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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Hi. Mike Decker, author of the book, How to Retire on Time. Here's a question I was recently asked on my retire on time q and a. Check it out. Our top concerns for our audience change.
David:Mhmm.
Mike:I don't know if that's the new cycle, if it's a new audience, or a combination of the two, but inflation is the number one concern today. Mhmm. The next one's market crash. You know what's interesting? Inflation risk and market crash risk are paradoxical.
David:Away.
Mike:If you wanna get rid of market risk, you increase inflation risk. If you wanna increase inflate... Or decrease inflation risk, you increase market risk.
David:Oh, I see what you mean.
Mike:And the problem is we wanna solve this problem, so we look for the perfect investment or product, which doesn't exist. And the way you solve this is by having a plan first, assign the mission, explore the strategy second. What do you do in this situation or that situation? And then third is the portfolio. Like what if you had a section of your portfolio that, yeah, had inflation risk, but not that much because it laddered out your income for the next three years.
Mike:That's not that much inflation risk because you've got enough assets in the market to grow an offset inflation risk.
David:Right.
Mike:It is concerning when when I hear things like Trump may or may not be planning to inflate our debt away. I mean, like him or hate him, he knows how to handle debt, and inflation's a very strategic way of doing that. I don't know if he's trying to inflate it away, if it's deliberate, if it's accidental, or what. I'm never going to assume I know someone's thought process. Mhmm.
Mike:And I try to give every president the benefit of the doubt regardless of political party.
David:Mhmm.
Mike:But inflation is sticky. We have concerns in the stock market because of inflation, and we see that when the inflation reports come out, and we see issues with people who are buying bonds. This is important. The Fed does not set the treasury rates or all rates. The Fed only sets the overnight night rate.
Mike:That's the rate that affects your high yield savings.
David:Alright. Okay.
Mike:K? The ten year treasury is set by Scott Besson when he issues new debt through the big banks. The big banks have to bid on them. And right now, people don't want to bid on them at the traditional prices. They're having to bid at higher coupon rates.
Mike:What does that mean? That means people aren't willing to take the risk of holding on long term debt for thirty years at a four and a half, 5% coupon rate because they're concerned about long term and sticky inflation, which means they are asking or demanding the government give them a higher coupon rate because they think inflation's gonna stay around for a while, kinda like in the seventies.
David:So so these banks that would bid are thinking, no. We we need
Mike:They want higher higher coupon rates. That's why we see this parabolic increase, a massive increase in the ten year treasury and the thirty year treasury coupon rates. Well, what does that do? That creates an issue with the stock market. Because if you can get more money from a bond, which has a guaranteed payout for ten to thirty years depending on which ones you buy, and you can get that rate, and that rate's getting closer and closer to what the S and P has averaged over the last thirty years, you might start shifting money to bonds.
Mike:Right. If you sell stocks and you buy bonds, what happens? More people are selling stocks. If more people sell stocks, that leads into pressure in the market, which means you just need a catalyst or some sort of event to then put a shaky stock market on a fire sale or a crash or a downturn or a recession or whatever it might be. I mean, the canaries are in the coal mine and they are singing pretty loud.
Mike:Actually, I don't think that it works that way. Isn't that the canaries stop singing? Like they die?
David:Oh, that's right.
Mike:In the coal mine.
David:Because they've they've inhaled too much carbon dioxide or something and they stop.
Mike:So the canaries seem to be dying right now. Right. And the the response to this is to not panic. It is to know what to do when markets are up, and what to do when markets are down. And then to have a portfolio that allows you the privilege of exercising either strategy.
Mike:A risky or a prepared reaction is better than a risky prediction, and that's why planning is essential. Not portfolio construction, that's last.
David:Mhmm.
Mike:Planning first. Strategy second. How do you get more of your money? Portfolio third. The tools in the toolbox essentially select themselves.
Mike:Hey. I wanna pause real quick and just say, if you're getting close to retirement, I wanna invite you to download my book, how to retire on time. It's free. Just go to retireontime.com, and you can download my book, get the audiobook, the workbook, and so much more, including six plus calculators to help you prepare to retire on time. Check it out.
Mike:Retireontime.com. Alright. Let... Now let's get back to the show.
David:Yeah. Based on the the plan, based on what what choices you wanna make for yourself. This tool will satisfy this part of my plan and Yep. And then you start picking them. You can't go the other way.
Mike:I mean, how hard is... I'm concerned the markets are gonna crash next year. Okay. How do you wanna handle that? We have CDs or money market.
Mike:Both of those work with the timeline. It's a fixed growth rate. It's FDIC insured and protected. Well, I want money in the stock. Well, the stock market might go down, then you wouldn't be able to take income from that source.
Mike:What if we just take this small chunk of your portfolio, and we assign it the specific mission of your income next year. What would that do for you? Great. That's the one product that does that. Not good for long term growth, but it solves that issue.
Mike:It solves that mission. Yeah. That's what planning looks like. It's so fun. Alright.
Mike:Let's go to our next question. David, what we got?
David:Yeah. So next question that came in, pardon me. What options do you have for reserves when you are 50? So 50 is tricky. Yeah.
David:Because you... Are you still kind of in accumulation phase at 50? I mean, you
Mike:have maybe a few years till retirement or maybe you wanna retire early. So what you're working with is a is a couple of extra gap years. What do mean by gap years? A gap year is where you are to the next tax law or opportunity.
David:Mhmm.
Mike:Okay? So 50 to 55, you're gonna have to do a couple of things that are little bit different than 55 to 59 and a half. What is that? At 55, you have something called the rule of 55, which means you can take money out of your four zero one k without a penalty, the 10% penalty under certain conditions. So please don't just arbitrarily leave money in the four zero one k and assume it works.
Mike:Talk to an adviser, make sure you're doing it right. Mhmm. K? But that's a gap. So how do you get to 50 to 55 if that even works?
Mike:And then you got 50 to 59 and a half. 59 and a half is when you are able to start taking money out of your IRA without the penalty or your Roth and so on. So Right. So there's there... And then you got 59 and a half, then you've got 65 for Medicare.
Mike:Right? Before that, have to deal with affordable care act insurance, and then 67 or 70, whatever Social Security files, that's going to alleviate burden on the portfolio, and then you've got requirement of distributions is another... There's all these different moments Mhmm. That are gonna matter. So you've got to first line what those...
Mike:Like, line those up. Then you've got to start having the conversation of, okay, how much income do I need? Where is it gonna come from? Where are the tax laws at? And so on.
Mike:So the younger the person is, the more limited your options are. Why? Annuities, for example, you're not getting guaranteed lifetime income as a 50 year old. It's just not competitive.
David:Because the insurance company is gonna get that application like, oh, this person's gonna be alive for a long time?
Mike:Yeah. Yeah. Why would they wanna give you seven, 8% on the money you put in there at 50 years old? They won't. Yeah.
Mike:It's too much risk for them. So they might give you like 5%. Well, why would you do 5%? You might as well put it into a a bond and get a higher rate. Now don't actually do that.
Mike:Remember, there's no financial advice here, but you see my point. Yeah. It's tricky. It's tricky. For reserves and for the the uninitiated, those who have not read the book yet, let me explain reserves.
Mike:Reserves are assets that have growth potential and no downside risk. That's
David:it. So they can't go backwards. The balance is... Your initial, like, principle is always maintained. Right?
Mike:Correct.
David:Alright.
Mike:So... And there's a little bit of wiggle room there, like, you have an expense ratio on it, like, okay, it might go down a percent over twelve months. That's close enough. Okay. For all...
Mike:For complete clarity.
David:Sure.
Mike:But the idea is simple. Sequence of returns risk is the risk that when markets go down, you sell and lock in those losses to generate income. If you're a dividend person, dividends can stop paying. And then your stock goes down, and then you're up a creek without a paddle. If you're a rental real estate person, you could just be in between tenants for a while, which means you've got to sell other assets.
Mike:And like, so there's all these nuances of any strategy that you take, and when that strategy doesn't work. So what do you do? You want some assets. You got you got growth, protection, liquidity. All assets offer you two, not three.
David:Mhmm.
Mike:So growth and protection means you gotta give up some liquidity, but then you can map out that liquid... Liquidity. You can kind of ladder out the liquidity schedule. That's the idea. So what does that mean?
Mike:You're 50 years old. You probably have buffered ETFs available to you, and indexed universal life insurance available to you.
David:Okay.
Mike:They both have upside potential, no downside risk. If you borrow against a life insurance policy, yeah, you might have some fees that will slowly you weigh at the policy, so you need to make sure that you understand how to structure those policies. Here's the secret. The lowest cost of insurance has the least burden on those policies. Also pays a smaller commission.
Mike:So most people might not admit to that. I shouldn't say most people might not admit to that. There's a conflict of interest, because the higher the death benefit, the higher the commission is to the agent.
David:Okay.
Mike:You want the lowest death benefit possible, which means you kinda want the lowest commission possible. It's fine that people get paid on these things, but you just need to understand how do you fund it and drop the death benefit so that you have the smallest death benefit possible, which gives the most cash value potential for growth.
David:Okay.
Mike:So that's the idea. Very effective for younger people, especially those that are retiring at at 40 years old, 45, 50, because it has... At least in my opinion, based on my research, it's got more growth potential long term than buffered ETFs with the max buffer. It's got more growth potential than bond funds, at least historically speaking, if you compare the two. Because it's basically a structured note with an insurance wrapper that's got a little bit more control on upside potential.
David:And so how does this policy, like... How... What what is determined? Like, how does it make money? How does it grow?
David:Like, what is... Is it tracking an index?
Mike:How does
David:that work?
Mike:Yeah. You're gonna pick an index. So if it's like the S and P 500, you might get up to eight, 10, 12% on the good years and no downside. And it resets every year.
David:Okay.
Mike:So it's better than a buffered ETF, and the reason why it can be better than a buffered ETF is because it's life insurance. They know it's gonna be around for a while. Buffered ETF has an annual renewal. Yeah. So if you can buy, and the way it works is most of it's funded typically by fixed income, which is a fancy way of saying bonds.
Mike:Okay? Okay. So if most of it's in bonds, that kind of protects the principal, and they take the extra with what... Which is what's called an option budget, and they buy options for the upside potential. In other words, the markets go up, they exercise the options, and that benefits and credits your policy.
Mike:So that's why it's called index. You've got upside potential. If the markets go down, they just say, well, forget the option contracts, whatever. The fixed income still keeps the policy going.
David:Uh-huh. Alright.
Mike:This is why you can't do this as well on your own. You don't have the same option contracts or the same structures. Like you kinda have to be near an investment bank to do this kind of stuff. Mhmm. So you've got the index growth, no downside risk.
Mike:It works any time of your life. You don't have to be retired to do it. Indexed annuities only work in the retirement like 59.5 or older.
David:Okay.
Mike:So you've got those and you've got buffered ETFs. And like a max buffered ETF, just so we have comparison. You might have like five to 7% upside with very little downside.
David:Not guaranteed, but just the the downside is is much less than other ETF options.
Mike:Yeah. So what does that mean? That means you've got limited options, but they're still available to you. But you might wanna ladder things out a little bit differently.
David:And how does the I o... IUL qualify as a reserve then? You mentioned you... Because you can borrow from the policy. Is that why it's a reserve?
Mike:You can borrow from the policy tax free, which is nice. You don't have to pay it back the policy. The death benefit will take care of the policy at the end of it. So that's kinda nice too. And you're borrowing against the policy, which means the cash value that's still there, hopefully would grow at a faster or higher rate than the loan.
Mike:So let's just be mean about it for a second. Let's say the policy is growing. The cash value is growing by like 6% on average, and the loan against it's like 5%. Well, you spent the money, but let's say it's growing, and I'm just using arbitrary numbers here, these change. Yep.
Mike:But let's say it's growing like the money that you spent is growing at 1% greater than the loan. That means you're making about 1% on money you've already spent. It's kind of a nice deal. Mhmm. It just has to be structured correctly.
Mike:You gotta look for the products and so on. I'm not saying you should do IUL. I'm not saying you should go down this. This... They are complicated products, but you got that or buffered ETFs.
Mike:In my opinion, the IUL has more growth potential long term than the buffered ETF.
David:Okay.
Mike:Just because of the economics on how they're fundamentally built. It's just like... Tesla's an electric car. Mhmm. Right?
Mike:Mhmm. So is a Mustang. Well, a Mustang is not electric. It's a gas car. Right?
Mike:Yeah. They both have different benefits and detriments, but they're fun... They both are cars. They both go, but they have fundamentally different structures.
David:Mhmm.
Mike:So they're gonna operate in different situations in different ways.
David:And someone in a Tesla almost ran into me today on on the way to work, by the way. Oh. When you said Tesla, I just had a, like, little flashback.
Mike:Yeah. That sucks.
David:Yeah. It was. But
Mike:But how much... How many cameras do they have? Like, is that even possible?
David:I don't know.
Mike:They they got more surveillance than The United Kingdom. Tesla's CCTV is nuts. Right. Anyway, but that that's the answer. You've...
Mike:You might have limited options for the seasons, and you might fund it to get through one season, and then you have another season that's going there as well. Mhmm. But that's why it's so important to plan first and then the strategy second. Mhmm. The strategies that can help you navigate the different seasons along the way.
David:And so if you're if you're around 50, do you wanna use, like, a money market or high yield savings?
Mike:Or Not long term. Okay. That will erode with inflation.
David:Yeah. Yeah. Yeah. Thus, the IUL or buffered ETF.
Mike:You can't win with you can't win with money market for the rest of your life unless you're a billionaire and you don't plan on spending any of your money. That's all the time we've got for today's show. If you enjoyed the show, thanks for tuning the podcast. Don't forget to subscribe, leave a rating, and as always, tell your friends, the larger the subscribers are, the better the content can be that fuels your preparation for retirement. We'll see you in the next show.