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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. Say goodbye to oversimplified advice you've heard hundreds of times. This show's all about getting down to the nitty gritty. As always, you can your questions to (913) 363-1234. And remember, this is just a show, not financial advice.
Mike:David, what have we got today?
David:Hey, Mike. What risks concern you based on current market conditions? Yeah. Tell us what are the conditions right now in the market.
Mike:Let's start with what you'll hear from your clerk at the grocery store. Alright. I mean, it is incredible how much information is shared. You could be a five year old and just go on YouTube and understand more about the market than most people back in, like, let's say, the seventies and eighties. And that's not to disparage anyone back in the day.
Mike:It's that, I mean, information is so accessible to that. I shouldn't say five year old, maybe an eighth grader, who know a ton more about the market today than ever before. And so I use the example of the grocery store clerk and what they would recommend to you. They're not supposed to give financial advice, but what are they investing in? And it's almost without fail.
Mike:I like to talk to people. I like to humanize, you know, our human experience here
David:on Earth.
Mike:Yeah.
David:Yeah. So I'll
Mike:ask them, you know, how are you doing? And and usually, they'll say, how are you? What was your day? I'll say, well, I work in finance markets. We're like this today.
Mike:And they'll say, oh, are you in? And then they'll say, Nvidia, or they'll say, are you in super microcomputer or AMD, or are you are you an AI? And they'll want my take on it. And the reason why I think it's interesting is because they'll ask me for my professional opinion. I'm not giving them financial advice.
Mike:I'm just saying, well, here's what I'm seeing. And they'll say, well, I'm in this because and I'm all in. It's almost whenever they're like 30 years or younger, they're all in on one or two stocks. Sheesh. Yeah.
Mike:I I mean, you're young enough. You could take that kind of risk, but they're all in on these things because they only go up, and they're sure that they're right. And so almost always, the conversation seems to be revolving around AI. Okay. That nothing else is really making money.
Mike:And there's truth to that statement,
David:which is scary. Yeah.
Mike:If you look at the money flow, it's very interesting to see how the money will go from, like, OpenAI to NVIDIA, to this company, to that company, and it's very incestuous. And they get more money because more people keep buying their stocks, which then increases the value of the company, the valuation, the market cap, and they can sell them more of their shares and move things around to then generate more revenue. And it's like this it is this bubble. There there's some companies that have suggested that the AI bubble is 17 times larger than the the dot com crash of two thousand, which lasted for three years. Now that might sound like a scary thing.
Mike:The problem, though, is we don't know when the bubble will burst. There is no at 20 x or five x of a bubble or valuation or whatever assessment you are. That's when the bubble always bursts. There is no always. And so many people right now are staying, if not invested, in AI because that's what's growing, but they're waiting for the other shoe to drop.
Mike:And a lot of people are hoping that they can time the market as in, oh, well, now it's dropping. It's not gonna get out. There's a lot of that.
David:Yeah. How would they know, oh, this is the right time to sell all my AI stock?
Mike:You can't know. No one knows the future of the market. If you look at the late nineties, 1998, there was a scare. Couple of banks went under. There was a shift in the global economy and that caused people to say, is this when it's going down?
Mike:And then it recovered. And then it it grew for another two years. And I have met very prominent hedge fund managers and if I said their names, you would recognize them, that joked about how they went to cash in '98. Oh. They missed out on some of the greatest returns.
Mike:We don't know when the AI bubble will burst. It could be five years from now. It's typically there's an event. There's a new policy. There's a now a post that could trigger it, and excuse the expression, but there's typically a pinprick that initiates the contagion that creates the market to shift and then fall.
Mike:And no one knows what that will actually be, because some of them might be false signals, false positives as they say. So that is a common concern that a lot of people have, and I think it's very much warranted. Does it mean that you sell everything now? That would be a fear based decision. My question is, what is your system?
Mike:Not your intuition. Intuition is a great way to be deceived by the market. What is your system? But I don't think that's really my biggest fear. Okay.
Mike:My biggest fear is that we've grown so well for the last ten, fifteen, twenty years that retirees are going to retire, and this is an assumption. This is a prediction. This is a concern that I have for many people that retirees are entering into a flat market cycle. What is a flat market cycle? That is where the markets go flat, so it goes up and down for ten years.
Mike:But start to finish, including dividends being reinvested, you made no money for ten years.
David:Yeah. So in 2010, you had, like, half a million in your portfolio. And by the time you hit 2020
Mike:That's 2000 to 2010. So that's an interesting point. 2000 to twenty ten, zero performance in the market. 2010 to 2020, about 14% year over year in the market. So if you're young, you can handle that kind of volatility.
Mike:Because when the markets are flat, it's a really good situation for you. As long as you've got job, you kept your job. You can keep reinvesting dollar cost averaging so that when it leaps forward, you had some great growth. But when you're retired, you need income. So ten years of no growth, as you're taking four, five, whatever percentage out of your portfolio, that destroys retirements.
David:Because they're banking on, like, I'll take money out for my retirement for income. Right? But I need some growth to happen to sort of offset my withdrawals. Uh-huh. And if you're taking money out of account and it's not growing.
David:Then you're lowering your wealth. Oh, yeah.
Mike:And it happened in 1965, 1966, depending on where you started. That was another flat year or flat market cycle. Over ten years, no growth in the market. Uh-huh. 1929, so the Great Depression, which by the way, right before that, the the roaring twenties.
Mike:Ever heard about roaring twenties? That's so interesting.
David:Book. Yeah. Yeah. Looked like a good time. Flapper girls, you in the Charleston or whatever.
Mike:Yeah.
David:Yeah. Okay.
Mike:Whatever the times were, it was incredible growth. Yeah. And then we had some of the worst economic conditions, and that lasted well over ten years. And then nineteen o six, which was the rich man crash, you most people weren't investing in the market in nineteen o six, but those who were, flat market for over ten years. So it happens every twenty years or so.
Mike:We don't know when the next one's gonna happen, but this is a legitimate concern for me. And the reason why is I don't know many financial professionals that even know about the flat market. I don't know many financial professionals that know how to build a portfolio for a flat market other than saying just buy annuity and turn on lifetime income, which has its own set of risks. Yeah. So why is a bear a part of our logo?
Mike:It's because we're not scared of the bear market. The bear market's the market crash. It's bad news bears. That's how you remember that. Mhmm.
Mike:We're not scared of it. We're just building portfolios in preparation for a great market, great growth, or a market crash, or a flat market cycle. And I don't know how many people are really preparing for those situations.
David:You referenced earlier, like, you would ask someone what is their system. And so what you're talking about are systems here now, right, for a system for the in place for great growth, bull market, bear market, doesn't matter.
Mike:Yeah. So you've got here's a simple system that you could consider. Do your research. This is not investment advice. But you can have some of your assets focused on traditional growth.
Mike:It's in the market. You don't need it for over ten years. If you did spend it earlier than that and the markets were up, great. If they weren't, no problem. Because you had enough time to absorb the short term risk of it going down and then eventually recovering.
Mike:So risk is really a measurement of when do you need the money. It's a time question. It's not as much of an emotional question because if you don't need it, you can let it recover.
David:Yeah. You can sort of swallow that risk. Like, I don't need this.
Mike:And if you're stock picking, then maybe you need to sell when it's down. But if you're buying indexes, there's less emphasis on the need to sell it and switch things around because you bought enough companies, things sort itself out. Yeah. Then you've got your what I'll call your emergency cash. It's not really growing.
Mike:It's protected. It's liquid. So if something horrible happens and you've got a health care expense, you need a new roof, you need a new car, that money is there for whatever purposes are needed, but it's not really a long term investment. It's just there for lifestyle needs. And then you've got this middle category, whether it's fixed growth or indexed growth, but you've got protection.
Mike:You've given up liquidity for a certain period of time. Like, you put money to a CD. It's illiquid for, let's say, a year. I mean, you could sell it, and there may be some sort of penalty, but you know exactly what you're gonna get for that period of time. And the reason why fixed products, so CDs, treasuries, or bonds, long as there's a good rating, good credit rating, a fixed annuity, as long as a good credit rating, those, they're gonna grow regardless of market conditions at the declared rate.
David:This is like a contract. Right?
Mike:Yeah. Yeah. So that's not a bad way to hedge against a flat market to have some assets growing at a fixed rate, if that's what's right for you. Then you have the index products. So over a ten year flat market cycle, if every year you can increase your wealth, you capture upside growth on the good years, and then when the markets turn over and go down, you don't lose money.
Mike:You're not in a flat market cycle. You're just making money when the markets are good, and you're not making as much money. But you are making some money when the markets are good, and you're hedging against that downside risk. So think of it as kinda like stairs going up. That's a way to put a part of your portfolio in either fixed or indexed products to hedge against a flat market cycle.
Mike:Because at the end of the day, what's the right combination for you so that you're able to advance to grow your wealth forward every single year? Do you see how there's some different components that aren't talked about as much, like buffered ETFs? They're compelling to consider. Because if we are in a flat market cycle, I'd rather be in buffered ETFs than stocks. Because stocks would be flat, buffered ETFs could capture the upside, things like that.
David:So to answer the question then, the risks that you're raising during this current market are we've got this bubble that's bubbling up, and we don't know when it's gonna burst.
Mike:Yeah. And everyone kinda knows that risk. It's in the air. It's palpable. But a flat market risk, I don't think many people realize.
Mike:Oh, if the markets crash, I'll just tighten my belt for years. It will eventually recover. Well, if you look at 02/2002, that was three years it was going down. How long can you really tighten the belt? And then how long did it take to recover?
Mike:Oh, around 02/2006, 02/2007. Oh, what happened in 02/2008? Crashed again.
David:Yeah.
Mike:And that took around four or five years to recover. So are you gonna just tighten the belt for the first ten years of your retirement?
David:That doesn't sound like fun.
Mike:Your healthiest years? Yeah. The years you're supposed to be traveling. And then here's the other risk I really wanna highlight that that doesn't keep me up at night, but I don't think it's talked about enough. That's inflation risk.
Mike:In the seventies and eighties, there was hyperinflation. There was a lot of inflationary risk. A lot of it had to do with energy and trade and the manipulation of the dollar. Recently in the pandemic, we had some issues. We printed a lot of money.
Mike:We created inflationary issues, and we felt that, and it really hurt. Today, there's the manipulation of currency.
David:And how does that happen? Can you define that?
Mike:The devaluation of the dollar.
David:Oh, okay.
Mike:So the Fed's gonna increase or decrease rates. That will affect then the global opinion of the value of a currency. Basically, it's just saying, what are people willing to exchange for that currency? So if you are a British citizen and you wanna take the British pound and trade it or give it up for United States currency, the dollar, is the pound in your opinion worth more or less than the dollar? And that's backed by the Federal Reserve.
Mike:You look at debt. You look at treasuries. Lot of mechanics there. It's just financial plumbing for what it's worth. But, basically, the devaluation of our own currency, there are some benefits to it.
Mike:There's some detriments to it. Inflation, if it comes roaring back, whether it's through energy costs, whether it's through the alleged possibility of tariffs backfiring at us, There's all sorts of ways it could happen. Really hurts a retiree, especially if you have lifetime income. Because if you have the majority of your income coming from a lifetime guaranteed income stream, which I don't have an issue with some of it being there. I know I wrote an entire book arguing against it, but I acknowledge that some people want some of their assets guaranteed as income.
Mike:I'm fine with that. People like pensions. That's basically an annuity from your old employer. Yeah. I don't know any other way to describe it, but all your eggs in one basket, I think, is risky.
Mike:And so when you understand that if inflation gets out of control a couple of times in a thirty year span and you're retired, I think inflation needs to be well addressed, especially if it gets out of hand in ten years from now. And how do you build your portfolio to hedge against inflation risk? It's because it's so subtle, you almost forget about it. Yeah. It was painful the last couple of years, but now it's kind of under control until it's not.
Mike:And, again, I go back on if you assume a 3% inflation kind of around the target of what the Fed tries to do. Over ten years, you've lost 25% of your buying power. Well, what if inflation gets out of control? It's losing 25% over a 3% inflation rate, but let's say there's a 30% reduction as well. Now it's like half.
Mike:Can you imagine losing half of your buying power and trying to make it work in retirement? Now the trick is if you're in the market, inflation is offset by what's in the market.
David:Because the what's in the market is hopefully growing?
Mike:Yeah. Inflation's basically the market getting out of hand, and the profits are exceeding. The dollar is less valuable, so then it just bubbles up into the market. Inflation helps the wealthy, hurts the poor. And guess who needs the annuity?
Mike:The poor. Guess who likes the market and likes the growth and can handle it? They're wealthy. So I don't wanna get all philosophical and political on, oh, well, you know, things should be this way. It's really cowardly, frankly, to say, well, this is how it should be.
Mike:Because there's a gross misunderstanding or oversimplification of how the economy works. You cannot force economic outputs. You know that whole bit of allegedly in New York, this the MnDamy is gonna be he probably will be elected for mayor, and maybe he'll implement socialism there.
David:Yeah. Yeah.
Mike:I'm not political. This show is meant to be politically neutral. I see the appeal of what he's promising, but what he's promising has a huge price tag. And it's almost like every now and then we need to implement socialism in a controlled part of the country to show how it doesn't actually work. I get the bleeding heart that we want to I'm gonna get a little political for a second.
David:Is that okay? Let's let's go.
Mike:Let's have some fun with this. Yeah.
David:We can't stop the train. It's moving.
Mike:Yeah. I don't care. We own the show. Yeah. Forget about just for a moment.
Mike:Forget about Republicans and Democrats. Alright. Just forget all of the rhetoric today because it's rather dangerous for both sides. I don't care of your opinion, and say, oh, well, I'm self validated for this. Just forget about all that for just a second.
Mike:Let's just redefine terms. Okay?
David:Alright.
Mike:The United States, in this whole idea of having an opposition, we have a two party system. One party is supposed to be trying to have less government, while one party is supposed to have more government. One party is supposed to free regulations and to let the government not get in the way of growth and innovation and all that. And one party is supposed to keep the overgrowth of government regulate, keep things in check. Do you see how I'm not really trying to emphasize one part or the other?
Mike:It's that we're supposed to have opposition in all things so that we stay centered. Yeah. I believe, and this isn't aligning with any political party today, of the importance of having, what was the constitution saying that the pursuit of happiness? Yeah. It means you're able to pursue it, but you're not guaranteed it.
Mike:We need to work for our own keep. Yeah. Right? But things happen in life, and there is a general and there there is a huge emphasis in Christian moral beliefs in our constitution, if you wanna compare the two, to where you've got some these Christian aspects where if you're down in your luck, you're being taken care of. If you've lost your job, there are social nets or programs to help people on there.
Mike:It's really easy. So, yeah, the programs are broken. They need to be fixed. Fine. Whatever.
Mike:Yeah. But there is beauty in trying to keep things centered so that there is charity within our government systems, but not too much charity. That there is freedom, but not too much freedom. There is a a nice paradoxical balance of being helpful, but not having chaos, having government, but not chaos. There is a balance there that needs to be met, and there's beauty in that.
Mike:That's why it's good to have conflict in our political system. Not like today, but if you think back of what it used to be. Right. There's beauty in trying to find that balance. None of this, by the way, is representative of either party today.
Mike:In balance, it it's very much become very extreme with the rhetoric. But my point being, inflation's a risk. There's a lot of risks, especially with the political narrative today with the tariffs and what's going on. When you go into a portfolio, when you go into your structure, when you go into all these things, it's so easy to lean too heavy into one strategy or the other. You want to be balanced in all things.
Mike:You wanna have different strategies that you're diversifying my strategy. You wanna have those because we don't know what's gonna happen. Right. But if you're balanced, you can maintain flexibility while maintaining protection. You can maintain enough liquidity.
Mike:It's just it's easy to go extreme. It's hard to be nuanced. It's hard to be balanced. That's my point. Moderation being good.
Mike:So I am concerned about certain aspects, not in the government collapse or anything like that, but certain programs that would hinder growth. I am concerned about certain elements that will disproportionately hurt those who are less fortunate in getting them into the workforce. We need a strong workforce. We need people working. So how do you solve that?
Mike:That's the jobs of politicians. That's why we vote for them, and we enjoy their debates. I enjoy I use the word term loosely. Yeah. But we need to have these conversations.
Mike:Right. Maybe another time we can get more not political. I'm not I'm not here to endorse anyone. I don't care for that. But I wanna overemphasize the importance of balance, the importance of having two seemingly contradictory opinions that when they can find the middle ground creates a genuine strength.
Mike:A strong economy has our two polar opposites coming together, fighting the middle ground, and not this pathetic, belittling, petty rhetoric that we're experiencing on both sides today. But this shows not to propose political anything. I just wanna point out that side of it. There's a lot at stake. Not democracy.
Mike:Not that. I'm just saying, is the market going to crash soon? Is it not gonna crash soon? And there's a lot of political influence that will support or hinder that. Is this making sense?
Mike:We really went off a tangent here.
David:Yeah. I mean, I think we talked about the risks that you're seeing in our current market conditions. We've got inflationary risk, flat market risk, and maybe this AI bubble, those sort of being like the three major
Mike:Those are the big three.
David:The big three, and but there is a way, if we have the right system, to overcome all that with some moderation in our personal retirement It's balance. Balance.
Mike:Don't go all in on one strategy. Don't be an only dividend investor. Don't be an only growth investor. Don't be an only annuity income person. Balance in all things, because that's how you're able to adapt as the political environment will shift more to the right and then more to the left and then more to the right and more to the left.
Mike:That I think should be expected, and that I believe is a good thing. If it can keep us centered, I think that's a good thing. There's my 2¢. 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.