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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. 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.how to retire on time.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 adviser, insurance agent, and tax professional, Which means when it comes to financial topics, we can pretty much talk about 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. David, thanks for being here.
David:Yes. Glad to be here. It's fun.
Mike:David's gonna be reading your questions, and I'm gonna do my best to answer them. You can send your questions in right now either by texting them to 913-363-1234. Again, that number, save it in your phone. 913-363-1234, or email them to hey mike@howtoretyme.com. Let's begin.
David:Hey, Mike. If I can get dividends at around 8% a year, then why would I do anything else?
Mike:So in today's environment, we're seeing a higher payout, right, for fixed products or perceived fixed products. Let me kind of explain that.
David:K.
Mike:Because words matter.
David:Yeah. They do.
Mike:So I heard someone once say that they're getting a dividend from their Bitcoin. Bitcoin doesn't pay a dividend. Yeah. What they were doing was basically just enjoying a profit, or they were selling a little bit off of the growth. When I say growth, the increase of value because Bitcoin isn't a company.
Mike:It is, you know, it's a currency. It's a thing. Right? But the reason I wanna clarify that is just because you might be able to take a little bit and put it in your account, that's not necessarily a dividend. And the reason why I say this is there's a growing number of ETFs out there that look like they're paying a dividend when they're actually paying out covered calls or other ways to create or generate income for their investor.
Mike:Is that clear?
David:I think so.
Mike:A dividend is when a company makes a profit and then they pay it off to the shareholder. Anything else may create income but isn't necessarily a dividend. So we wanna be careful with our terms.
David:Alright.
Mike:And I think the reason why we wanna be careful with terms is, I mean, mostly the fact that we need to know what risk we're taking. So dividend risk would be associated with credit risk. Is the entity able to keep paying that dividend or not? You know, is the company likely to keep paying, like, a Coca Cola dividend? Yeah.
Mike:They're probably gonna be, you know, paying that dividend. They're a pretty tried and true company. Yes. Do you like Coca Cola? I mean, I've just had
David:one, actually.
Mike:Yeah. So Literally. Not an endorsement. Just a lot of people like Coca Cola.
David:Yeah.
Mike:But there is something important about desperation when it comes to dividends. Here's what I mean. David, would you prefer a 4% dividend or a 6% dividend?
David:6% sounds like it'd be better. Would that be more?
Mike:Yeah. More money. Right? I'd I'd like more money. What about 8% dividend?
David:I mean, let's keep going. I like this.
Mike:So you put in a $100, you get $8 back. Yes. What about, 12% dividend? Oh. Would you be into a 12% dividend?
David:I'd be okay with that.
Mike:How about 16%?
David:It keeps getting better.
Mike:At some point, whether it's 16, 17, 20, 40%. Woah. Things happen.
David:Okay.
Mike:But there's a reason why a company would have to pay a higher dividend. It's because they have more risk, because they're more likely to default or come under financial difficulty or whatever it is. And it's not necessarily dividend to I wanna include in this conversation, bonds that, you know, they they pay interest rates. Right? And so their coupon rate.
Mike:We need to understand that there's no way to game the system. There's no entity out there, whether it's a company issuing an alleged dividend that they're targeting or a bond, municipal, federal, foreign, whatever the corporate, whatever the bond is, there's no reason for them to offer a higher dividend unless they understood people won't take this. People won't buy the debt unless they receive the appropriate compensation for the risk that they are taking. If you want a fun history lesson, look at the Puerto Rican bonds, for example, or my favorite, the Argentinian bonds.
David:Oh.
Mike:Really, Argentinian bonds, Greek bonds. You've got Italian bond. There's countries around the world that the bonds have defaulted.
David:Okay.
Mike:We don't like it when our money defaults.
David:Doesn't sound good.
Mike:It doesn't necessarily mean your money vanishes, though it could. There are problems. Maybe you're not getting your payment. Maybe you're not gonna get all your money back. It just these are risks you need to understand.
David:Mhmm.
Mike:Okay. So about once a week, someone will come into the office and say, look, I've read about the 4% rule, but I'm getting, like, 7, 8% of my dividends. So what am I missing? And I really appreciate the question. Mhmm.
Mike:Because they're not trying to be smart. They're trying to understand. What is it that I'm missing? What questions am I not asking? What risk am I unaware of?
Mike:Those are some of my favorite questions because it's people who are trying to do what is right as opposed to trying to be smart and saying, I beat Wall Street. You don't beat Wall Street. In the growing popularity, as I mentioned earlier, there's something called, basically ETFs that do covered calls. K? So here's the basic idea of it.
Mike:A covered call means, you know, you've you've got your securities in there. You got Nvidia or Apple or whatever, and you sell an option. So if you if I sell you, an options contract, I make money off the sale of that contract.
David:Okay.
Mike:And if certain conditions were to happen, and it depends on the contract and how you structure. So I'm trying to keep this really simple. But if a certain condition were to happen, you could exercise that contract and you're taking away my my securities. So what a lot of companies have done is they've said, well, hey, we we think we can get it just right. We can get the strike price just right.
Mike:That's when you would wanna exercise your your contract that you purchased from me. And in that situation, you would win. And they're trying to set these option contracts in a way that they can generate income for their clients. That's where that alleged dividend comes from, but it's not really a dividend. That's paying, you know, 7 or 8%.
Mike:And over the past couple of years, it's done rather well. The problem is it works until it doesn't.
David:Uh-huh.
Mike:Many people I've noticed don't understand the situations where it may not work. True story. A guy I I did an event, was it a year or 2 ago? To my face said, why would I ever not do options? Because I make money.
Mike:They make money. We all make money. He didn't understand that they were buying the contract as an insurance policy. So if things went sideways, he was their solution. He was going to pull the so do you see the risk here?
Mike:Yeah. Many times we don't understand the risk here because the rug could get pulled underneath you. And so is it a good or bad strategy? I and I'm not gonna say it's good or bad. It is a strategy.
David:Mhmm.
Mike:And maybe a part of your portfolio, this would make sense. But usually in finance, I have found that absolutes or superlatives or extreme positions where you're going all in on 1 or 2 things, even if you're diversified with this strategy. So, you know, you bought a bunch of ETFs that are doing the same thing. They're just different managers. That's still not really diversifying the strategy.
Mike:Because if the market shifts, even though you're quote unquote diversified, the rug could get pulled from all of them at the same time. And that's not really a a situation you wanna run into. As you're approaching retirement, this is when you're entering the stay rich phase. So our job from 16 years old, if that's when you start working, until the day you retire or 5 years before is the get rich stage. Let's let's create wealth.
Mike:Yeah. At some point, you need to start taking less risk and focus more on preservation. And I'm not saying buy a bunch of annuities, turn on income. There are many ways that you can preserve your principal. You've got CDs and treasuries, really basic stuff.
Mike:You could use fixed or fixed indexed annuities as bond or CD alternatives. You could look at buffered ETFs that basically have no loss available. So you got some upside, but it can't go backwards. You've got structured notes if they're structured correctly. So, you know, big asterisk there.
Mike:There are many ways that you can enter retirement and preserve your principal, which is what we call the reservoir. Anything that is protected. But the big takeaway here is know that that 8% plus dividend you're probably getting or enjoying right now probably won't work as you would hope it would for the next 5, 10, 20, 30 years. And retirement's a long time. So be very careful about this.
Mike:I mean, for what it's worth, if it's so easy, why are insurance companies offering 5, 6% guaranteed income for life? It's not that they're greedy. They're trying to be competitive. They just understand that an 8 plus percent dividend or payout or option covered call income or whatever it might be is a bit high and will probably be adjusted. It will probably go through different phases where it's competitive and not competitive, like all investments, like all products, like all markets.
Mike:So we don't wanna just focus on what's in vogue today and expect that to happen from this point on. Am I explaining this
David:okay? Yeah. Yeah. I think so.
Mike:Any any questions on that, David? Do you think I the audience you know, you're you're the voice of the audience, the Vox Populi Uh-huh. If you speak Latin.
David:Does anybody do that anymore?
Mike:I don't know. My brother just graduated from Oxford, and his whole ceremony was was was in Latin. No one understood a word, but in tradition.
David:Yeah. The answer is yes.
Mike:Here here's a couple of takeaways.
David:Okay.
Mike:There's a reason why the rule of thumb is you take out around 4% of your income. It's not that you might today be able to take out more. It's the fact that the sequence of the returns matters every year. What the market does can affect your overall ability to retire and stay retired. So, for example, if assume a 10% average, let's say 10% over 2 years.
Mike:Okay. So you have a $100,000. You've got 10% average. So the 1st year you make, what, 110,000. You with me so far?
Mike:2nd year, you'd make a 121,000. That's a 10% average on the cash growth year over year.
David:Okay.
Mike:With me? Yep. Well, you could take, let's do a 30% loss and a 50% gain over 2 years. That would be a 10% average. Right?
Mike:Yeah.
David:Okay. So
Mike:in that situation, a 100,000, 30 percent loss, you've got, see math in my head, $70,000. Mhmm. 50% return, you're at 105,000. Now hold on. That was a 10% average, but you only increased by 5,000 over 2 years as opposed to the 21,000 increase.
Mike:Uh-huh. That's a lot of money for a discrepancy.
David:Right.
Mike:You might be thinking, well, Mike, you're you're just you're abusing the numbers to your favor for your argument. No. I'm not. We could reverse it. A 100,000.
Mike:Great. You made your profits. In the 1st year, you're at a 150,000, that 50% gain. But after the 50% gain, if you still take that 30% loss, you're back at a 105,000. Yeah.
Mike:So we've had 2 great years of growth. It's unusual to have that much growth over 2 years. Things could get volatile this year. The sequence of the returns matter. How the market operates, whether it's a market crash and upmarket, if we're in a flat market, these things matter.
Mike:They have an effect on the idea that maybe you can't go all in on one strategy and that it magically works out. Everything ebbs and flows, especially in finance. Even the annuity that turns into a flat income stream ebbs and flows because tax policy affects it and inflation affects it. So we just wanna take more of a neutral position here and really dive into the details, diversify your strategies, have a reservoir, some protected accounts that can help you get you through those troubled times, and maybe be less polarizing about our our strategy, but be more balanced, more nuanced into the the details, as we say over and over again. Put your plan together first, see if you can afford to retire, then explore the strategies to help get you the most out of your money as possible, But also you're hedging against those risks.
Mike:And then put together the portfolio. I really think that's the that's the ideal situation. You're listening to how to retire on time. 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.
Mike: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. 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.
Mike:Go to www.yourwealthanalysis.com today to learn more and get started.