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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.
Welcome everyone to how to retire on time. I'm Michael Decker here with David Franson. We're both from Kedrick Wealth. This show is all about answering your retirement questions. We actually wanna get into the nitty gritty here, not that oversimplified generalized advice that you hear over and over again that completely lacks context.
Mike:Right? Like, you know, oh, here's a prescription. Everyone shouldn't take that prescription. Well, maybe everyone shouldn't do IRA to Roth conversions. Maybe everyone shouldn't have, I don't know, an eyelet or, you know, all all these fancy things.
Mike:So let's keep it simple. Let's bring context into the equation. As always, you can submit your questions anytime during the week to retireontime.com/askask. Nice and simple there. Or if you're joining us live, you can put it in the chat here as well.
Mike:As we're getting started, I think one of the more fundamental questions that I well, I shouldn't say. The topic of today, the theme of today is stuff that gets sold not bought. There's a difference. Okay. I'm talking about the predatory they don't actually say, they don't actually promise returns, but they get your hopes up and your hopes fill in the gaps.
Mike:And that crap is running rampant in the financial services space. It's a problem. So as the questions are are coming in and all of that, I wanna talk a little bit about this, basically predatory salespeople. And I'm I'm not trying to use the word that aggressively. I think a lot of them genuinely believe in their product.
Mike:I think a lot of them genuinely are excited about what you're gonna get. Mhmm. But like, I don't know. I'll I'll go back to medication. There's a number of medications that are miracles.
Mike:Mhmm. Doesn't mean it's right for me. Right. And that needs to be applied here. Let me tell you a story about a car salesman.
Mike:This will be fun.
David:Talking about predators. Yeah. We love our car sales people. Yeah. Just for the record.
Mike:Well, this is a great car sales story.
David:Okay.
Mike:Okay? So years ago, I set out to buy my dream car. I've always wanted a Mini Cooper. Oh. And so I went then I was up in Seattle at the time when I lived there, and I and I went to the Mini dealership.
Mike:Yeah. And I was trying to I I wanted a compact car. I wanted either the Mini, which is zippy, fast and fun, or I was gonna do a Hyundai. Both great companies, both great cars, very different experiences. Yeah.
Mike:And I went to the Hyundai dealership, and the guy was nice, but told me all the reasons why I should buy. He's like, oh, well, you're gonna you're gonna save money here. There's this, there's this, there's this. It's amazing. It's perfect.
Mike:Everything's great. And then I went to the mini dealership, and the Hyundai, it's not a criticism of the Hyundai salesperson. Mhmm. He was doing his job, and I went to a Hyundai dealer Yeah. To be sold a Hyundai.
David:Right.
Mike:But then I went to the mini dealership, and I'm driving around, and he goes, you know, what do you think? What do you want in a car? I said, I want it small and fast. He goes, well, then a Mini Cooper might be right for you. Uh-huh.
Mike:I said, well, I'm thinking about a Mini Cooper or the Hyundai. He goes, both great cars. Wait. Which one do you want? Like, had no opinion almost.
Mike:If I had a question, I'd say, well, you know, what's the horsepower? I didn't really care. Like, didn't know it's it's zippy. Like, I don't know that stuff about cars. Right.
Mike:But I started asking him questions like I felt like I was supposed to ask him, and he remained neutral the whole time. He just said, you know, if if that's what you want, then it might be the right car for you. They're both good cars. You just you should buy what's right for you.
David:Wow.
Mike:You should buy the car that you want.
David:I'm I'm impressed.
Mike:It was the most comfortable and uncomfortable situation, because it was comfortable because I wasn't pressured in anything. Mhmm. It was uncomfortable because I had all my walls up waiting for the other shoe to drop and it never happened. Imagine if all car sales spend, you know, the the Subarus, the Toyotas. Yeah.
Mike:It's a great car. Here are some things that does well. Here are some things that maybe would make it so you don't wanna buy. You know, hey, I wanna buy a truck. Okay.
Mike:Do you want a heavy truck? Do want a light truck? Like, what's if salespeople were honest, that's kind of what it would be. An original sales was getting people to the right outcome even if it wasn't the thing that they were selling.
David:This guy was like the fiduciary of car sales.
Mike:Yeah. He was legit. He could barely speak English.
David:Oh, really?
Mike:Could barely speak English, but he spoke enough and he just was very pleasant. Very, very pleasant.
David:That's interesting.
Mike:Here's here's my point. There's no such thing as a perfect investment product or strategy. People are signing up for things though and way way over going like overdoing it drastically because they don't understand the detriments. Just because a hammer has the risk of hitting your thumb if you miss, doesn't make it a bad tool. Just because a saw has risk of cutting you, doesn't make it a bad tool.
Mike:The the fundamental question has to start with, what do you want your plan to be, explore your strategy second, then you dive into the right tools that you can assign. Everything I'm gonna talk about today, I've got 10 products that have very common horror stories associated with. It doesn't make the tool wrong. It only makes it wrong if it wasn't explained correctly or if it was used inappropriately.
David:Mhmm.
Mike:And it's very important that we don't ostracize any investment or product. They all have their place. Put in the chat, by the way, if if this is you, if if you're one of the people that said, oh yeah, I got sold this thing and I I couldn't stand it. Mhmm. It could happen.
Mike:The first one was one that happened last week. Okay. So option trading is becoming a very popular thing.
David:It sounds like really fancy and like, oh, options trading. Right?
Mike:Yeah. It it is.
David:Yeah. Like there's there's an allure to it that, oh.
Mike:It's sophisticated. It's complicated. But there are schools that teach you how to sell option contracts and and basically play the market in a different way. Doesn't make it right. Doesn't make it wrong.
Mike:It's just a system. And so this this particular individual who said, well, I'm doing weak option trades. Not not the ones that go for end of day, which is basically gambling in my opinion. Mhmm. Not the ones that are more long term to kind of hedge a portfolio.
Mike:Though they're just selling weekly option contracts. It's like this new ecosystem that's growing exponentially. And what she said was, well, I make about 1% a week.
David:Mhmm.
Mike:I said, hold on. 1% a week. That means if you compound that, that's 68% a year. You expect to make 68% a year? Yeah.
Mike:And that's my retirement income.
David:Oh, boy.
Mike:For context, Madoff didn't even dare. The, you know, the the famous Bernie Madoff Yeah. The Ponzi scheme guy, didn't even dare to suggest that he could get more than one to 2% a month or so. He wasn't gonna go farther than that. Yeah.
Mike:And this lady, who's only been doing it for a very short period of time, thinks that this is gonna happen in perpetuity. Doesn't make the strategy wrong, but maybe you don't put all of your retirement in there. Her hopes are now associated with the dependency that this has to work or now she fails in life. That's a very risky situation. And you know who's not correcting her?
Mike:Her teachers. The people that sold her the strategy. The people that have a financial incentive that she should keep paying, keep coming to class, and keep this thing going. Alright. What a what a sick situation that is.
Mike:Yes. And the sad part is, as I said, look, if this is true, then you'd be the greatest investor of all time. And she said, well, it's been working, so why wouldn't it in the future?
David:Sounds like some famous last words.
Mike:Yeah. No one's promising returns. The school didn't promise returns, but they imply them loudly. And then the hopes and dreams fill in the rest. That is the danger.
Mike:And she's talked to other financial advisors, and the problem is they have a conflict of interest. They kept saying, no, you shouldn't do that. It's risky. We should manage your assets. Those are two conversations.
Mike:The first one is, no, that is risky. You shouldn't do that. Mhmm. The second one is, how should your money be managed? Whether it's you managing it, adjust the portfolio or not.
Mike:And so she didn't believe these other advisors because the conflict of interest of, oh, well, they wanna manage my money for 1%, but I'm doing fine on my own.
David:Yeah. It's
Mike:kind of why I like our position, selfless kind of shout out to to Hedrick Wealth. We don't really mind where your money goes. If she said, you know, let's put 10% in this. Let's keep the strategy going, but let's shore up a portfolio that you could manage that maybe isn't as risky, which she has no idea how much risk she's actually taking. Maybe that's a better situation.
Mike:Because she has no idea that she's picking up pennies in front of a steamroller that's about to just mull her over. Just flatten her. Right. I said, have you ever lost money? She said, no.
Mike:Why would I? Oh my gosh. It's like they completely forgot that section of the class. Yeah. Oops.
Mike:And you know what's interesting is, two days later we had a client who actually does the same strategy or very similar strategy. Mhmm. I mentioned, hey, I I may have talked to someone that was doing this, and she just puts her hands in her face and just goes, oh, that poor lady. Oh, no. Because this lady, who's a client of ours, has done it for ten years.
Mike:It's a part of her portfolio. It's an appropriate allocation of all of her assets
David:Mhmm.
Mike:That can afford to take that risk for horse her specific plan. Yeah. My gosh. Talk about some crazy things that that people are doing today because of the hope. Yeah.
Mike:So Larry's talking. He does option tradings, but thirty, forty five days, and expects 15 to 25% a year. See, that would be appropriate. Mhmm. And Larry, you probably know if you've been doing it for a while that there is downside risk.
Mike:And that's okay. Everything has risk. CDs have risk. It's called inflation risk. Everything has risks.
Mike:You cannot get out of risk. It's understanding the detriments or the benefits and the detriments of every strategy. Let's keep going. You ready for the next one, David?
David:Yeah. I'm ready.
Mike:Alright. Here we go. So the next one I wanna talk about is the oversold annuity. Annuities are not bad, but they're often sold as God's gift to the financial services space.
David:Mhmm.
Mike:And that's just not true.
David:And is that because like, oh, guaranteed income, like Yeah. Yeah.
Mike:Yeah. So guaranteed income is a feature. The benefit is it's gonna pay out regardless of market conditions. The detriment is it will slowly erode with inflation.
David:Oh, yeah. We just mentioned that with CDs.
Mike:That's fine. It could be an income stabilization feature in a portfolio. Mhmm. And today, you're gonna get a better payout than if you would do if you did like a thirty year bond fund. Your retirement's thirty years long.
Mike:Like, do the annuity. Mhmm. You're gonna get more bang for your buck with that kind of a situation. Unless there's a reason why you need the bond funds, or bonds specifically. Mhmm.
Mike:The other one is a lot of index annuities are used as kind of a structured note buffered ETF alternative. And by virtue of how it's built, you you might have more growth potential. You should have more growth potential, frankly, in it. And we're not gonna dive into the mechanics of how that happens. It's just because it's illiquid, they can they can have an option budget that goes a little bit further.
Mike:It's a it's a really cool thing.
David:Mhmm.
Mike:But detriments or it is like illiquid, and and this is one of those, let me say the oversold part. When someone comes to you and says, hey, we're independent, we're fiduciaries, all could be true. Those statements could be true. Mhmm. And we're gonna get the best cap on the S and P 500.
Mike:We do our research, we're agnostic about this. That's fine, and I'm using fake numbers here to prove a point. But let's say the cap is like 12 or thirteen, fourteen, 15% cap on the S and P. That's a really good rate. I'm so glad I I talked to this person, give me a 15% cap, when everyone else is gonna give me an 8% cap.
Mike:Well, pump the brakes.
David:Yeah. That's my mind is running faster. Like, does the S and P in some years even reach 15%?
Mike:Oh, yeah. Yeah. I mean, the past five years. Yeah. But you know Okay.
Mike:It's 8% is the average total return for the last twenty five, thirty years.
David:Alright.
Mike:But the problem is, that promise of a 15% cap is unsustainable, at least in my opinion.
David:Right.
Mike:So if the markets crash or if the option contracts become more expensive, three, four, five years, those rates go down from 15% to like 5%. Yeah. And now you're pissed. Yeah. And you know what they do?
Mike:They then say, oh, well, you know, things happen, but have we got this other annuity for you? There's a bonus. So we're gonna get you out of this annuity, and we're gonna bonus you the cash. What they're not telling you is you could buy that same annuity and have higher growth potential, but the bonus lowers your growth potential. So you're taking from one crappy situation with the elusive bonus of fake cash that you only get if you keep it in there for ten years to then go to a lower product.
Mike:Doesn't make them wrong, but notice the sales angle. I'm gonna give you the best today, but it might be the worst tomorrow. That's kinda like buying a car lemon.
David:Oh, yeah.
Mike:You know? Hey, it rides, but it might be a money pit.
David:Right.
Mike:Whereas a proper adviser who does the research might look at volatility indexes or a more sustainable cap. For example, today, can get a buffered ETF, about 7% cap on the S and P, which means eight to 9%, in my opinion, is probably a sustainable cap for an index annuity. That'll probably last.
David:Like year after year throughout the contract?
Mike:Yeah. That's sustainable. Twelve, thirteen, 14%, probably not sustainable. Right. And would you know to no.
Mike:You wouldn't know to ask these questions. These are the problems. They're they're sold based on your hopes. And on the income side, let's let's go there. Many annuities today have an income doubler.
Mike:It's kind of a nice feature that if you go into the hospital or qualify for a certain care after ninety days, like your income could double for up to five years. But everyone fails, seems like. They fail to disclose that that benefit goes away when the cash associated with it goes away. It's not a long term care policy. Yeah.
Mike:So when people are, like fifteen years surrender years, it's just, it's one of those things that the tool is not bad. We use these tools all the time. But there are some tools that are sustainable. Some tools that may not be as sustainable. Some tools that have a lot of variability.
Mike:Some that have more predictability. Mhmm. And unless you're working with someone that you trust and respect, that's sharing with you the different options, saying, this this is a 12 or 13%. It'll probably go down a little bit. Are you okay with that gamble?
Mike:Or do you want something more predictable? That's the conversation it should be having that people should have, that's just not happening today. So, I mean, yeah. It's I've even seen some people say, well, annuity the annuity over this period of time beat the S and P 500. It's not gonna beat the market over the long term.
David:Right.
Mike:That's an inappropriate expectation that's been set. It's somewhere between maybe better than bond funds and worse than the stock market. It's that in between gap. That's economically where it should be. It's a great tool.
Mike:Yeah. That's a buffered ETF on steroids.
David:So it's a great tool as part of an overall portfolio with, you know, different buckets Yeah. For different purposes and different periods of your retirement.
Mike:But you need to make sure there's enough liquidity. You need to make sure that it serves a purpose in your plan. If it doesn't, you don't just arbitrarily buy these things, which is usually what happens. Hey, I bought this annuity a while ago and what should we do with it? Why'd you buy it?
Mike:Well, I wanted less risk. How'd you determine the amount? Seemed like a good amount. That's what gets in the way of proper planning. Remember, plan first, strategy second, portfolio third.
Mike:Mhmm. Because the portfolio, the plan and the strategy should dictate what goes in your portfolio. It's it's self selects the tools in the toolbox. Mhmm. Alright.
Mike:You ready for another one?
David:What's the next one?
Mike:Whole life or indexed universal life. Sold as Be Your Own Bank. Hate that book. Hate that book.
David:Be Your Own Bank.
Mike:Yeah, the idea is you're gonna put money into something that's gonna grow at a fixed rate if it's whole life. Maybe you've got index rates, it's got upside potential, Right? No downside risk if it's index universal life insurance. And you can borrow against it, just like a bank, you know, you borrow against the bank. Mhmm.
Mike:You've put money in there to be a bank.
David:Alright.
Mike:The problem is, there's an insurance cost that's a constant drag on the portfolio, or on the cash value. So many times they're underfunded, and then left alone, and then they just get destroyed. Or other times, they start, but then they they don't commit. Or other times, they just don't need a death benefit, so they're paying for something they don't need. Now we do do index universal life insurance as a part of some people's plans.
Mike:The purpose is to have a death benefit to cover certain gaps. You know, someone's like 55 years old, wants to retire at 65. We just want some sort of death benefit to kinda bridge a gap there, but also fund it. So if we don't use a death benefit, it's a bond fund alternative. Like that, it might have its place.
Mike:Or someone who's 60 years old, and wants to be able to tap into the death benefit, if there's medical urgencies, know, terminal illness rider. Those are life insurance reasons. You're paying for a risk to be transferred. That's fine. But being your own bank, no.
Mike:Please.
David:So they go into it with the idea that I'm gonna put this money here, and then I know I'm gonna take some out to borrow.
Mike:I'm gonna borrow against it, and it always makes more than than the loan against the policy, and then and I've got complete control over situation, and nothing ever could happen that's bad.
David:Right.
Mike:Yeah. The be your own bank, what the Rockefellers would do, or the power of zero, they overemphasize what life insurance could do on all the benefits, and they fail to talk about the detriments. Does it make the tool wrong? It just might be wrong for you. It might be right for you, but it also might be wrong for you.
Mike:Right. Pump the brakes. I have this note I wrote down. When a life insurance product is being compared to an investment account, that's kind of a tell.
David:Okay.
Mike:It's likely not gonna beat the stock market. So don't treat it, it's not an investment. There may be a cash component associated with it, but just be careful. Yeah. Beat beat beat your four zero one k.
Mike:Stop funding your four zero one k. Put in life insurance for the rest of your life. That beats the No. No. No.
Mike:Please no. Yeah. Unless your four zero one k sits in cash for thirty years.
David:Yeah. Then, alright.
Mike:That would be something, but doesn't make it wrong. It's just often oversold, because if you only sell hammers, everyone's a nail. Alright. Put in the comments if you got some fun stories on this, that'd be fun. But I'm gonna do non traded REITs here for a second.
Mike: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.