In this podcast, Motley Fool host Ricky Mulvey and analyst Bill Mann discuss:
- Netflix's $5 billion deal with the WWE.
- Procter & Gamble's quarter and write-down of Gillette.
- Why Schwab's deposit flight isn't quite breaking the bank.
Plus, Motley Fool personal finance expert Robert Brokamp kicks off a two-part interview series with Michael Finke, the director for the Granum Center for Financial Security at The American College of Financial Services. In part one, they discuss what to consider when planning a withdrawal rate for 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 23, 2024.
Ricky Mulvey: Netflix gets Raw and you're listening to Motley Fool Money. I'm Ricky Mulvey joined today by Bill Mann. Bright and early. Bill, good to see you.
Bill Mann: What is happening Ricky, you doing well?
Ricky Mulvey: I'm doing pretty well. How about you?
Bill Mann: It's warmed up a little, so that's nice.
Ricky Mulvey: Yeah.
Bill Mann: I'm not part polar bear like a lot of people.
Ricky Mulvey: Last time I think we lost you due to snowfall so its good to get you back on the following week.
Bill Mann: I know people from the Northern climes laugh at the DMV when we talk about snowfall but it was actually legit. We had a legit snow.
Ricky Mulvey: I'll take your word for it. Let's talk about Netflix. Netflix got a big deal this morning. The streamer is paying $5 billion to get WWE raw for 10 years starting next January. The TKO Group which is the combination of the UFC and the WWE. Those investors are a little bit more excited than the Netflix investors. Talk to me. Why do you think Netflix is going heavy on these live events right now?
Bill Mann: I love the fact that I've been called upon to talk about wrestling because I grew up in Raleigh, North Carolina, which was the home of Dorton Arena. So we had all the time, Rowdy Roddy Piper and Dusty Rhodes, and the Russian Bear, Ivan Koloff, coming into our climb. Wrestling is something that is in my blood. But back in the '70s we would not have expected wrestling to go for $5 billion worth in terms of television viewing revenues. It's really staggering. I think from Netflix standpoint in some ways this is battening down the hatches in the area in which it probably feels like it has the most vulnerability versus other streaming services. They have not really done much or have they really successfully cracked the code on live entertainment. Wrestling is something that's interesting because it's live entertainment but it also has a longer tail than almost any other form of sports entertainment. I'm making up a number. But 95% of the people who watch a football game watch it within the first 24 hours. With wrestling you can go back and because there's a story line attached to it there is much more of a tail there and those are things that Netflix knows how to handle. It's a really interesting transaction to me because of those two things.
Ricky Mulvey: I also envision an executive conference room where the words scalable and repeatable are often being used about this. I remember 2017 my buddy was like you want to go to the WWE Monday Night Raw? I'm like this is going to be stupid but I'll go. Because I got nothing better to do. There's parts where I'm like this whatever. I like real sports. Braun Strowman and Big Show jump off the top turnbuckle and literally break the ring to finish the show and I was like this is sick. Let's go.
Bill Mann: See, I go back to the country boy, Haystacks Calhoun and 600 pounds worth of doing the same thing.
Ricky Mulvey: Bill, we're not talking about Haystacks Calhoun. We had our trip down Memory Lane. [laughs]
Bill Mann: It is also a sport unlike the NFL with a huge international reach.
Ricky Mulvey: Yes.
Bill Mann: Netflix, you could call it a geographically unconcerned entity now has access to now has a recent Saudi Arabia for example which is not a huge market but it is one that is wild about wrestling and WWE and Raw is something that is going to do very well there and it's going to draw viewers in to the entire platform of Netflix.
Ricky Mulvey: They'll also pay some pretty big money to put on large shows there. I think what's also significant is that WWE on a Monday night unless there's Monday night football going on it is often the number 1, 2, and 3 cable television show. This is a signal for linear television where your top three dogs are literally leaving and WWE is saying, you know what? We're going to lose some of our audience because there's going to be friction in this transaction. Shout out to the Schwab discussion we'll have later. But they're saying this trade-off is going to be worth it or what Howard Stern did to radio and what Joe Rogan did to podcasting a little bit.
Bill Mann: It really does show and it's why just to make a little bit of a bizarre step in this conversation it is why content is still king. It is not to say that Disney hasn't had a huge amount of missteps for example including how they've managed their content. But at the end of the day if you were to ask me do I want to invest in a pipes company or do I want to invest in a content company it's the content company all the time.
Ricky Mulvey: Let's kick out, talk about Procter & Gamble. They reported this morning the expectations. But what's grabbing headlines is another Gillette write down for the razor maker. P&G bought it back in 2005 for $54 billion. Four years ago P&G took an $8 billion charge on Gillette. This quarter it's another $1.3 billion dollar write down. Bill Mann, what happened?
Bill Mann: Accounting is such a funny thing. I just want to go back and emphasize that you're talking about a transaction that happened in 2005. It was $54 billion, it was about $95 billion in today's dollar. So it was a huge transaction for Procter & Gamble. But basically the way accounting works is they put that transaction on their books and it's considered an asset but they have to make a determination whether that asset is impaired or not. They're going back for an 18 year old transaction and they're saying we don't believe that we're going to make full value from that transaction for Gillette. It just goes to show in business how much stuff is left to chance. Because Procter & Gamble is a very savvy company. You're not talking about a company that goes out and does wild things. They went out and bought a dominant razor and blade company thinking that the environment in which they were operating in 2005 could last long enough that they would be able to you to regain their investments. AI is not a risk to people needing to shave. It just isn't. What they really didn't get right was that things actually did change.
Ricky Mulvey: They didn't. It's a story about pricing power. It's existed, it's a question I think for some product Procter & Gamble and right now though I'll also add grooming is watch me from Cincinnati play defense on this. [LAUGHTER]
Ricky Mulvey: Grooming is the smallest segment for the company. It's 8% of sales. This is a multi-billion dollar company that still seems to be doing all right.
Bill Mann: I mean, that's the baseline. I think that's exactly right. Again, fascinating that we're talking about in 18 year plus ago transaction that is still on their books is being written up and down. A couple of things happened. One was that the distribution channels changed a little bit. You remember Dollar Shave Club, and they're fantastic ads, that bit a little bit. But what really bit into Procter & Gamble was at the time that they made this transaction, the thing that it seemed like the world was counting on was that the dollar was in a decline. What has happened almost linearly since 2005 is that the dollar has gone up against almost every other currency in the world. It's made it much more expensive to buy Gillette products. They call out places like Argentina and Nigeria, but those are simply placeholders for all of the countries that are outside of the US where the middle class is going to be price conscious. It has harmed this transaction for Procter & Gamble.
Ricky Mulvey: I want to exclude the write down. Let's adjust that gap bill. If you exclude the write down operating income would have been up 21% for the quarter year every year. This is as you said it's a company that's not affected by AI. It's not one that you would expect to be quickly growing like that. It still has some pricing juice left in it. In organic sales, you're still doing OK.
Bill Mann: You said something important and I'm going to pull back, and you said, let's ignore the write down, which is a fine thing to do because Procter & Gamble doesn't have many of them. It is a red flag when you see a company that has every quarter or every year, they've got a different write down. Because then they can say, that's non cash. When in actuality they spent cash and debt to buy this. It's the realest cash there is. Procter & Gamble is right to downplay this, write down in the impact to it. Because it was money that was spent 18 years ago. From an accounting perspective, it was right of them to do, but you are absolutely right that Procter & Gamble is doing absolutely fine, and 21% rise is nothing to sneeze at.
Ricky Mulvey: Before we go, I also I want to check in on Charles Schwab with you. Deidre, Matt Frankel took a look at the banking sector last week. I know you follow Charles Schwab. There's a pretty gloomy article about the company in the Wall Street Journal. It's maybe not a banking crisis, but Chuck still seems to be going through it. Looking at the latest quarter, there were a lot of parentheses in the wrong places bill. A year ago, Schwab paid about 800 million in interest expense on the quarter. This year it paid 1 billion more. How's that happen?
Bill Mann: Well, you've heard about rates going up.
Ricky Mulvey: [laughs] It makes money on interest revenue.
Bill Mann: Not, exactly bight but you know who else does?
Ricky Mulvey: The savers? The people fighting T bills.
Bill Mann: Basically, since 2009, we have been punished to save. It has been absolutely fine at places like Charles Schwab. Charles Schwab isn't organized as a brokerage, it's organized as a savings and loan. That it is, at its core, a bank. For years, people who have not had their money invested in stocks, have had them in sweep accounts where you've been paid, 0.1% on your money. But as it turns out, when you go into a higher interest rate environment, it becomes beneficial for Schwab's customers to put their money that's not allocated to stocks or other investments into interest bearing instruments. That's where the billion comes. That's from members reinvesting their money, taking it out of cash, and putting it into interest bearing vehicles. That's something that's called cash sorting, and it is something that is costly to Schwab, but they had to expect it. I mean, it is something that was absolutely part of what a savings and loan at its core does.
Ricky Mulvey: Yes, so Schwab lost essentially 175 billion in bank deposits, which is nearly 40% of what it had at its peak. That's bad. There's a version of this where that means you have a banking crisis, and Schwab doesn't seem to be having that.
Bill Mann: No, exactly. That's what's entirely different about what's happening at Schwab. In 2023, people after Silicon Valley Bank collapsed are like, what's the next one? There's Schwab, because under accounting standards, this seems like a banking crisis. But Schwab, they haven't been losing money. People haven't been withdrawing from Schwab. They've been taking bank deposits, and then transferring them into T bills, or transferring them into CD's. Or transferring them into higher interest bearing instruments, which changes the capital ratios at Charles Schwab. But Charles Schwab, unless they are forced to revalue the debt side of their balance sheet, it's not great for Charles Schwab, and it's really not great in an environment in which they are already undertaking a merger with TD Bank at all of those deposits. But it really is just the valley of the shadow of death that they've got to walk through. They're going through the fire swamp, that's what I would say, Ricky.
Ricky Mulvey: Fire swamp?
Bill Mann: Some would say that it's impossible to get to the other side, but Wesley and Buttercup did it. Schwab's going to do it too.
Ricky Mulvey: I mean, for as much friction as there is with the TD Ameritrade merger, they've got 15 million accounts going over, they've got basically 1.6 trillion in assets. Basically, everyone gets a letter at TD Ameritrade, which is a negative consent letter, meaning hey, if you want to opt out of this, you can credible. [laughs] Actually, I know the wealth management firms are not happy about that. Anytime you give just a reminder, if you want to leave, you can. They got they got a couple of frictions coming at them right now.
Bill Mann: They've got friction, but imagine thinking that a firm that has, $8 Trillion in client assets under management, and it's 33 million client accounts. It's just going to be allowed to fail by Uncle Sam because of a capital ratio. It's not going to happen. With Schwab, I look at a company that had a very, very bad year. Some of it was unfortunate, some of it was they had flown a little close to the sun. But at a baseline, the price that is available for Schwab now absolutely takes into account most reasonable case scenarios for the company. It's not good at Schwab but if you believe that a dominant bank with a history of innovation has a steady state, that steady state, I think is higher than it is now.
Ricky Mulvey: Uncle Sam, always looking out for the little guy. He's a Schwab shareholder bill, I hope that's the case. I hope they don't forget about them. But as always, Bill, appreciate your time and your insight.
Bill Mann: Thank you so much, Ricky.
Ricky Mulvey: Before we get to our ad in our next segment, I wanted to throw in a quick pitch that if you find value in the show, please leave us a review on Apple podcasts. A few sentences helps us reach a bigger audience, and also rating the show on Spotify helps us out too. If you have specific notes about the content, guests, anything you hear, our email is podcasts@fool.com. That is, podcasts with an S @fool.com.
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Dylan Lewis: What's a safe withdrawal rate for retirement? Dr. Michael Finke is a professor of wealth management and the director for the Granum Center for Financial Security at the American College of Financial Services. He caught up with Robert Brokamp to talk about his research in the first of a two part conversation.
Robert Brokamp: Michael, you have two PhDs. The first one you earned is in consumer economics. In that first chapter of your career, what did you learn about why some people make better choices when it comes to purchases like food, and how did that lead you to getting a PhD in finance?
Michael Finke: Wow, that it's an interesting part of my career. I was interested in knowing what motivated people to eat healthy foods. I found in my research that there was this amazing correlation between eating healthy foods, and exercising, and saving. I thought, well, there's got to be some an interesting theory that connects what motivates people to eat well and to also save. I took a finance class, it was actually a PhD class in investments. At the end of the class, I love the class, by the way. I thought it was so fascinating, I loved investments theory. At the end of the class, my professor took me aside and said, ''Do you realize how much more money you could be making if you were a PhD student in finance, than studying food consumption?'' That served as a jump for my second PhD in finance. Now, there was a lot of overlapping content between the two, because as much as finance, people don't want to admit it, it's just applied economics. I was doing applied economics when I was studying food consumption, and I'm still doing applied economics right now. It's just a topic that tends to be of interest to people who have money, which is a good thing as an economic.
Robert Brokamp: We recently did an episode on the correlation between health and wealth. In terms of cause and effect, we felt like it went both ways. Did you find what cause one or the other, or is it people just wired to be better with their money and their bodies?
Michael Finke: Yeah. There is this idea that one of the reasons why people who have more money live longer is perhaps because they have access to higher quality healthcare. Actually, there's really not a whole lot of evidence to support that. What seems to be happening is that the people who do things like eat better and exercise, and they are making investments in their health. Now, what is an investment? An investment is a sacrifice that you make in your joy today in order to experience more joy in the future. It really is just what we call an inter-temporal choice. Anytime we make an investment, whether it's eating the grilled chicken instead of having a hamburger for lunch, or whether it's getting up in the morning and going to the gym, as opposed to doing something that's maybe a little bit more fun, which is just about anything. All of those are motivated by this desire to live better in the future, and so that also motivates people to save more. I'm doing some interesting research right now on positivity, and I had no idea. We did this survey, we added a few questions about how positive is your outlook about the future. I didn't expect them to be really strong predictors of financial outcomes. They ended up being huge predictors of how much people save for retirement. Even things like asset allocation, or you're willing to take more risk if you have a more positive view of the future. All of this I think is just fascinating getting into what motivates us to choose one type of financial behavior or another, but it does seem to be a powerful way of thinking about that motivation is as an investment and investments in health, investments in relationships are similar to investments in mind.
Robert Brokamp: When it comes to retirement as a goal, which has really become much more of your focus. People have to decide on the price of that goal, starting with how much income they'll need to maintain their lifestyle and retirement. I'm sure that many people have heard that they'll need around 75% of their pre-retirement income when they retire. Is that a good starting point?
Michael Finke: It depends. It could be higher, it could be lower. It could be higher if you earn less money, and it could be lower, if you earn more money. Now, that means that, let's say someone who's making between 100 and $200,000 a year. If you think about it, they're already saving especially if they're doing catch up contributions after the age of 50, they might be saving 15% or even 20% of their income. That's money that's not being spent. If they're making $200,000 a year, you're going to start at $160,000 right there. Then you've got payroll taxes that you don't have to pay in retirement, Social Security, Medicare taxes, you don't have to pay that stuff. That's another 15% if you're self-employed, half of that if you're employed with a company. The fact is that most people don't spend every single penny of their paycheck, especially people who watch shows like this, or there are people who tend to accumulate money in their savings account. What I found is if you look closely at the data even before retirement, someone who's making a couple $100,000 a year, probably only spending about 55-60% of that, that's the lifestyle that they need to replace in retirement.
That's good news, I think, especially in an environment where you believe that asset returns are going to be lower than they have been in the past. The goal is more attainable and of course, you have Social Security, which serves as a foundation. You simply have to make up the difference in that lifestyle over the course of an expected lifetime in retirement. Now, that lifetime in retirement, of course, we were talking about health investment. David Blanchett, who works at PGIM, used to work at Morning Star when I did a study where we looked at people who save and define contribution plans. People who save and defined contribution plans are different than the average American, because they tend to make more money. People who make more money are healthier, which means that it's far more likely that they're going to live on average into their late '80s, which means that their time horizon, if they retire at 65, is probably on average about 23-25 years. Then you have this uncertainty that surrounds how long the money needs to last, and boy, that is the ultimate issue is none of us know exactly how much money we need to save, because none of us knows exactly how long retirement is going to last, nor do we know the returns that we're going to get on our investment portfolio.
Robert Brokamp: There's also the question of how spending changes over the course of retirement. Because if you use a retirement calculator, or even the foundations of the old 4% rule, which we may talk about later, the assumption is that your expenses go up every year in retirement. But is that generally the case?
Michael Finke: No.
Ricky Mulvey: There's two questions here. On average, how much does spending decline in real after-inflation terms? It does tend to go down. There's some differences of opinion based on the way people do research on this topic, but the reality is that we're not going to be able to spend as much money when we're 90 as we could when we were 70. Now the other part of that question is how much happiness are we going to get per dollar of going on vacation when we're 90 as opposed to going on vacation when we're 70. That is a compelling reason to front load some of that spending. But that makes retirement more risky because you're spending more early on. That means that you're more susceptible to what's known as a bad sequence of investment returns early on, you could significantly deplete your savings.
Think about it. You're a 65 year old healthy woman. You are, on average, going to live to age 90. Let's say you've got five rows of five circles, and you've got so much money saved, and you've got to decide how many chips you're going to put in each one of those circles. Do you put them all when you're 90? Do you conserve your chips so that they're left over if you live to be more than 90 or do you put more of your chips on 65, 66, 67, 68, 69 When you're more physically and cognitively capable of enjoying the money, that might make more sense. That's part of the game of life, is that we've got to figure out where to put our chips. If a lot of people just end up conserving their chips because they're worried about running out. That just means that your kids are going to spend the money. They're going to have the fun that you didn't have between the ages of 65 and 75.
Michael Finke: Some of your research has shown that for the median retiree, they're spending about 8% less than they probably could. For wealthier retirees, they're maybe even spending 50% less than they could, possibly, because they're so worried about running out of money.
Ricky Mulvey: Yeah, to me that's the big mystery. I have a new article coming out on this topic, which is why do so many people who say they are not that interested in passing money on to others after they're gone, why do they just not spend the money? I've done interviews with retirees and I consistently see how proud they are of the fact that they're not spending down their money. They're 10 years into retirement. They have more money than they did 10 years before. They're proud of it. Because they even look at me like, you're a finance guy, you should be proud of it too. I'm not. I think they're making a mistake. I think that they've, wasted 10 years essentially because they haven't spent the money in a more rational fashion. Now, if that's your goal, if you really want to pass it on after you're gone, then don't spend it like, that's fine. That's the way to win the game. But if that's not your goal, then there's only two places your money can go. You can either spend it on yourself or you can pass it on to others. If passing it on to others isn't that important to you, let's put together a plan for actually spending the money while you can still enjoy it.
Michael Finke: When you talk about how much someone can safely spend each year, that brings up the topic of safe withdrawal rates, which most people have heard of is 4%. Some say it's too low, some say it's too high. What's your take? I'm guessing that you don't agree with Dave Ramsey who in November said it should be 7% to 8%.
Ricky Mulvey: Yeah. Dave Ramsey said that his mathematics was very clear. That is, since stocks always return 12% and inflation is 4% you should easily be able to withdraw 8% of your savings balance as your retirement income plan. Now, there are so many things wrong with that. You want to keep me focused here for a moment. But first of all, they don't actually return 12% because there's a difference between what's known as geometric returns and arithmetic returns. He's referring to the arithmetic average. Geometric is what you actually keep. In other words, if you have a year like 2022, your investments go down by 20% then you have to get a 25% return the next year just to get back to where you started.
On average, you may have had a 2.5% return, but you have exactly the same amount of money as when you started. That's the difference between arithmetic and geometric returns, so he's ignoring that. The other part that he's ignoring is what happens if you get unlucky at the very beginning of retirement. Let's say you have one million dollars, you're pulling $80,000 out the first year. What happens if your portfolio goes from a million down to $800,000. Now you're pulling $80,000 out of it. You have $720,000 at the end of Year 1. Do you again pull $80,000 out of there? Well, what happens if the market's flat now you're down to 640. It's not difficult to imagine that you're going to be out of money pretty quickly. In the early 2000, you can pretty much pick your year in the 2000. If you would have followed that strategy, it would have maybe taken anywhere between 10 and 15 year to run out of money if you would experience that same sequence of returns.
The sequence of returns risk is a very real thing. It means that you're going to have to significantly adjust your lifestyle downward if you get a bad sequence. You simply can't just be blind to whatever return that you got. That's what the 4% rule is based on. It is this idea that if I have one million dollars, I can spend $40,000 the first year. I can increase that by the rate of inflation that should last me over the course of 30 years. What happens if I get unlucky? What happens if my portfolio falls the first year? What if it falls again the second year? Do I continue to spend $40,000 a year plus inflation? At some point you're going to say, that's getting a little bit risky. I'm not comfortable with that. Maybe I should adjust that spending downward. That's what you should do. That is the way that a rational person would respond to a down market. They would spend less. I think that that which was known as a flexible withdrawal strategy or something that involves guard rails.
In other words, you could maybe go up by a half a percent per year or something like that, that's the right way to do it. That allows you to pull more money out at the beginning, by the way, because you know you spend more early on in retirement as long as you're willing to make adjustments. If you get unlucky and remember that bad luck, that's going to cause you to have to adjust your spending downward. But what if you get good luck? In other words, what if at the beginning of retirement you have a positive sequence of returns, then should you not spend more? It shouldn't just be your financial advisor and your kids who benefit from the risk that you took, you should be able to spend more also. That's what's known as flexible spending rule, I'm a big fan of that. I think that's the right way to do it. Now, you can do a flexible spending rule only if you have the ability to be flexible in your spending. That's why I think one of the stages of planning for retirement income is evaluating how flexible you are capable of being with your retirement budget. Because if you do have a segment of the budget which is simply not flexible, then you can't take investment risk with that portion of the budget. You're going to have to cover it with Social Security and some other strategy that is not going to require you to cut back if you get on money.
As always, people on the program may own stocks mentioned in the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.
Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Bill Mann has positions in Charles Schwab and Walt Disney. Ricky Mulvey has positions in Charles Schwab, Netflix, Procter & Gamble, and Walt Disney. Robert Brokamp, CFP(R) has positions in Walt Disney. The Motley Fool has positions in and recommends Apple, Netflix, and Walt Disney. The Motley Fool recommends Charles Schwab and TKO Group Holdings and recommends the following options: short March 2024 $65 puts on Charles Schwab. The Motley Fool has a disclosure policy.
