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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 retirement questions. We're here to move past that oversimplified advice and dive into the nitty gritty. Now remember, this is just a show. It's not financial advice, so please do your due diligence. You got questions?
Mike:Text them to (913) 363-1234, and we can feature them on the show. David, what do we got today?
David:Hey, Mike. There are many strategies out there suggesting income, I'm assuming that's retirement income, around eight to 9%. Why are advisors still talking about the 4% rule? Give us a little bit of the history. Like, if you don't know, what's the 4% rule?
David:Yeah. Now we've got 8% and 9% being thrown around?
Mike:This is such a good question, and I have to laugh. Not at this person.
David:Sure.
Mike:At these circumstances. So okay. Before I talk about the 4% rule
David:Okay.
Mike:David, when was the best time to take part in the gold rush in San Francisco?
David:I guess it was 1850 something.
Mike:Like, I don't know the dates. The beginning? The beginning, the middle, or the end.
David:I mean, yeah, you'd wanna be there at the beginning, and was supposedly when it's just you just stick your pen in there and you just It was just gold. Yeah. Just gold everywhere.
Mike:Yeah. When was the best time to put money in Bitcoin? I guess, again,
David:at the very beginning when people could still mine it on their own, right, with their machines in their garage.
Mike:Yeah. Yeah. It's like there's this interesting trend of things really work out until they don't. Now there's a fun saying in the industry, the financial services space is full of really pithy one liners. Here here it is.
Mike:Brace yourself. Okay. It works until it doesn't. Yeah. That feels fairly universal.
Mike:Put that anywhere. So and here's just a couple of examples. Equities in the nineties worked until 2000 when it didn't, and you made no money for ten years. Yeah. Bond funds were miserable from 2010 on until they started working again.
Mike:K? It works until it doesn't. Nothing works in perpetuity, yet we're looking for the easy way out. We're looking for the set it and forget it strategy. And so right now, based on market conditions, based on current interest rates, and they're kind of going down a little bit, based on the bond market, which is the largest market that's out there, based on the AI revolution.
Mike:There's a lot of things going on here. There are certain investments or products that appear to almost consistently give you eight, nine, maybe even 10% annual dividends, income from contracts, income from real estate, whatever it might be.
David:Okay. And you say they appear to. Yeah. What's the next?
Mike:All markets cycle. You've got the bond market. That's gonna be good. It's gonna be terrible. You've got the equities market, the stock market.
Mike:That's gonna be good until it's not, and then it's gonna be terrible. You got the real estate market, which is gonna be good until it's terrible. You got your precious metal market, which is gonna be good until it's not. Everything cycles. So I have no problem with someone doing these covered call ETF strategies that are paying out 9% until they don't.
Mike:I have no problem with annuities fall into this category. K?
David:Okay.
Mike:Right now, and I'm not pitching any sort of product, but you might be able to put your assets, buy an annuity, and it pays you, let's say, 8% income for the rest of your life. Guaranteed. Who wouldn't want that kind of a deal? Yeah. It works until it doesn't.
Mike:And even the guaranteed income for life works until it doesn't, as in, like, inflation erodes or taxes go up and it erodes. So there's there's just the the packing of the insurance company goes bankrupt, and now you're dealing with the state trust fund that's supposed to help offset all of that, and that's a disaster you never wanna get a part of. So it works until it doesn't, and you need to understand the latter side of it. We don't like talking about the detriments. We don't like talking about the pain, the issues.
Mike:If you've ever known someone that goes to therapy, which is a very healthy thing, they don't want to face the trauma that they're gonna have to deal with. But if they do, on the other side, it's typically a healthier life. No one breaks their arm or has a stroke and is like, I'm really looking forward to physical therapy.
David:Yeah. Right.
Mike:But if they go through it, if they understand it, then they're able to have a better life on the other side. Mhmm. You've got to understand what's on the other side. Okay? So all the things that are suggesting the real estate market.
Mike:You know, actually, hold on. I'm gonna pull this up. Fannie Mae. There was a recent study. This was fascinating that came out.
Mike:This is on the real estate market that was suggesting we might be at a real estate market top. So the real estate market could crash. Fannie Mae.
David:K.
Mike:Fannie Mae said if we want the real estate market to be affordable again, which by the way, affordable again is another way of saying it's reached equilibrium, as in we could be at a market top right now, and maybe it stays overpriced for a while.
David:Okay.
Mike:But what happens when there's not enough buyers and things start tipping over? For the real estate market to correct, one of three things needs to happen. Prices must go down by 38%.
David:Okay.
Mike:I would call that a crash. Yeah. Or income must increase by 60%. Average household income. That's not happening anytime soon.
David:That sounds like a tough sell.
Mike:Or mortgage rates must go down to 4.15% or so. Must go down. That's the ten year treasury has to go down. How is the ten year treasury gonna go down? Well, that means the Fed is lowering interest rates, making money really, really cheap.
Mike:But even then, that's not gonna happen. If you look at what happened in Europe, they were lowering interest rates, and their ten year treasury equivalent kept going up because the confidence in the treasury debt wasn't high. So they have to pay a higher interest rate, and the ten year treasury is what affects mortgage rates, not the Federal Reserve rate, and people miss that. So you're in a really crappy situation because it's not likely that mortgage rates are really gonna go down. Because even if the Fed drops rates, I don't think treasuries are gonna go down with it as quickly because our debt's so high.
David:So a lot of people who are sort of banking on their equity in their home like, imagine if your home was 30% less valuable. Oh my gosh. No one would wanna sell.
Mike:Yeah. But then you've got, like, a third of the states that are showing recession like symptoms. Mhmm. Do wanna you hear the states?
David:Oh, they
Mike:already did. Based on GDP. Are you gonna say Kansas? Yeah. The are states where their gross domestic production, their ability to produce, is going to near recession.
Mike:Recession means that the negative production of a state has gone down for two consecutive quarters.
David:Okay.
Mike:Okay. That's a recession. Yes. Depression's four. So they could be entering to recession.
Mike:Wyoming, Montana, Minnesota, Mississippi, Kansas, Massachusetts, Washington, Georgia, New Hampshire, Maryland, Rhode Island, Illinois, Delaware, Virginia, Oregon, Connecticut, South Dakota, New Jersey, Maine, Iowa, West Virginia, and District of Columbia. There's some populous states. And that list, I believe, is growing. So if they're going to recession, recession's when your neighbor loses their job. Depression's when you lose your job.
Mike:Yeah. If that's happening and they're losing their job, the real estate market starts to slow down. If the real estate market starts to slow down, will people panic? I don't know. Will they be able to hold on to their properties?
Mike:If they can't hold on to their properties, do they go to foreclosure? There's all sorts of things that could panic. If you really look at back at 02/2008, it wasn't a financial crisis like people really thought.
David:Mhmm. Yeah.
Mike:There's a great TED Talk about this of mark to market accounting, which we've gotten rid of, but then the panic that ensued. It was like a little fire just blew up in this massive panic. So there's all sorts of things that could or couldn't happen that create a real estate market correction. But the reason why I bring that up is because you've got a lot of wonderfully wonderful privately traded REITs, for example, or, you know, just real estate investment companies, public or private, that are paying a good dividend until they don't.
David:We've come back full circle.
Mike:You don't wanna assume that anything's gonna work forever. You wanna, in my opinion, have the flexibility to shift based on market conditions. Keep an eye on all that.
David:Does that mean that the 4% rule doesn't work forever?
Mike:Let's go back to that. Yep. Yeah. So the 4% rule is not really intended to be an actual rule you follow every single year.
David:Oh, okay.
Mike:The idea was simple. If, let's say, stocks average seven or 8% year over year, which historically they have, and the bond market averages 4% year over year, which historically it has, you should be able to take out 4% from your portfolio and be fine. Because you're taking income, and there's still growth to offset inflation. It is an intentional rule of thumb to help figure out how much income you should have in retirement or you could have in retirement. Because the 9% dividend isn't inflating.
Mike:It's not growing with inflation a lot of the time. So what good is 9% dividend or an annuity that's paying you 8% for life, whatever it is? Notice 8% guaranteed for life income. After ten years, you've lost 25% of that buying power because of inflation. Uh-huh.
Mike:Or the eight, ten, whatever percent of the the REIT. But what if the real estate markets crash? What if there's bad tenants? The real estate properties underlying mechanisms go belly up. You lost that.
Mike:You're being compensated for the risk that you're taking. And you might put it in the market. But if the markets go flat, then where are gonna take your income? You've got liquidity, so you could accentuate those losses. Maybe you put in some buffered ETFs.
Mike:So the idea of the 4% rule isn't a hard fast rule. You put your money into whatever you want, and then hope it works out, and it's not that you can just take out 4% and you're stuck with that. It's a rule of thumb to let people know they might be getting closer to retirement. But the reality is, once you get close to it, you then start getting into the details of how are you diversifying your assets and your income strategies so that you know what to do when the markets go up, and you've got a what we call a bear market protocol. You know how to take income when the markets go down.
Mike:Mhmm. So it works until it doesn't. What's your strategy? Your alternative strategy, your backup strategy for when it doesn't. You hold on to good REITs.
Mike:Hopefully, the income comes back. What do you do in the meantime? You're a dividend investor. Dividends dried up for a time being. What do you do until they come back?
Mike:Markets go down. What do you do until they recover? Every strategy has a risk. What do you do until they recover? That part, it's not talked about nearly enough except for the annuity people.
Mike:And the annuity people say, you don't have to worry about the risk. Yeah. But you do need to worry about inflation and taxes because it's a subtle risk. It's the risk that slowly eats away at your retirement. If you assume a 3% inflation, you've lost 25% of your buying power, and after twenty years, it's like 43% of your buying power.
Mike:Let's assume that you've got a 100,000 of income for easy math. Okay. Today, could you live off of 75,000? Well, no. That's kinda tight.
Mike:Well, that's what it's gonna feel like in ten years if we assume 3% inflation.
David:Right.
Mike:Because it's a flat income stream. And there are other annuities out there and all of that that have a cost of living adjustment. They have an index component to it. But even then, those components stop at a certain point.
David:Oh, like during the length of the contract? Yeah. Okay.
Mike:So the moral of the story here is don't oversimplify your strategy. Have your backup strategy or bear market protocol. Understand what to do when times are great, what to do when times are good, and what to do when times are bad. Have built in flexibility with your plans. Don't fall for the oversimplified.
Mike:It's just more dangerous than you realize, and that's just the income component. There are other parts, the taxes, the longevity risk. What was the question? I wanna make sure we really hit this hard.
David:There are many strategies out there suggesting income around eight to 9%. Why are advisors still talking about the 4%?
Mike:If you feel like you're getting a good deal, it means you're taking on more risk. 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 or if you're missing tax minimization opportunities that you may not even know exist.
Mike:Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.