The Keys to Retirement Planning and Investing for Olim
Updated: Feb 11, 2019
In our latest expert interview, President and CEO of Lighthouse Capital, Aaron Katsman, provides some great information about retirement planning as well as investing for all stages of life.
We are really excited about our guest interview today. Our guest is licensed financial advisor, Aaron Katsman. He runs a successful boutique investment firm in Jerusalem in addition to authoring the book, “Retirement GPS: How to Navigate Your way to a Secure Financial Future with Global Investing.” Aaron is well-known in the finance industry and writes for prominent financial publications who believes we need a new way of thinking about retirement investing.
Thanks for being with us, Aaron. Tell us a bit about yourself.
I am a licensed financial advisor, both in Israel and the United States with multiple licenses in the US. I am a branch of the US brokerage firm Portfolio Resources Group. We open up accounts in the US for people who want to invest globally. I write an investing column for the Jerusalem Post. I am a regular contributor to a big financial website called SeekingAlpha.com. I am a Retire Mentor for Marketwatch.com. And, I have a book available on Amazon, called “The Retirement GPS: How to Navigate Your Way to a Secure Financial Future With Global Investing” which is being published by McGraw Hill – There is a real sense of pride I have about that point. I made Aliyah about 24 years ago.
What was the inspiration for the book?
Well, I have been in the business for a while, off and on for about 18 years, working with all kinds of clients, but a lot of them were pre-retirement and retirees. I do a lot of reading and writing, and most of the information that I have found out there is very much “one size fits all” solutions. It’s like someone is sitting in their ivory tower spewing conventional wisdom, but has not sat across from a living, breathing client, and once you do that, and I have for years, I think that financial planning and retirement planning takes on a different shape just because each person is different. Their approach to risk and approach to retirement is different and I always felt that more and more retirement is becoming such a big issue as baby boomers are retiring. The advice out there in the financial media is just lacking and it really doesn’t provide a good solution to the client, so I decided to write a book about it.
What is different about retirement now, from say, 10 years ago?
The big difference, I would say, is that people live a lot longer nowadays. Let’s say 10 years ago, especially 20 or 30 years ago, the model was that you worked pretty much until you died. Now, people can live regularly 20 or 30 years into retirement. That means they need to stretch their funds, and their funds have to work for them for a lot longer. And that provides for all kinds of challenges in order to be able to live out your life and not go broke. Along those lines, because people live longer, it’s not just that their money needs to work with them for a traditional retirement, but these days retirement is like a new life and people love to travel, have hobbies etc.. – and none of these things are free. So in many cases, people are spending more money than when they were working and they don’t have the steady income from a job, so they have to be able to maneuver their retirement funds, pensions, social security, bituach leumi, whatever it is, in a way that enables them to lead the standard of living they want. And if they don’t have enough money for that, they have to adjust. That provides for very challenging situations in many cases.
What is your general theory for retirement investing, is it more buy/hold, or risky?
I would say it’s probably neither. The most important part in retirement investing, naturally, is to understand what it is you need to do. It’s not saying, I have X amount of money and I want it to grow. The first thing is to say, this is my budget, this is how much money I have coming in from various sources, such as pension and social security, and this is how much money I think I am going to need. If I’m short, then I am going to look at my investments to supplement that income. And then I am going to create a portfolio which will then enable me to do that. But a lot of people have other goals and, generally, that is to have enough money to live off of. But then others want to leave money to their kids or grandchildren, or help them while they are still alive. Others just decide to spend every last penny until they die.
The first thing you really have to do is budget, understand what your income and expenses are going to be, and what your goals are going to be, aside from just making it to the end. You really have to rank those goals and then are you able to create an investment portfolio to achieve what it is you are setting out to achieve. I think both investing aggressively and the buy/hold approach for retirees, none of them applies. The buy/hold approach is misguided because there is a different aspect which is the individual retiree. It’s not conventional wisdom, it’s sitting with a living person that doesn’t necessarily have the emotional or financial ability to get himself into a portfolio and watch it drop by 35% and then follow the “don’t worry, it will go back up,” which is what the buy and hold people preach. So, if you are 65 years old and you just hit retirement, you can’t extend by working more; you managed to save what you can save and you’ve got your income from pension and other sources, you can’t really take that risk that it’s just gonna go back up because if you lose 25-30% of your principle, you are really up the creek. The investor/retiree needs to understand themselves and what their red lines are. If that means to sell in order to sleep at night, then that is what needs to be done. Your health is more important than some extra dollars.
When should someone start planning their retirement?
The earlier, the better. Young people in their 20s and 30s should start saving for the long-term, they should start saving whatever amount of money they can now because it make a huge difference to save when you’re younger. You don’t even have to save that much to come out with a big nest egg. The bigger problem is that people tend to wake up in their mid-forties or late-forties and realize they haven’t really saved much and only then do they start to save.
So, number one – start saving when you’re young. Number two – Once you start planning for your retirement (I don’t think a 20-year-old should necessarily have to plan for retirement unless his goal is to retire early), I would say in your late forties is when you want to start thinking about it and discussing with your spouse what you want to do even though it is way down the road. But, better to start planning early than to wake up 5 years before retirement and realize you have nothing saved, and then you’re scrambling. There is almost no way to make it back if you start too late. Then 15-20 years before retirement you should have “the talk” and in your 50s you should start getting pretty serious about it.
Is it better to invest a lot in a concentrated area or diversify investments to just about everything?
If Bill Gates had followed the advice of financial advisors, he wouldn’t have been Bill Gates. What do I mean by that? The reason Bill Gates is Bill Gates is because he kept all of his money in Microsoft stock and watched it zoom up over the course of decades and now he is one of the richest men in the world. I would think that for every Bill Gates, there are thousands and thousands of investors who tried the same approach of buying and holding one stock, and all of those guys crashed and burned. I can’t tell you how many people I remember during the internet craze 15 years ago who said, I am going to buy Nokia stock or Dell stock and I’m going to become a multimillionaire; now both those companies, years later, are showing that they were not great investments. Now these guys are years behind their fellow peers because they didn’t diversify.
I think the answer is somewhere in the middle; you don’t have to own everything, but you have to strategically diversify. How do you do that? I think the way to do that is sort of look at the world, which is what the book focuses on, really global investing. Secure your financial future by investing globally and look at trends and where in the world things are happening and not happening and adjust accordingly. To invest in everything is to invest in nothing but I believe you do have to diversify strategically.
What is Retirement GPS?
In Retirement GPS, the GPS stands for Global Portfolio Strategy. The book talks about the way to retirement, which is to invest globally. To really take advantage of what’s going on in the world. The world is not the same economically that it was ten year ago, twenty years ago, and fifty years ago. There have been mass movements of wealth from the West to the East and to the South. Money is both being created and being transferred to Asia and Latin and Central America. Those are the countries and economic regions of the future where a lot of the economic growth is going to continue to come from. All the trends point to those areas having more growth than the developed Western world.
The classic approach says you should keep most of your money in the United States and some in Europe. I try to turn that on its head by saying yes, you should invest some money in the United States, but you should have a significant amount of your money outside the US. That is where this book varies from about 99% of the other investing books that are out today.
What types of investments are you bullish about in the US and Israel?
Let’s talk about Israel first. You know, when everybody talks about investing in Israel, they are talking about investing in Israeli ingenuity and Israeli creativity – sort of what the Start-Up Nation thing is about. So, while investing in Israel has been a sexy topic, people who haven’t done it right haven’t made any money doing it. What do I mean? I am talking about stocks not real estate. If you look at the Tel Aviv Stock Exchange, you will find that most of the big companies are the big banks, the phone companies, some real estate companies, some food companies – very little of that is part of Israeli ingenuity. Basically, by investing directly into the Israeli stock exchange you are investing in the Israeli economy. Now, the Israeli economy has been good, no question about it, but I can find you dozens of countries that have an equal or better growth rate than Israel. So, the Israeli economy doesn’t really stand out as a place that you need to invest. The place people want to invest is the ingenuity side which generally means investing in hi-tech which predominantly trades in the United States. So the way to really do that would be to invest in Israeli companies which are listed on the US exchanges. And that is also one of the things we do for clients.
In terms of the United States, I think some of the same themes play there as well. New things are always coming out and the amount of entrepreneurship, the science behind it, and what is being created is just mind-boggling; you can’t keep up with technology these days.
How much of a role does currency strength play in Retirement GPS portfolio of investments?
Currency is really important and the reasons are twofold. Firstly, since the Korean War, the US Dollar has been declining against most of the rest of the world’s currencies. Again, nothing to do with the United States, but rather the rest of the world’s currencies have caught up with them economically in many ways. Where once the Russian Ruble was joked about, today it is fine currency. People used to joke about the Shekel and look at the Shekel now. So you see that the rest of the world has done quite well and, as such, their currencies have done quite well. So I think it’s very important for most investors, just economically as another way to profit, to have a significant amount of non-US Dollar exposure.
For someone who lives in Israel it is doubly important because you’re living in Shekels, so your investments will be in a foreign currency, but you’re pulling that money out in Shekels. So you need to be sure that you are hedged against the continued strength of the Shekel, which is something investors don’t pay nearly enough attention to. I had a prospect come meet me a few years ago, they were making Aliyah and they had saved a million dollars. They said, we don’t want to work and maybe we will tutor or teach English in Jerusalem. That was their plan. Not a particularly great Aliyah plan. Anyway, they wanted to live off the one million dollars, but they wanted to also travel and go back home to see the kids often, so they were going to spend a lot of money. They came when the Shekel was around 4 to the Dollar, or 4 million Shekels. Well, it wasn’t long before the value of their portfolio was right around just about 3.2 million shekels, so they lost 20% of the value of their money and that was huge for them. They couldn’t make any of the plans they wanted to as they had, in essence, lost 20% of their net worth and they actually moved back to the US. Had they been smarter about things (and followed my advice), they certainly could have hedged that, and the currency volatility wouldn’t have been nearly as much.
What are the safest and riskiest investments people can choose to invest in right now?
Well, the safest investments are always deposits and bonds. Of course, you won’t make anything on them because the interest rate on them is basically 0. In financial investments, the most aggressive investment you can make is a stock. To me, all stock is the same, it is all aggressive. We’ve all learned, based on the couple of market meltdowns in the past years, that a stock can lose 70% of its value like a champ. There’s nothing about a stock that says it can’t also take it on the chin. That is an important message to get to investors; any stock can get creamed and there is no such thing as “safe stocks.”
How do you tie together all the various investment choices with the income you want for retirement?
First you have to look at the individual retiree and see how much income he needs to generate in his portfolio. If it’s a number that’s reasonable, he should go ahead and do it; whether it’s using bonds, dividend stocks, non-US Dollar bonds, international stocks (which tend to pay much higher dividends than US stock). When you can create that kind of portfolio then just do it.
There are some times though, when the needs of the retiree are just more than the amount of funds that are available. In such cases you sometimes have to draw down principle rather quickly. But, generally, you use what’s out there, be smart about it, and you can create the income that most people need to live on for retirement.
We would like to thank Aaron once again for his wonderful insights into retirement and global investing. If you would like to read more about Aaron’s new book, check out his blog at GPSInvestor.com.