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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 Fransen. As always, this show is about answering your retirement questions. Not that oversimplified crap that you get online. Now we wanna get into the nitty gritty here.
Mike:It's all about the details. Submit your questions here. We got a live feed. You can put your questions into the chat and or anytime go to retireontime.com/ask to submit your questions throughout the week. You know that moment you're driving in the car.
Mike:Okay. Maybe not driving in the car and texting and driving, but you're at home, you're thinking about stuff, you're at work. Alright. And you're like, I want that one question. Retire ontime.com/asksubmitit.
Mike:Catch the show live on Tuesdays, on the weekends, on the radio, or on YouTube. We post the show and everything through podcast and YouTube as well. Let's have a good time today. So today's theme is about risk. So as the polls are coming in for kind of what everyone wants to talk about today, as the questions are filling in the chat, we're gonna talk about risk.
Mike:I think it's one of the most fundamentally misunderstood parts of finance.
David:Yeah. So why do you say that? What makes it so misunderstood, I wonder?
Mike:Well, okay. If you take on more risk, what do you get?
David:Well, the the old saying goes, more risk, more reward. Right?
Mike:Yeah. Yeah. That's the problem.
David:So we we maybe we're thinking like, well, I'm I'm guaranteed to to get more reward or I I won't get any reward if unless I take a lot of risk.
Mike:It means that you can take it on the chin over and over and over again and you're still gonna be better off. Maybe. Maybe. Yeah. I'll use the classic example of Cisco in the late nineties was one of the best stocks you could have bought.
Mike:And then it and that was risk you were taking. You were taking that the price was going to keep increasing and then it didn't. And then it tanked, like over 80%. And it took twenty five years to return.
David:Wow.
Mike:So do you really wanna be sitting in that risk threshold? So this is where risk becomes a bit more nuanced, a bit more complicated. And I really wanna break it down because the thing I keep hearing today, frankly is these assertions that I'm comfortable with risk. No, you're not. I know you're not.
Mike:We've had these conversations. You're comfortable with more reward. Yeah. And who isn't? Right.
Mike:I hear the conversations and maybe, you know, anyone listening here would have said this. Things like, well, I don't need to touch the Roth for twenty years. So let's put additional risk in there. Because I can withhold it. It's like 80% true what their what their intention is.
Mike:Mhmm. But I think it's misguided because it lacks context. Okay?
David:Okay.
Mike:Let's do a few examples. I I I've I tried to kind of come up with an analogy here for a second. So let me know if this
David:works. Alright.
Mike:And say in the chat if you appreciate this or not. But risk doesn't mean reward. More risk means more growth potential. There's always two sides to that equation. Okay?
Mike:So, anytime you're driving, you're taking risk. Right. Right. Have you ever been t boned or hit?
David:I haven't. I've been hit but not t boned.
Mike:Okay.
David:Yeah. Thankfully. How was that? I mean, it's it's Was kinda
Mike:it aggressive or was it like a little tap?
David:No. There oh, there's I mean, there have been a couple there have been some taps and there have been some more aggressive ones, but
Mike:k.
David:It's not a fun experience either way.
Mike:You're an unlucky driver if you've been hit a couple of times.
David:Yeah. It's been a while. I mean this was in my younger days. Oh, younger more vulnerable days.
Mike:Yeah. So let's take the example of the classic stop Mhmm. A great invention. Right? We've got green light, yellow light, red light.
Mike:Yeah. Every time you go through that green light, you are still taking risk. Someone could t bone you. Now the risk is inherently lower. When you go to a yellow light, you're increasing your risk.
Mike:Now, for this analogy to work, let's say that everyone goes to a yellow light. So in some countries, they say like your yellow light's like, get ready, you're gonna go. Mhmm. And other ones just shut off. So let's say that everyone gets to a yellow light and then it switches.
Mike:So red, yellow, green, and green, red, or yellow, red. Right? That yellow light, that's the cautionary bit. There's increased risk of what you're going to do. And I see this all the time, you know.
Mike:Someone's like in the in the middle of the intersection. Right? They're gonna take a left. It's yellow. Oh, they can go.
Mike:But the other person who's coming down wants to speed and hit the yellow. So they're gonna they're gonna speed up and going through the intersection, not realizing the person's in the middle taking the turn, and then they hit each other. And that happens a lot.
David:I've been in that exact situation. Which one were you?
Mike:Maybe you shouldn't say for your insurance provider.
David:Yeah. It was it was a while ago, but
Mike:But that's a risk. Yeah. Okay. Now let me give you another risk. Running a red light.
Mike:A lot more people have run red lights than they want to admit.
David:Yeah.
Mike:It happens. I mean, how do you think the person going through the green light, you know, that that was increased risk. But in theory, you could, let's say it's 02:00 in the morning, just go through a red light and there's lower risk, but there's still risk. Yeah. My point being is, you cannot drive and have no risk.
Mike:Right. There's elevated environmental levels of risk. Let's use another analogy. I went recently deep sea fishing out of Aruba.
David:Mhmm.
Mike:I've been on the ocean many times. Usually, I don't get sick.
David:Okay.
Mike:This season, the swells were, you know, six, seven, eight feet. There was an increased risk of getting seasick because the conditions were different. Plus, the the fish at that moment had a decreased level of seasonality. Whatever that means. You know, people say, oh, well, they're in season here.
Mike:I don't really know fishing. I just know I like to get the charter bit and I like to catch the fish and someone else does it for me. You know, the hard parts. So, in that experience, yeah. I went deep sea fishing.
Mike:Yeah. I fed the the ocean several times.
David:Mhmm.
Mike:And yeah, we caught no fish. The theme I'm trying to make here is risk has an environmental component. And we need to acknowledge that. In 2010, 2010, the good old days. Oh, yeah.
Mike:Okay? We just through, we just had gone through the great financial crisis, a horrible recession, depression, whatever you wanna call it. People have different definitions. It seems like the definitions are changing. And now, we've got treasury rates low.
Mike:The market is primed for cheap money. We've gotten through that financial crisis and the conditions are perfect for growth. That's a very different condition than 1999, where we've already experienced significant growth. Do you see there's there's an environmental factor here? So it's not just saying, I want to increase my risk arbitrarily.
Mike:It's, I'm okay with increasing risk. What does the environment tell me? Yes. And I don't hear this conversation because usually what I see people doing is they're either in the market or they're in cash. That's a tactical model, which is very difficult to do and many times can fail.
Mike:Because the markets are going down, go to cash and then it jumps back up because of some tweet or something like that, and everything's fine and you miss that opportunity. Or, there's the static model of we have no idea what the markets will actually do, but this is the questionnaire you filled out for a static allocation to this sleeve and that sleeve and this much in stocks and that much in bond funds and blah blah blah. And that's just the averaging of everything and saying, alright, this is what we're gonna do, and never question it.
David:Yeah. So you saw you you have this diversification here and we never change it. It's just this is what it is all the time.
Mike:Because that's your risk suitability. Who cares about your risk suit mean, it's important to understand risk suitability.
David:Yeah. Yeah.
Mike:Okay. But who cares about your feelings when the whole process lacks to acknowledge the current economic conditions? It's like, are you comfortable with being warm? Like really really hot outside. Some people are fine with it.
Mike:Some people are not. Now let's ask, is it summer or winter? Yeah. Those questions need to go together and yet so often we only ask one and not the other. Here's my point.
Mike:Right now, we know the markets are pretty high. They're pretty expensive. That is a a economic fact. Right now, we know that we've had incredible growth over the past couple of years. A lot of that due to the printing of lots of money.
Mike:So we've manipulated the money supply that led to a lot of inflation and inflation favors the wealthy. That's why the stock market has incredible returns for the past couple of years, plus AI. So we printed a lot of money and then it went to AI and there's this new technology everyone wants a part of. So there are several key canaries in the coal mine that say, yeah, it's been really, really great. But how great can this gravy train keep going?
Mike:Now, I'm not saying that people should go on bond funds and hide under a rock and not I'm not saying that at all. What I'm saying is arbitrarily managing a portfolio based on sentiment ignores risk conditions. Arbitrarily having a portfolio that's your plan with a a rule of thumb withdrawal rate for anyone that's retired or within five years of retirement, kind of ignores several factors of what risk actually is. Because risk in the most basic form is the the willingness to put some money into something with upside potential but being okay with the downside exposure. In the short timeline, in retirement at least, you cannot afford to take high risk.
Mike:Because if you get it wrong, you're accentuating those losses. So this is the time component. One, have the conditions. Two, we have the time. When do you need the money?
Mike:It's appropriate to put something in a model or some sort of system that is measuring risk today, but you don't need to touch the money for ten plus years. While you have other money that may be laddered out. Maybe your first year of retirement comes from a CD. Maybe your first year of retirement comes from that treasury ladder you put together. Maybe it's from a MYGA.
Mike:Maybe you're retiring in five years and you bought a fixed index annuity that's liquid in five years, and you're gonna take that for the first two years or something like that. Do you see how risk is not only a time spectrum, do you have enough time to write out the risk that you're taking, but also it's a conversation of, you know, when you need the money and the current conditions. And current conditions, let me be specific about that. There's the bond market. Look at the ten year treasury.
Mike:Is it high? Is it low? That's going to affect the low risk environment that you could take. And if the low risk environment is appealing, more money might sit there. If it's a bad deal, more money might try to go into real estate or might try to go to the stock market because it's trying to look for a good deal.
Mike:You've got the stock market and its current valuations. And is it a good deal? Is it not? So there's so many factors here. Inflation.
Mike:Tax rates. How do you get money out of one thing to the other? That can inhibit people from wanting to make various decisions. Mhmm. Which then has a conversation about liquidity and I can keep going on and on and on and on and on.
Mike:But the point being is risk is not an arbitrary thing that you sign up for without understanding your conditions. You don't say, I don't need sunscreen. I can just be fine. And no, it's a cloudy rainy day or it's a cold day. Like Yeah.
Mike:It's disconnected. And I think a lot of people don't understand risk because the past experiences over the last five and even fifteen years have basically said, the more risk, the more reward. Mhmm. And that is deceptive because that allows us to willfully ignore past performance isn't indicative of future returns. It's like, oh, I know they say that but you know, wink wink nudge nudge.
David:Yeah. Right.
Mike:We're gonna kill it again.
David:So much like the, if we if we're getting dressed in the morning, we wanna check what the conditions are outside. That'll determine what we put on. Yeah. So so if that analogy stretches, if I'm hearing you right, to the market. Like, what are the conditions in the market?
David:And that'll depend on where I'm gonna invest my money.
Mike:Yeah. And this is us here at Kedric Wealth not trying to drive fear into anyone. Frankly, our model right now, and we maybe we'll talk about our model a little bit. Our model says risk on. We're good.
Mike:I'm trying to have the conversation now, so that later it's not a oops. Yeah. No one told me.
David:Right.
Mike:I have conversations with financial advisors all the time, and you know what most of them don't know? That the markets can go flat for ten plus years. So all of the DIY investors, the self managed investors, where they're going, this is great, have no idea that the historical conditions suggest that the next ten years have a total return of 3% based on historical averages and the cape ratio, Which is a pretty good metric. It's been pretty accurate for, you know, a hundred plus years.
David:Okay.
Mike:No one knows that. Yeah. Do you wanna take the risk that suggests, again, by these historical measurements, that you might get a total return of 3%? Or do you want a system that says, yeah, risk on risk off. Let's dial it up and let's dial it down.
Mike:Mhmm. Not static allocation, not time the market, and not I'm in and I'm gonna take it on the chin. What if there's a more methodical system? That's that's all I'm suggesting here.
David:Alright.
Mike:So it because we we brought it. Well, let me talk about this first. We'll we'll talk about the the model. So, my thesis was pretty simple. When I when I said, you know, what can we do?
Mike:It's really hard to beat the S and P year over year. That is true. And I wanted a model that said, hey, if the S and P says go risk on. If the model says risk on. If if the indicators say risk on, I have no problem with a self managed individual Mhmm.
Mike:Going mostly in the S and P 500. That's a great growth strategy. And anyone that says otherwise, jealous. Like, it it's almost like we're we're paid to convince you to do something that's in your best interest. No.
Mike:It it is it is a good thing to do. Especially in your working years. There's nothing wrong with it. Let's not criticize that strategy.
David:The strategy of just sort of buying an index fund and then holding it or
Mike:Yeah. What's wrong with that? Yeah. I know it's like our job to try and convince people to do more fancy complicated things, but that's kind of a conversation to convince people to pay people money when you could do a lot of it yourself. Like, you're within striking distance if not beating people during the good years.
Mike:The problem though is that assumes you're driving, in that driving analogy Mhmm. And you're only gonna get green lights. Mhmm. Maybe a couple of yellows, but you blew through them, no red lights. That assumes in my fishing analogy that the waters are the seas are always gonna be calm.
David:Oh, right.
Mike:We know that's not always the case. And so, to me I prefer that ability of having a system that says yellow light, just be aware. Or red light, this is gonna get pretty ugly, or at least it looks like it's gonna get pretty ugly. Let's let's start tapering it down a little bit. Mhmm.
Mike:And then when the time is right, let's buy the dip. That's all I'm suggesting. Okay. And the only way to really do this, because you can't time the market perfectly, no one can. There's no such thing as a perfect investment product or strategy, is to stop looking for products.
Mike:It's like the retirement space and your Instagram feed
David:Mhmm.
Mike:Has taught you to say, I've got a lump of money, I need to arbitrarily buy this product and that product and that product and this product, and they're all gonna kind of do their own little thing and it just kind of is gonna work itself out. That's like going to the grocery store and buying a bunch of random ingredients, and then going home and then starting to figure out, okay, what can I make with this?
David:Yeah.
Mike:And I'm pretty for sure fish oil doesn't go with most other ingredients. Like that's a weird one to cook with. Specific. Top ramen probably isn't a good thing to cook with if you've got, I don't know, ingredients for beef Wellington. Yeah.
Mike:Making stuff up here. But you get the idea. Here is the secret. Not even a secret, it's the sequence that a lot of people get wrong because there's an inherent distrust in financial services. Because everyone's trying to sell the product.
Mike:It's to put your plan together first. This is how you get rid of the product pitches and the biases and figure out what's right for you. Put your plan together first. Mhmm. When you have your general projections that are reasonable, then you can start to say, okay, do the numbers work out under these inflationary factors, under this, under that, and then so on.
Mike:And then you start figuring out your efficiencies.
David:Okay.
Mike:How do you get more out of your money? Maybe one of the questions today will be on that, but how do you get more out of your money?
David:So the plan could be, I wanna travel, I don't know, whatever, eight weeks out of the year, and then so how much is that gonna cost? Yeah. And then you've and then you throw all those other things in. Yeah. Is this sustainable?
David:Does this work?
Mike:Yeah. And that's that's kind of it. I mean, let's let's just do a quick example. Let's say, we've got a couple here that, they're both born in 1966. Okay?
Mike:They're retiring soon. All is well. And they want a 120,000 out of their Well, let's say a 150,000 for fun. Okay? A 150,000 they want out of their IRA assets because they need to spend money somehow.
Mike:And they're, you know, they're not filing for social security yet.
David:Okay.
Mike:Okay. That could work. And you could buy an income annuity and you've got that kind of income stream. You could buy a stock bond fund portfolio in your IRA and then you could take that in there and you're like, oh, well I don't wanna have RMD issues and so let's do that. Or, you could say, well, what if?
Mike:What if I only took 50,000 out of my IRA? Oh, by the way, if we assumed Arizona state tax, a 150,000 gross income, it's gonna be around, assuming the standard deduction, it's gonna be around 20,000 in taxes. But let's do 50,000, let's say, and then we're gonna take out some some of their brokerage funds. But they didn't think they were gonna touch for a while, kind of their fun. Maybe there's 20,000 in gains, in that and the rest of it is basis they're taking out.
Mike:That 20,000 tax bill just went to 3,200.
David:From 20,000 to 3,200?
Mike:Uh-huh.
David:All by shifting like where they're taking the money from?
Mike:Just looking at strategies. Yeah. Now notice there was no conversation about a product here. No. And I'm just doing this on the fly with our tax calculator.
Mike:But, when you know what you have in the pre tax, after tax, and taxable account. Okay? And you understand the seasonality or the strategies that will be available to you, maybe you're gonna retire at 62 years old. You're not gonna take social security yet, so there's a golden opportunity. I forget where that's from.
Mike:Golden opportunity. It sounds like a Disney movie or something, but Yeah. A golden opportunity here that you could tap into brokerage funds, maybe blend different income streams, maybe lower your tax rate, which means more money stays into your account, helps for future spending or future legacy. And we're even peppering in there your affordable care act subsidies all at the same time. That could be like a $2,030,000 dollar savings in just one year.
Mike:No products were talked about. Because if you say, oh, I want that annuity here, we're gonna do that real estate deal here, we're gonna do that there, you're piling on tax burdens. And then once you've bought them all, a lot of times you can't change it. A lot of these assets are illiquid. Mhmm.
Mike:And they're gonna keep paying you, and it's gonna show up in your ten forty, and you're losing out all these, like, tens of thousands of dollars each year of efficiencies. Because you bought products and you didn't start with a plan, and then go to strategy second. Because the strategies determine then the tools in your toolbox. The proper investments and products that you need. To do something like this, maybe the two years before, you start putting all of your savings in the buffered ETFs that have upside potential, but a lot of downside hedging.
Mike:Taxes long term capital gains. You're shoring up a amount of a couple of years that's gonna be incredibly tax efficient.
David:Mhmm.
Mike:This is I don't know why, but these are the conversations that don't happen. When people go through our planning process, they're going, oh my gosh. Because you have to have strategies second. How do you get more out of your money? And then it's the right investments and products.
Mike:Maybe for them, they're very concerned about income and they're gonna retire, at 62 in this example and they're gonna file for social security at 67. Maybe at 67 is when they want that lifetime income stream because that's what emotionally gives them permission to live. And we just need to ladder out some income from tax efficient strategies for a couple of years. Low risk, very tax efficient, everything is solved. Mean, this is kind of the conversation that needs to be had.
Mike:Yeah. That's not. That's all I'm getting at. Right. Did I miss something, David?
Mike:What do you think?
David:No. I I I think we got a it's such an important you have to go in that order. Right? If you get that order mixed up, then you could be paying more than you have to is what I take away from the
Mike:Yeah.
David:Or maybe you if you get the order wrong, maybe you think, oh, I can't retire yet. But in reality, no, no, no, look, you really can.
Mike:Yeah. But but We we say that over and over and over again. I don't think I can retire Yeah. For x y z reason. And it's usually some article they read online, They did some calculations in Excel and they didn't know the strategies that were available to them.
Mike:Uh-huh. I can't tell you how many people don't retire until 65 because they don't know how to handle affordable care act insurance.
David:Oh, right.
Mike:And the tax efficiencies. And they put this arbitrary cost when they could afford it, and now they're basically saying that their time is not as valuable as trying to save $10,000 a year when they could afford it. I mean, how much of your life is much is it really worth? Right. Can you put a price on your time?
Mike:10 to 20,000 depending on single or couple, and you could afford it? Yeah. Just these are these are deep questions to ask. So, for everyone listening in right now, if you wanna go through a what we what we believe is to be a proper planning process, go to retireontime.com, click the button that says talk to a planner and schedule a thirty minute call with me or the team. It's real simple.
Mike:The call's gonna ask you, what do you want your retirement to look like? Are you retired? Are you getting close? We just need some context. Do you wanna travel?
Mike:Do you wanna front load the income? Do you not? Are there legacy intentions? Kids? We need to know what you want, And then you tell us what you want from us.
Mike:Your financial professionals. Whether it's a one time plan, teach you how to fish. You want an ongoing relationship or something in the middle. We've got a lot of options there. But our job as fiduciaries is to do what's in your best interest.
Mike:That starts with you telling us what you want. If it makes sense, we then proceed, start the planning process, and you get the first two planning sessions for free. Okay? Yeah. Because financial planning is very abstract.
Mike:You really don't know what you're getting into. Like all of the cool things that could be done until you see it. I mean, it's like, when I hear surgery, oh, I'm gonna get a procedure, a surgery. Yeah. Okay.
Mike:But what actually goes into that? I mean they've got all these tools and weird things and like a doctor would know that. Yeah. We don't have a clue. No.
Mike:Very technical. Financial planning is surgery on your finances to help you get the most out of it. And until you see it, it's hard to fully grasp the abstract nature of all the different variables that are at your disposal to help you get more of your money. Go to retireontime.coms, click talk to a planner. It's a great way to start.
Mike:You get two two sessions for free. To see that that looks like before you have to make a an actual decision if you wanna keep going or not. And it's okay either way. Yeah. No hard feelings.
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.