Ingredients for a Happy Retirement

In this podcast, Motley Fool host Ricky Mulvey and analyst Jim Gillies discuss:

  • What to watch as big tech companies report their quarterly results.
  • Flutter Entertainment‘s share count and debt load.
  • The switching incentives in sports betting.

Plus, Motley Fool retirement expert Robert Brokamp continues his conversation with Michael Finke, a professor of wealth management and the director for the Granum Center for Financial Security at The American College of Financial Services. They discuss the key factors for a happy retirement.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on January 30, 2024.

Ricky Mulvey: It’s not just the revenue growth. You’re listening to Motley Fool Money. I’m Ricky Mulvey, joined today by Jim Gillies. Jim, good to see you.

Jim Gillies: It’s great to be seen. Thanks, Ricky.

Ricky Mulvey: Big tech earnings, they’re kicking off this week. The show is going out, as Microsoft and Alphabet report, excuse us for our timeliness. Jim, I know you’re not a tech investor, and I’m baiting you with that. Is there anything you’re keeping an eye on from the mega caps?

Jim Gillies: I am a tech investor when it makes sense for me to be a tech investor. We’ll put it that way. You can feel free to ask me about my cost basis in Amazon, Apple, Shopify, MercadoLibre, and I’ll leave it at that. Or what I did with Apple in late of 2018, 2019 when you were buying the premier cash-generating story of our generation for 10 times cash flow. But anyway, what am I looking forward for out of big tech. Basically, I just think it’s largely going to be more of the same. I think Amazon looks like they probably have some pop in them coming out. Microsoft will probably continue their excellence. I know there’s some questions about Apple, specific valuation wise, in context of, shall we say, growth dearth. More recently, valuation ratios have been elevated versus the growth profile. I’m interested to see that, interested to see the product lines at Apple. How they do in terms of phones, how they do in terms of watch. We forget about the iPad and then also in terms of their services. Microsoft, like I said, is probably just going to continue to being excellent. At Alphabet, there’s some question about advertising spend as well as, there’s the will they are, won’t they? Antitrust stuff that seems to always be circling around. But largely, these are for the most part strong, excellent companies, and we’ll probably just see more of the same. I don’t think anyone’s opinion is going to be changed by any of the earnings reports from the so-called Magnificent Seven.

Ricky Mulvey: I will ask you about your cost basis in those companies. If you ask me about my cost basis in Unity Software and Lemonade, and the listeners will find out why I am hosting this show and you are offering analysis on various companies.

Jim Gillies: Fair enough.

Ricky Mulvey: I’ll tell you one piece of information that affected my thinking a little bit. It was Bill Mann on the Friday show. He made a great point about just how large these companies are. Microsoft is at the point where its market cap is worth $428 for every single person on the planet. The Magnificent Seven is now about 30% of the US stock market. For the people who aren’t thinking about it, what does this mean for the average investor or, how about the people who like to pick stocks?

Jim Gillies: I mean, can open worms everywhere, right?

Ricky Mulvey: Yeah.

Jim Gillies: I got some fun little data that I’ve looked up here and been playing with. You mentioned Microsoft, and the size. Here is something more, most people know. I’m Canadian, I live just outside of Toronto. The 394 largest Canadian companies, publicly traded companies in Canada, combined have a market value of approximately 2.7 trillion. Microsoft is slightly over 3 trillion. Again, this truly is pretty insane in terms of size and scale wise. For people who like to pick stocks, honestly, I think you stay away from the Magnificent Seven. That’s going to sound a little, maybe, crazy. I mean, a lot of people are loving the story, specifically about Nvidia. Apples moved a little bit past their prime by some people. But you can get all the Magnificent Seven exposure you want and then some by just buying a simple S&P 500 ETF. I’m someone that likes a portion of my portfolio and index funds because sometimes my style, which I’m very comfortable with, but sometimes my style, any style, is out of favor. I have a significant part of my family’s personal wealth in S&P 500 index funds, TSX Index fund, and that thing. But I actually have a case study for you, Ricky. I came today with a case study because, here in Canada or as I like to refer to it, Soviet Kanakistan, we had the largest company by market cap, which was a company called Nortel Networks. In the summer of 2000, Nortel hit its all-time high price, such that its market cap was something like $380 billion Canadian. To put that into perspective today, nearly a quarter Century later, the largest company in Canada, by market cap is the Royal Bank of Canada at 187 billion. Here was good old Nortel networks at 2X, today’s largest company. Nortel has this really interesting factoid about it that it was once the largest company in Canada, and it is a zero today. The danger, if you will, or air quotes, danger of investing in an S&P 500 index fund is you are basically putting 1/3, 30% of your money into the Magnificent Seven, effectively. We have an example of a company being 1/3 of the index, roughly Nortel Networks in Canada in the early 2000s, going to zero and the impact on index investors.

Essentially, I looked up some data, the TSX, from the start of the data set that I have, which is late 1979 up to Nortel’s all-time high in July of 2000, the TSX had returned an annualized 12.6% total return, dividends included. That’s pretty good, 21 years, 12.6% annualized. Since then, it has returned about 8% total because it had to absorb the largest company in the index, almost 1/3 of the index going to zero. Now, that’s not going to happen with the Magnificent Seven. But you can see how index investors who are going to hold a lot of the Magnificent Seven stocks because again, it’s about 30% of the index. Index investors have a large exposure here. If the magnificent seven do take a breather, because a couple of them are, we’ll just say richly valued. Shall I leave it at that. Or if there’s any kind of stumble that causes a revaluation for one or more of them, they could lead to stalling out of index appreciation in the US or S&P 500 which then could have an impact on the long term returns for investors, specifically index investors. Again, TSX Pre Nortel 12.5%-12.6% an annual lies from 1979 to Nortel’s peak. Following Nortel’s peak, about 8%. There is the potential for some muted gains if these stocks do stumble.

Ricky Mulvey: I want to move on to the Flutter listing in a sec. I will plug that. I think you have a great, great thread or post on X about index investing and essentially the returns and costs associated with index investing versus the famous active investors including Kathy Wood and Bill Ackman. I’ll put a link in the show notes.

Jim Gillies: Sure.

Ricky Mulvey: There is a gambling company called Flutter. It is making headlines. It’s an international sports betting company known in the US for Fan Duel, and it joined the New York Stock Exchange on Monday. The shares listed in London pop 20%. We’ll talk about the business in a sec, but it seems like a really big deal to join the New York Stock Exchange even in 2024.

Jim Gillies: Is it?

Ricky Mulvey: It is, not to you.

Jim Gillies: Not to me at all. No, I don’t know why. For an already publicly listed company to pop 20%, I view dual listings or even triple listings. I could give you a couple tickers that are on multiple exchanges, not just two. It’s almost like stock splits. I’ve got one pizza. Whether I cut it into two pieces, four pieces or eight pieces, I still have one pizza. This is the same company, like you did not create 20% more economic value by just dual listing this thing. I think some of those people who are buying those shares to pop at 20% may have gotten over their skis a little bit, but that’s their problem, not mine.

Ricky Mulvey: I’m hoping I can bait you a little bit with the value of the story with this company. Stock has solidly beaten the market. It’s a highly addictive product, looking to put a casino in every pocket and be climate-neutral along the way. Jim is shaking your head for those listening at home and I want you to tell me if I’m an old codger on this one. The company is still very much in growth mode. It has incredible revenue growth numbers of I think something like 70% year over year in the United States. Forty percent total for the company. It issues a lot of debt. It also issues a lot of shares. I think it’s about 4x its shares outstanding since 2016. At the same time, it’s had trouble growing its earnings per share. I mean, what is the market thinking about this company? It’s been a market beater, but the earnings per share necessarily haven’t really grown.

Jim Gillies: Well, if you’re an old codger, what am I? I’m old enough to remember the first round of publicly traded companies trying to bring people into the internet gambling space and how basically the morality police basically shut them down and destroyed all the value that was building up companies like cryptologic, companies like Boss Media. It’s interesting to me that 15, almost 18 years later, I guess the morality police have decided better off to join them rather than trying to put them out of business. I like the story here in terms of their brands. I mean, even I’ve heard of fan duel. I’m not someone who does a lot of gambling, frankly because, well, because I can do math. They do have recognizable brand that’s important in a space which is essentially commodity space. Then in terms of revenue growth, Yeah. I mean, if you’ve grown your share count 4x over the past 7.5 years, yes, of course, this is going to impinge your earnings-per-share growth or anything per share growth. My question, not really knowing this company beyond the branding; my question is what have they spent those shares on? Because in very classic Berkshire Hathaway acquisition mode, if they’ve spent those shares as part of acquisitions where they have perhaps, taken on more value than they’ve given up in the form of those shares. That can actually be very good, and I’ve got no problem with that dilution if they’ve been hosing it to insiders. It’d be very hard, I think, to 4x share count and only give it to insiders. I suspect there’s been some acquisition stuff going there. But just giving it to. It’d be a little difficult, a little bit more difficult to love that. But no, I think it’s interesting some of the brands that they have, some of the brands that they hold, Betfair and Poker Stars were brands that I saw in that first iteration of the online gaming public thing. I think I can make a case for liking the one.

Ricky Mulvey: In other businesses you have switching costs. In this one there are switching incentives that you might want to look at. Another thing with the business that I think is worth looking at is that it has about $6,000,000,000 in net debt. The reason it says 4.7 on cap IQ, I think is because it’s listed in British Pounds. The interest costs about 150 million for the first half of 2023. It’s got the adjusted free cash flow to cover it, but some of that debt is not investment grade and it’s got a pretty high debt load for a company. Is this a risk that its investors should be paying attention to?

Jim Gillies: One hundred percent, but you should always pay attention. That’s a layout because you should always pay attention. Any company that’s got some debt, you want to see the tenor of the debt, you want to see what’s the interest rate, what’s the maturity schedule. I’m not too sure what adjusted free cash flow is, to be honest with you. I’m old school where I like cash flow from operations minus PX is my starting point. When we do that, cash flow from operations should include the cash interest on it, but it is something to pay attention to. If this company is suffering from easy switching, we’ll put it that way. They might get stuck in that pattern where they have to always provide incentives. It’s like to throw back the Bed Bath and Beyond when they were still alive. They gave you a coupon every week in your mail of 2 so no one went in without a coupon. This whole industry space may have evolved to a spot where they have to give you constant incentives because there is essentially no cost of switching. But I would always pay attention to the debt load because, yeah, that’s financial risk. Financial risk is the thing.

Ricky Mulvey: Jim Gillies, thank you for your time and your insight.

Jim Gillies: Thank you.

Ricky Mulvey: Before the next segment going to do a quick ad. We talk about a lot of stocks on the show, but it’s just a peek at the Motley Fools investing universe. This year we’re rolling out a new offering. It’s called Epic Bundle. The service includes seven stock recommendations every month. Model portfolios and stock rankings, all based on your investor type. We’re offering Epic Bundle to motley fool money listeners at a reduced rate. Just as a thanks for listening to the show. For more information, head to 198. I will also include a link in the show notes. Last week Robert Brokamp kicked off a conversation with Michael Finke, a professor of wealth management and the director for the Granham Center for Financial Security at the American College of Financial Services. Up next is part two of that conversation where they discuss the three ingredients of a happy retirement.

Robert Brokamp: To a certain degree, we’re having this discussion because in America, everyone has to be their own financial planner and investment manager. At least to some degree, especially now that fewer people are being covered by traditional pensions. This also means that we could be managing our own finances well into our ’80s and ’90s. What does your research show about financial literacy and how it’s affected by getting older?

Michael Finke: Financial decision making ability is very similar to driving ability. With the ability to drive, we lose about one to 2% of our capabilities every year. There’s a problem with that. One of the problems is that we’re a lot worse at it in our ’90s than we were in our ’60s. The other problem is that it’s happened so gradually that we oftentimes don’t perceive it. We’ve all had this experience of driving with a relative who may be in their late ’80s or ’90s. We’re sitting there in the passenger seat. After a block, we realize that we’re in the wrong seat. This is not someone who should be piloting around at 2.5 ton vehicle. We’re all piloting our own 2.5 ton vehicle when it comes to our retirement savings in our ’90s, if we don’t create some sort of a plan for dealing with this inevitable cognitive decline. It’s just a part of getting older. It happens on all of these cognitive tasks. We lose our ability to, and it’s not an easy thing to do to manage an investment portfolio and decide how much we can safely take out every year. I think part of the retirement planning is recognizing that that’s going to happen to us. To the extent that we can delegate some of that decision making to someone who is legally required to look out for our best interest or automating income, especially later on in life.

Makes a lot of sense. I’m a huge fan by the way of the criminally under utilized Qualified Longevity annuity contract, which is a way to take up to $200,000 of your IRA savings and buy yourself an income. By the way, the rates are really attractive right now, so the quotes are pretty good. Buy yourself an income that starts at the age of 85, then you don’t have to worry so much about what’s going on in the market before the age of 85, and it’s like dementia insurance. You’re going to get that income and there’s a tax incentive to do so because you don’t have to pay any RMDs on that $200,000. I am a card carrying member of the QLAC Appreciation Society. There are at least ten of us now. I encourage anybody to join. It’s one of those things that economists love, this idea of being able to buy longevity insurance, but it doesn’t sound at all appealing to the average person. I put up $200,000 and I only get it back. I only get to spend any of it. If I live to the age of 85. Now, I may get an income of $80,000 a year for the rest of my life. That’s pretty cool, but I only get it if I live past the age of 85. Now practically speaking, it makes retirement income planning a lot easier to delegate that longevity risk to an institution, like an insurance company. Take it off your plate and then also automate later life income.

Robert Brokamp: A follow up point to that. The evidence is clear that retirees with higher levels of guaranteed income tend to be happier in retirement. You did a study with David Blanchet, which I think you called it “License to Spend”. Whereas people who had more guaranteed income felt more comfortable spending money because they didn’t feel like they had to play it safe because they were worried about outliving their money. I think you agree that with most people that the best annuity is delaying Social Security to age 70. In one study you did showed it’s even more beneficial for women.

Michael Finke: Yes, because women live longer. The best way to think about delaying Social Security is that you are buying an inflation adjusted annuity which really doesn’t exist anywhere outside of Social Security. That’s what you’re doing. You’re taking some of your savings. You can use it as a bridge strategy. Let’s say that I’m 65 when I retire. I want to think about potentially delaying Social Security to 70. Take money out of my IRA, use it to fund my lifestyle for five years. Then at 70, I get a much larger Social Security income payment. It’s adjusted for inflation. It’s a significant amount of income for a high earner. For many retirees, it’s pretty close to enough to cover all of their basic expenses. Then you use your savings for the remainder. The reason why it’s so attractive is because some of the rules that define how much extra income you get for delayed claiming, those were created in the early 1980s based on mortality tables in the early 1980s and assumptions of after inflation interest rates in the early 1980s. They’ve changed since the early 1980s, which means that delaying Social Security is more attractive now. In fact, it’s a way of gaming the system. You get to buy something at a below market price or buying an inflation protected annuity at a below market price, if you use your IRA savings to delay claiming. Remember it is most valuable in the year after the adjustment goes up. It goes from 5% per year to 6 and 2/3%. That’ll happen for someone born after 1960 at age 65. If you wait between 65 and 66. If you wait between 67 and 68 again, you get that 8% increase in lifetime income. It should be just a little bit higher every year, but the government uses a short cut. They make it 5% for a couple of years, 6 and 2/3% for a couple of years,8% for three years. That is a shortcut and it makes it most valuable to delay claiming the first year that that rate goes up.

Robert Brokamp: When you were talking about what to do with concerns about cognitive decline, you also talked about maybe hiring somebody who has a responsibility to keep an eye on your money. You did a study on financial advice and whether outcomes were better or not. It looked like it depended somewhat on the incentives of the financial advisor.

Michael Finke: Well, right. If incentives run in many different directions and they’re highly complex. When it comes to someone who is legally required to look out for your best interest, they’re going to be less likely to sell you, for example, a product that maximizes the amount of commissions that they can get. That becomes especially a problem for older consumers. But at the same time, you may not need someone to manage your money every year. Someone who is paid a fee has a strong incentive not to discourage you from. They don’t necessarily benefit if you’re spending down your savings over time. That’s a conflict of interest. Also in retirement, there’s the only types of advisors where you just pay a fee for a financial plan that tends to minimize those types of conflicts. But every form of compensation involves a certain type of conflict of interest. I think it’s just important to be aware of them. You really want someone that you can trust. You want someone who has figured out some succession plan. Because if you hire them when you’re 65, you want to be able to rely on them when you’re 95 also. You want to feel confident. This is something I think it’s easier to assess in your 60s than it is in your 90s. You want to feel confident that they’re going to be making recommendations that are in your best interest. Oftentimes, it’s not easy because you may, in your 90s be tempted to make choices that are necessarily not in your best interest. It may be important to have an advisor that can help guide you through some of those complex choices to make sure that you don’t make mistakes.

Robert Brokamp: Let’s move on to our last couple of questions here. You’ve done a lot of research not only on how to retire, but how to retire well. What have you found to be the ingredients of a happy retirement?

Michael Finke: When I run an analysis on retirement satisfaction. What I find is that the predictors cluster into three groups. Well, first of all, money, so it’s good to have more money. Second of all relationships, so positive relationships, particularly the most important relationship that we have in retirement is with our primary partner, generally our spouse, friends also matter. Kids not so much. The relationship we have with our kids is not a significant predictor of life satisfaction. But the relations we have with our friends are. Friendships are an investment also, they are investments just like health or money. We can during our pre retirement years maintain those friendships as a way of cashing in or making sure that we cash in on them after retirement because they are a source of life satisfaction. Of course, the third one is health, and it is important to think of health as an investment. I just read Peter Attia’s book, Outlive, and one of the things that really struck me about that book was this idea that our ability to process oxygen VO_2 max goes down every decade in life. You have to work to maintain your VO_2 max. When it comes to retirement planning, that’s an important thing to remember because let’s say you want to go hiking after you retire. You’ve always wanted to go hiking in Switzerland and Colorado, and so you saved up this money so that you can go on vacations and then you get there and your VO_2 max isn’t good enough to go hiking. You’ve got to be able to not just save for the vacation, you also have to be able to make investments in your health so that you can combine. Because remember, the money doesn’t provide any happiness on its own. It’s an input into the production of happiness when you combine it with other stuff like relationships, like health. Remember money is just green paper. It’s just dots on a computer screen. It’s the other stuff that you can make an investment in, that actually produces the life satisfaction.

Robert Brokamp: Let’s wrap things up with our final question. Is there anything else about retirement planning that you think is underappreciated, but more people should know about?

Michael Finke: I think friendships are the one that really, I did not fully appreciate when I started doing research in this area. It defines where you want to live when you retire. Do you want to move to the beach? Do you want to move to the mountains? Well, if you have friendships that are really that strong source of life satisfaction, the weather is less important than the activities that you’re doing in retirement. I think the one thing that I did not fully appreciate is to be more, I guess, thoughtful about planning how I’m actually going to live. I think a lot of us who are very quant focused, just think if we have enough money saved, we’ve got it figured out. But money again, money is not what makes us happy. It is our ability to imagine what we’re actually going to do, and then making investments and putting together a plan that is most likely to result in a satisfying retirement. That’s something I think a lot of people just haven’t thought enough about. Have you actually sat down and imagined how you’re going to spend your time, where you’re going to live, who you’re going to be interacting with, because if you don’t do it, you’re going to find yourself a bit lost. I see this a lot among people who retire is, work gave me a lot of stuff. It gave me a lot of opportunities for social interaction. I felt a lot of accomplishment. I was able to do what I was good at. Then I retired without giving enough thought to actually how I was going to spend my time. That’s the thing that I think is under appreciated.

Robert Brokamp: Well Michael, this has been as educational as expected. Thanks so much for joining us.

Michael Finke: My pleasure.

Ricky Mulvey: As always, people on the program may have interests 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. I’m Ricky Mulvey. Thanks for listening. We’ll be back tomorrow.

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