Welcome to how to retire on time, the 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.howtoretireontime.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 finance, your money, all of the above, we can pretty much talk about it all. Now that said, please remember this is just a show everything you hear should be considered informational, as in not financial advice.

If you want financial advice, you can request your wealth analysis from my team by going to www.yourwealthanalysis.com. With me in the studio today is David Franson. David, thanks for being here. Yep. Glad to be here.

David's gonna read your questions, and I'm gonna do my best to answer them. You can text your questions in to (913) 363-1234, or you can email us at heyMike@howtoretireontime.com. Let's begin.

Hey, Mike. I'm concerned about the market. Are there other places I can park my money until things settle down?

Yeah. Absolutely. But if you're if you're trying to time the market, I would caution against that. If you're looking for a solution to take less risk, I'm all for that. Let me explain why.

Markets, they they do crash every seven or eight years, but they don't actually crash every seven to eight years. Okay. And I want to say that that might seem like an oversimplified, well, duh, answer, but it's not true. So well here's a story. Guy walks into office, he and the spouse are both planning separately, they both have their own millions of dollars, they've both done very very well for themselves, but they manage their finances separately, and that's fine.

Okay. So we're going through her process and all that, he's there, he's supportive, he wants to be aware of it just in case. I turned to him, said, well why aren't you putting your plan together? He says, I don't need a financial adviser. And I thought that was so strange that two people in relationship, they were married, had such different perspectives on how to approach their money.

And I said, well, pray tell to get to that conclusion. And he said, because the markets crash every seven or eight years. All you financial advisers, you all say it, so I just invest in the market, and then I sell it in the sixth year, I go to cash, I wait for the markets to crash, and then I invest back in after the

crash. Okay.

And I'm going, well, you know, they don't actually crash every seven to eight years.

It's not literal.

It's on AI. It's not literal, it's on average.

Okay.

So like for example, in 1987 Black Monday, the markets crashed very quickly. Thankfully, they recovered. That came out of nowhere. It was due to computers really being traded in the market. And then in 1990, Iraq invades Kuwait, a geopolitical event that you're not gonna plan on.

Three years later, the markets crash. These crashes don't matter as much if you don't necessarily need your money, cause you can ride them out. But in retirement, if you need the money and you draw income from an account that's lost money, you're accentuating those losses. That's the problem. That's why in retirement, you might not want to have all of your assets at risk because the market crashes can really sting.

Yeah. Yeah. So your balance has dropped because of the market crash, and when you're drawing income from a reduced balance, that's what you mean by accentuating losses?

Yeah. If if your accounts go down 30%, it would take a 43% return to break even. That's fine. You can recover. But if your accounts drop 30%, and then you take out 4% as income, let's say, you're down 34%.

You're not down much more, but accentuating that loss causes your recovery, your benchmark, what you need to recover, has a 50% gain, five zero. So taking up 4% means you need 7% more of return. It just exacerbates your ability to recover. Sure. And that's a problem.

They call it sequence of returns risk, and to put a spoiler alert Okay. That doesn't mean you go out and buy an annuity and turn on lifetime income. Uh-huh. Okay? The question, and I appreciate the question, is how do you take less risk just because maybe you shouldn't have all of your assets at risk in the market?

My point being is you can't time the market, so if you think you can time the market, it's not the case. So point, in fact, '87 markets crash, '90 markets crash, ten years of an incredible bull run. If you went to cash in 1997, you would miss a very significant amount of growth in ninety seven, ninety eight, ninety nine Yeah. And then the markets would start crashing. Great.

You've got now a bias that you've timed the market, but you have to wait from 02/2001 and o '2, '3 years the markets are going down, so you want two cash from 1997 to 02/2003, '2 thousand and '4, assuming that you knew when the bottom of the market actually was.

Right.

I mean you could say, well, know, '97 I go to cash, At the end of February, it's gone down enough. I'm gonna go back in, and then kept losing money in in o one and o two. So this idea that you can kind of manage getting in and out of the market is tough. I mean, can you imagine five years of sitting in cash? Let's say you did time it right, allegedly.

Uh-huh. So the whole concept of timing the market is ludicrous, yet humans continue to try and do it over and over again. Can you read the question one more time? I wanna make sure I answer

Yeah. I'm concerned about the market.

Which is fair. Yes. Very understandable, especially with the current administration and their negotiating tactics. Yes. Market doesn't like uncertainty.

So are there other places I can park my money until things settle down?

Okay. So in my mind, risk is when do you need the money? It's a timeline standpoint.

Okay.

Do you need all of your money next year? No. You need some for the year after, and the year after, and the year after.

Mhmm.

So as I'm answering the question, want to be very clear that maybe a portion of your assets that you would use for income, either use the ladder approach, the reservoir approach, there's many different approaches to just having some less risk that you can tap into if the markets do crash, but having some assets that are there for long term growth that you don't need to touch for let's say at least ten years

Okay.

And keep that in the market.

Alright. Alright.

Because what if it takes off? You don't want to miss out, you're just trying to be more deliberate about the portfolio. So there are seven places I believe that are appropriate for someone to put money into that would allow you to hedge against a potential market crash.

Alright.

And the crash could last for six months, one month, two years, three years, no one knows. But you've really got seven options here, maybe eight. High yield savings

Okay.

Is one. That would be, I guess, if we did eight. So high yield savings, you've got CDs Mhmm. From a bank, FDIC insured. You've got fixed annuities, which are basically a CD from an insurance company, and those are the fixed categories.

You you know what you're gonna get.

Yeah. There's like a fixed interest rate, like here's what you're getting, here's the time period.

Yeah. You know what you're gonna get for the time until maturity.

Okay.

Then you've got index products. Index products are a bit more complicated. If the index it's associated with goes up, you make money. You're not gonna probably make all the money of that index, but you're gonna participate with the upside. And if the markets go down, then you don't lose money.

So you're protecting your principal Uh-huh. But you're participating with the upside to hedge against inflation, because inflation still exists even if markets are crashing, inflation can still rear its ugly head. So this is where you've got fixed indexed annuities as long as there are no fees associated with them. So not variable annuities, not fixed annuities, fixed indexed annuities or FIAs. You've got indexed universal life as long as you're funding it or you already have it for an extended period of time.

You need ten years to even get into these things correctly. Uh-huh. And you have to also need death benefit. You have to have a reason to pay for the cost of insurance here, but those could qualify in this category of hedging against risk. You've got buffered ETFs, so it's kind of the securities or banking or you know that side of the industry's answer to the fixed indexed annuity, and then you got structured notes.

So here's how it works. Basically, whether it's an insurance company, a bank, or a financial institution.

Alright.

Let's say you want to put a hundred thousand dollars into something like this.

Okay.

Whether it's a buffered ETF, a structured note, this is roughly how it works. Let's say a hundred thousand dollars or a million dollars, whatever is going into it. Let's say a hundred thousand dollars for easy math.

Great.

A hundred thousand dollars goes in, and they're gonna go to a bank, and they're gonna say, all right, if we were to give you a lot of money, how much could we get as a fixed rate? They're basically looking for an institutional grade note. I'm not trying to be fancy with jargon. Institutional grade means they're putting together millions of dollars, so your hundred thousand and a bunch of other people's monies

Okay.

To get a better rate than you would get on your own.

Okay, okay. They're pooling

it together? They're pooling it together to get a more competitive rate.

Okay.

So they do that, and let's say the bank or whatever institution that's going to issue the note says, we'll give you 5.3% for one year. So they say, great. We're going take 95,000 of the hundred thousand dollars of your money in this example, and they're going to put it into this 5.3% note, so that in one year time, they know they're going to have around a hundred thousand dollars cash from this note.

Okay.

The principal is protected. Yeah. 95,000 becomes a hundred thousand, they've got no risk. So then they take the other $5,000 with all of the other people that are pulled together, and they buy institutional grade option contracts. So basically if the markets go up, they can exercise the contract, and you participate with the upside, because markets go up, it enters the strike price.

If you don't have options work, basically if the markets go up, you can say I want to exercise this contract, and you're required to sell me a price of a position or an index, whatever it is, at a lower than current market value price, and then you go around and just sell it. You made the money. Those option contracts cost money, that's why that $5,000 went to buy the right to buy at a certain price. It's complicated stuff. Some people will try and do this on their own.

I think that's kind of a fool's errand, because you're gonna get better rates when you're pulled together with tens of millions of dollars from a group of people at an institutional level.

Sure.

A lot of these things you can get on your own, the best ones you might need to go through a financial advisor to get, because they get more complicated. But the idea is simple. An indexed product with principal protection gives you upside potential, but no downside risk.

Okay.

Now I say no downside risk, be careful with fees. Index universal life has fees. Structured note has fees. Buffered ETFs have fees. Fixed indexed annuities, they don't necessarily have fees, but they might have a slightly less upside potential to compensate for the lack of fees because they gotta get paid somehow.

I mean there's no one's being a charity here.

Yeah. Yeah. Yeah.

Right. It's just different ways to slice the pie, but these index products that offer protection upside growth allow you to hedge against a flat market cycle. So if the equities market doesn't make any money for ten years, you can still keep up with inflation and growth. Okay? You make money on the upside, but you don't lose money on the downside.

That hedges against a flat market cycle. It hedges against a market crash because you don't lose, you're just next year at zero again, and then as the markets recover, you would enjoy that recovery. It's a way that you can hedge against what will probably be a very volatile economic time for the next four years. I hope President Trump does it right, but even he is at his negotiating table, has risks he's taking. Yeah.

And so we need to be there for if it works, and we need to be prepared for if it doesn't work. And so I appreciate the question in saying how do you hedge against it? This is how you hedge against it, but don't blindly put together a portfolio of, oh, well, let's put 60% or 40% or whatever in these protected assets.

Okay.

Put the plan together first

Yeah.

Then put together these strategies you want to implement to be more efficient with your money, and then put together your portfolio that supports the plan and the strategies. Plan first, strategy second, portfolio third, and that's where you can then understand how much should you be putting into. We call these reservoir assets.

Okay.

Like a city that has a reservoir of water in case of drought. Yeah. You've got protected assets in case of a market crash or a flat market cycle.

Yeah. It sounds like what you're saying is we shouldn't sort of withdraw everything out of the money because we need some growth

Can't time the market. And we

can't time it. So we we don't know. We since we can't see the future, we don't know when to put it back in. Right?

Yeah. Growth is important, but having some protection to hedge against the unknown is also a critical aspect.

So while we leave some in the market, we can put some in a safer spot as you listed out all those options.

Yeah. And you can get these products from insurance companies, from banks, from financial institutions Yeah. On the private markets, on the public markets. I mean, it's it's everywhere. But they all offer a different series or set of benefits Yeah.

And a different series or set of detriments. Yeah. So you gotta understand how to blend them together, because there is no such thing as a perfect investment product or strategy.

And how can we know what the benefits and detriments are? Talk to somebody like you? Yeah. Ask ChatGPT. Who's gonna tell us?

ChatGPT is a great starting point for research. Uh-huh. But unless you know the right prompts, you're not gonna get the full context. 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.

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