listen to if you were to in fact talk to yourself.
Steve Lewit: No.
Gabriel Lewit: Just an option for you.
Steve Lewit: I’ll wait. Have a great vacation.
Gabriel Lewit: Thank you. I hope I do and I intend to.
Steve Lewit: Yeah. Good for you.
Gabriel Lewit: Folks, thanks for tuning in. We love having you on the show listening and sharing and sending us your feedback and comments. And any questions you’ve got for us, of course, you can email us email@example.com or call us anytime (847) 499-3330. And otherwise we’ll talk again soon.
Steve Lewit: Stay well everybody.
Gabriel Lewit: Have a good one.
Steve Lewit: See you.
Announcer: Thanks for listening to “Our 2 Cents” with Steve and Gabriel Lewit. For any questions about your finances, give SGL a call at (847) 499-3330 or visit us on the web at sglfinancial.com. And be sure to subscribe to join us on next week’s episode.
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