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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to how to retire on time, a show that answers your questions about all things retirement, including income, taxes, social security, health care, and more. The show is an extension of the book, How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial advisor, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much discuss it all. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, then request Your Wealth Analysis from my team today by going to www.YourWealthAnalysis.com. With me in the studio today is mister David Fransen. Thanks for being here.
David:Yes. Hello. Thank you.
Mike:David's gonna be reading your questions, and I'm gonna do my best to answer them. You can send your questions in by either texting us to (913) 363-1234. That's (913) 363-1234. Or email them to heymike@howtoretireontime.com. Let's begin.
David:Hey, Mike. How risky or aggressive can you be in retirement?
Mike:Traditionally, you're supposed to have less risk the older you get. I think that's a fallacy. Oh. Yeah. Here's the ideas.
Mike:The older you get, the less risk you should take because what if? What if? What if? What if?
David:Uh-huh.
Mike:Well, why do we have protection in our portfolio? In case the markets crashed. Okay. If the markets never crashed, would you have bond funds in your portfolio? Oh.
Mike:I mean, really, would you want less risk if everything made money?
David:If I was guaranteed to never have a crash or I never have a down, whatever, a bear market, yeah, I would just, like, let's grow, baby, grow stocks, like equities only. Right?
Mike:Yeah. So the reason why we have bond funds in our portfolios is in case the markets crash. The reason why we have alternative investments or REITs or cash or cash equivalents like CDs or treasuries in our portfolio is in case the worst should happen. Mhmm. This is why I created the reservoir strategy.
Mike:It's simple that you have a certain amount of your assets in principal protected accounts so that when the markets crash, you can take income from those protected accounts and allow your other accounts to recover. That's it. Yeah. Now how to implement it is difficult. You gotta put your plan together first, then you've gotta explore the strategies and the efficiencies to get more out of your money, and then you can dive into the portfolio design.
Mike:That's the essence. So, David, let's just have a little bit of fun here. Okay. So if you're 60 years old and the markets crash every seven or eight years, how many market crashes would you expect that you would have if lived to mid nineties?
David:So, yeah, let me do my quick math here. About four?
Mike:Yeah. Probably four or so market crashes. And if market crash averages one to two years, maybe you had got eight years of the next thirty years of your life. You might need to draw income from a principal guaranteed source.
David:Yeah.
Mike:Now let's say you're in your mid seventies. K? You've got maybe ten years left. You might have how many more market crashes left? Mhmm.
David:I'm thinking two.
Mike:May maybe two. Yeah. Right? So maybe four years left. Do you need a significant amount of your portfolio to get through half of the market turbulence?
Mike:Because you've got half of your life expectancy left. I explained this right. Like when you have less time in life, not to be morbid. Yeah. There's a lower probability of market crashes.
Mike:Like they'll happen, but you're probably not gonna go through four. You're probably gonna go through two more. Yeah. So at some point, I think there needs to be a change in your investment philosophy to where you're either gonna spend it or you're investing for the kids or grandkids. And how would they invest their money?
Mike:You don't need access to all of your money, so let's get more deliberate about many portfolios. Let's say only 50% of your portfolio is what you need to sustain yourself and the lifestyle you want for the next ten years. How would you invest if you knew you didn't need to touch the other half of your portfolio? You didn't really need more income, you kinda slowed down a little bit, you didn't need to touch it, what would you do with it? Well, I'd give it to the kids.
Mike:Okay. Well, how do you wanna grow the money? Let's put it all at risk. Now it doesn't have to be penny stocks. You know, we can put it in large cap investments.
Mike:Put it in the S and P 500. If you want an oversimplified approach, there's better ways to grow the money than just buying an index fund. But Hey, you get the idea here. Let's put the timeline. Let's put life expectancy.
Mike:Let's put lifestyle and legacy intentions in the equation of understanding what is risk and how much is appropriate.
David:Yeah.
Mike:The day you retire is the day you should have the least amount of risk because you have the maximum amount of market crashes you'll experience within your retirement. And as time goes on, as you overcome the first market crash in retirement, and then the second market crash in retirement, you need less in your reservoir, which means you can have more money growing at, hopefully, a better rate.
David:Yeah. I get that.
Mike:We need to have context in the conversation. We need to have a plan that's maybe more academic. You know what's really funny about finance?
David:Okay.
Mike:The more you ask why, the more stupidity unravels. Mhmm. And I'm not trying to be pretentious here. I think Harry Markowitz work on the sixty forty portfolio was profound. He's the guy that won the Nobel prize that had the idea that maybe we should put 60% of our assets in stocks and 40% of our assets in bonds in case the markets crash and just kind of let it go there.
Mike:That creates a nice predictable growth pattern. I think it was rather profound. Yeah. It changed our perspective of maybe we should diversify a little bit more. Maybe we should be more strategic.
Mike:Well, he did it. He didn't actually if you look at his in his interviews, he never actually followed it himself. It was an academic study that had some interesting takeaways. Mhmm. And then the financial services industry ran away with it and then started talking about, oh, well and then you've got the large cap stock, and you've got the small cap stocks, and you've got the emerging markets, and you okay.
Mike:Well, why do you need all these funds? What's been their performance, and what's the volatility of it? And and are you being compensated appropriately for the risk that you're taking for the phase of your life? I think the market is fair, but do you really need to have a significant portion of your assets in bond funds? There are some suitability questionnaires that will follow what's called the rule of 100.
Mike:The rule of 100 says that your age is the percentage of your portfolio that should be in bond funds. So, David, let's say you're 70 years old. You want 70% of your assets in bond funds barely making money? Because inflation's gonna affect you just like everyone else.
David:Right. 70 is like the new 50. Right? People are living longer. They're Yeah.
David:Doing more.
Mike:70 is the new 50. I love that. But can you see how just asking why things start to fall apart a little bit? Yeah. Do you really need that much protection?
Mike:Or do you just need, if you're 70 years old, maybe enough in protected accounts, CDs, treasuries, fixed annuities. You've got buffered ETFs with a % buffer. You've got structured notes. You've got fixed indexed annuities as long as there's no fees associated with it. Maybe you've already funded an indexed universal life insurance policy, so you have access to cash value you could borrow against.
Mike:I mean, there's so many ways you could slice it. But if you're 70 years old, okay, you you probably need to just be able to have enough in the reservoir to get through three, four, maybe five years of your plan.
David:Uh-huh.
Mike:And it really helps, by the way, to actually have a plan. It really helps knowing that in three, four, five years, I need this much income from these taxable sources. So you basically preempted your future. You know what to expect. Right.
Mike:And you know, if the markets are up, you're going to pull from this part of your portfolio. And if the markets are down, you've got that reservoir funded and you pull from that part of the portfolio. The concept is so simple. It's so many people miss it because even though it's easy to articulate, the application of it can trip a lot of people up. But to the question, can you take more risk?
Mike:Yeah. Just make sure you've funded enough in your reservoir so that if the markets go down, you don't touch the accounts that have lost money. Alright. You got to let them be able to recover. It is so important.
Mike:So that's why we believe in the reservoir, funding those principal protected accounts that don't have liquidity issues when you need it. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast, just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility.
Mike:This is not your ordinary financial analysis.
David:Learn more about Your Wealth Analysis and what
Mike:it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com
David:today to
Mike:learn more and get started.