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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 to How to Retire On Time, a show that answers your retirement questions. We're here to move past that oversimplified advice you've heard hundreds of times. Instead, we're gonna get into the nitty gritty here. Have some fun. As always, text your questions to (913) 363-1234.
Mike:And remember, this is just a show, not financial advice. David, what do we got today?
David:Hey, Mike. Can you explain in more detail your bear market protocol?
Mike:So for the uninitiated or those who are just tuning in, a bear market protocol is something we have internally here. At Kedrick Wealth, we believe that bear markets are actually a good thing.
David:Oh, that seems counterintuitive.
Mike:Yeah. I'm almost looking forward to the next bear market. Dare I say. But here's what you need to understand. Many people build their portfolios around one market, the bull market.
Mike:And let's get rid of the jargon for a second.
David:Alright.
Mike:Bull means up, so you can remember that u in there. You and the bull means up, bear, down. Another way to think about it, bulls on the up. Bad news bears, so that's a differential. Whatever the story is, bulls strike upward when they attack.
Mike:Bears strike down. That's where the expression comes from. Whoever comes up with these euphemisms or ideas, I'd like to meet them. But everyone seems to be focused on the bull market. Let's grow, grow, grow.
Mike:Caution's thrown into the wind, because you can or at least the idea is if you grow well enough during the good times, you can take one on the chin during the downtimes. That's a very ignorant position to be in, in my opinion. You're gonna outgrow your problems.
David:Yeah. Is it too simplistic maybe? Or It's
Mike:not necessarily simplistic. It's like, I don't know, it's football season. You're gonna blitz the offense every single play. You might leave yourself exposed a little bit. K?
David:That makes sense.
Mike:What is the purpose of your portfolio? Is it to have the highest average annual returns or growing your money? That's not the same thing.
David:On the surface, it seems similar, but that's
Mike:why it's not. When you think about average returns, what you're doing is you're taking a bunch of individual returns and then doing a simple average together. You know, you add them all up, divide it by the number, and that's your average. So let's say the market or whatever average 3% growth, then it goes a 30% crash, and then it's a 10% growth, and then a 20%, and then a 7%, or whatever it is. K?
Mike:The problem is your money is affected differently in each year. I think we did a calculation. A 7.4% annual average grew money less than a 5% average return. Because the 5% was averaging 4%, 5%, 6%, 4%, 5%, 6%. It was within a smaller range, but it was more consistent.
Mike:And what people forget is 20% growth of a portfolio that lost 30% isn't that good, because you're growing less money. Okay. So let's think of that a different way. Is 10% growth on a million dollars better or worse than 10% on 800,000? It's less money for the 800,000.
Mike:Right. But people don't think about the term of the actual implementation or the realization of the returns when you break it down and chunk it out. So if you take an average annual return, you are getting a manipulated position. Mhmm. It's not wrong.
Mike:You do want good growth. You want to have, you know, a good average annual return, but you need to pull back and understand where are those numbers coming from. A very volatile situation might have some big drops, but the next year might have some incredible gains. That distorts than the average annual return. So when we say, well, you know, just buy the S and P 500 and you're good, The S and P 500 is a roller coaster.
Mike:It does go up, but it also has some pretty big drops. And it's not as big of a deal unless the equities market or the stock market goes flat.
David:Yeah. It happens every some number of years.
Mike:Twenty years or so. Okay. On average, not in the historical prediction. But 2000, 2010, had you put your money into the equities market, the roller coaster, no returns. You would have not made any money.
Mike:1965, 1966, depending on where you start for over ten years, no money, no growth in the market. But that's where the best average annual returns are. Right? Well, if you look at over thirty years, but maybe one third of that isn't really growing. So is it really the annual return?
Mike:Is it something that's you know, 1929, there was another flat market. That was like fifteen, twenty years long. Of course, it was the great depression, very unusual circumstances. In nineteen o six, they didn't do so. We know it happens from time to time.
Mike:Typically, it happens when a new industry comes in. We've overpriced it. This is my opinion based on my research. It's then when we start to digest what this thing was, or there were new financial investments or instruments that then were abused, manipulated, and basically put more money on a thing that was still fixed. So think of it like in 2008, these CDOs, so collateralized debt obligations.
David:Oh, I remember that phrase.
Mike:You remember on The Big Short? Uh-huh. There was one bet, and then people made bets on the bet, and then they met bets on the bets on the bets on the bets. Uh-huh. And it started to create a lot of new financial instruments that would swing based on one thing.
Mike:So the point of this is there's a couple of points here. First off, markets don't just go up, and I know the markets over the last ten to fifteen years have averaged over 10%. But if you look back to 2000, it's maybe around 7%. Maybe 8%, depending on on how you look at it. That's a concern.
Mike:We need to be aware of that. Markets go up, but they also go down. So if you build our portfolios just for the up markets, that's a tricky situation to be in.
David:They wouldn't do so well. If they're built for just the up markets, what happens to them in the down markets?
Mike:You're totally exposed. And the typical response that I get, which is well intended, but it's almost like they were told to give this response. The younger people, they're like, well, I can just dollar cost average in. You know, I still have my paycheck coming in. Markets are down.
Mike:I'll just buy it at a discount. That's a great response. Very healthy. Makes sense. Love that.
Mike:No resistance to that position. But for the retiree, well, we'll just tighten the belt, maybe take less income. We'll we'll get through it. They're saying that because they don't have any other options. They don't know any other way to approach this, so they've accepted a distorted reality that ignores certain strategies that could actually get them through these difficult times.
David:So there might not need to be any belt tightening during the down markets.
Mike:No. Why would you throw everything at risk in the stock market? Maybe it's the stock and bond market, but that's all technically at risk. So your stock funds and your bond funds, sixty forty, whatever your split is, all of them can lose money. And if they all lose money, you can't take income from that.
Mike:If you do, you accentuate the losses, making it more difficult to recover. Here's an example. 30% crash, which by the way, 2000 o one and o two thousand fifty percent, five zero, not 30. 2008, if you include a couple of months of 2009, 50%. Okay.
Mike:So let's look at the reality. Top to bottom can be 50%, but we'll use 30% in the example. Alright. 30% down in the market. That would be a 43% return to break even.
Mike:But look at that. A 43% return, 30%, you're averaging overall. You're averaging a positive percentage, but you're actually dollar for dollar 0. You just recovered. You just had the breakeven.
David:Oh, right.
Mike:K? But if you're down 30%, let's say, and you take out 4%, you're now down 34%. You accentuated the loss because you took out money from an account that's already lost money. Mhmm. Because you need income in retirement.
Mike:Yeah. You need to pay your bills. So that would require a 50%, five zero percentage recovery increase just to break even. Now from an average annual return standpoint, well, you know, negative 34%, positive 50%, that's you look like you're making money. You didn't make any money.
Mike:You're zero. This is how we get caught up on manipulated average annual returns. You've gotta look at the details. For years, this troubled me. You have to have a system for when times are good and times are bad.
Mike:There's a Finnish or Swedish expression that says there's no such thing as bad weather, just bad gear Yeah. Or clothes, depending on who said it. Yeah. So after a considerable amount of time and research and understanding, I created what we call the bear market protocol. Now it's a protocol because we believe in systems, not sentiment.
Mike:You shouldn't time the market. You shouldn't try to guess what's happening in the market. But when I look at a bear market, a market crash, if you understand it's an opportunity, then you would position your portfolio a little bit differently. And hopefully that premise helps explain why this is so important. There are several instruments, investments, or products out there that have principal protection.
David:And so meaning like the original principal can't
Mike:Yeah. Lose You either make money or you stay zero.
David:Okay.
Mike:So this is gonna blow you away. Okay? Alright. Wild stuff here. Ever heard of a CD?
Mike:Yes. I have. Or a bond, not a bond fund, but like buying a US treasury. I've heard of that. Now some of the more fancier ones, you could use a buffered ETF.
Mike:You have to have a max buffer. So I would define max buffer as 60% or more of losses are buffered out. So if the markets in one year period of time go down, let's say 50%, you didn't lose anything other than the expense ratio. Maybe you lost point 7%. But if the markets are down 50% and you only paid point 7% and you kept your principal, I think you'd be okay with that.
Mike:K?
David:I think that's safe to say.
Mike:Yeah. If the markets go down 65%, okay, you lost 5%. Big whoop. Now there's different types of buffered ETFs. I'm using a simple version.
Mike:You've got fixed indexed annuities. If they have a five year period certain, and I'll explain why in just a second. You've got upside potential, no downside risk. It resets every year. That's the idea.
Mike:Not good for lifetime income, not long term care insurance. It's just a very boring, often not talked about type of fixed indexed annuity.
David:Okay.
Mike:And then we you could technically use, like, other things like cash value life insurance, like index universal life if you already have it, but I'll we'll stick to the simple stuff for now. But hear me out. Okay? If the markets were to crash and you've got two portfolios, you've got bear market reserves, so assets that are growing, so it's offsetting inflation. It's trying to beat inflation.
Mike:K? Whether it's at a fixed rate or an indexed rate. So fixed, a CD, it's gonna pay that amount. Mhmm. Or indexed, upside potential, no or little downside risk.
Mike:So you've got those reserves, plus you've got over here your risk, and your risk goes down 30% or worse. If you just take income then for the next year or two or three or four Mhmm. From your bear market reserves, you never accentuated your losses.
David:The risk portfolio that lost money has time to grow during that period.
Mike:Just let it recover. Yeah. Now here's where it gets more technical, and this is fun. That's the simple version. Version one point o, that's what I talk about in the book, How to Retire On Time, which retire ontime.com.
Mike:You can grab a copy or Amazon. But there's more opportunities that we want to highlight here. Okay? So for example, let's say you have a slightly bigger bear market reserve because you believe the markets are overvalued. Well, you don't wanna stick it in cash.
Mike:As long as the markets continue to go up, you don't wanna be in cash.
David:You'd be missing out.
Mike:So what if you were in shorter term CDs that got a slight better return, or some shorter term treasuries got a slightly better return. Or what if you did quarterly buffered ETFs or annual buffered ETFs? Whatever it is. Even a fixed index annuity. Okay?
Mike:Whatever it is, as long as it has that five year period certain clause without the surrender penalties. Very complicated if you dive in that part. But let's say you've got your bear market reserves, so growth with protection. The markets crash, everything's on sale. When the markets crash, things are on sale.
Mike:When do you like to go shopping?
David:Yeah. I mean, Black Friday is when all the deals are. Things are cheaper. Right?
Mike:Bear markets or market crashes, it's Black Friday for those who are prepared. The problem is everyone seems to be focused on the bull market, the upmarket. They don't realize the risk that they're taking, especially when the markets are overvalued. But what if you had some reserves so that when the deals came, you could buy them at a good price? That's another layer of the bear market protocol.
Mike:Is what if you had two, three, four years, you didn't need all the income, so you started buying things cheaper. Can you imagine if and I'm just doing this as an example. What if Nvidia lost 30% of its value or 40 or 50% of its value? That's a really good time to start buying NVIDIA again. I don't think NVIDIA is going away anytime soon.
David:So even if it lost, we feel like that company's good enough, stable enough, they could rebound, they could come back and
Mike:If you understand how efficient their chips are, I don't see another company really taking them on. Yeah. There's gonna be some competitors. Like, I'm gonna get in trouble for saying this, but you know how Pepsi and Coke are kind of the same thing? Yeah.
Mike:It's just one slightly sweeter than the other. Right. I like my Coca Cola products more.
David:Uh-huh.
Mike:I'm a Coke guy. Some people are Pepsi people. My mom's a Pepsi person, whatever. But the point being is it's not as similar. Nvidia chips are significantly better than anyone else in the competition.
Mike:Mhmm. And the show isn't to do an evaluation on the company. I'm not even suggesting you should go out and buy NVIDIA. What I'm saying is if NVIDIA or Amazon or Microsoft or any of these large companies that are really good at growing their price
David:Mhmm.
Mike:They're expansive. If they went down twenty, thirty, 40%, it's a really good time to buy it. But you have to have assets in something that's protected so that you're taking it out of something that hasn't experienced a loss and then buying it at that point. Bear market protocol. How do you take advantage of the next market crash?
Mike:Here's a quick story. In my younger years, when I first got into the industry, I don't know how I got here, but I ended up at a luncheon with a bunch of very successful financial individuals, hedge fund managers and PhDs that teach economics and so on in New York City. So we're having lunch. This was in Vegas. They lived in New York City, but this is at a conference in Vegas.
Mike:I've met them a couple of times since then. Wonderful people. I won't say their names. But the conversation was joking about how this is like 2016, if I remember right, 2016, 2017. They were saying, yeah.
Mike:You know, the markets are going up and up, and, you know, markets crash every seven or eight years. And they were making fun of each other for how they each went to cash at the wrong time in the nineties. And these are like experts. Best of the best. Top minds on Wall Street.
Mike:But, you know, '97, it's overpriced. '98, oh, there's the banking crisis. This is the time they would sell, and it kept growing and growing. We don't know when the markets will crash. And to suggest that you could time it is ignorance.
Mike:And if you can't admit that, I don't know why you're listening to the show or watching this on YouTube. You may have accidentally timed it a couple of times. Mhmm. But no one's done it consistently over and over again, historically speaking. So given the fact that we don't know, having some assets for long term growth, wonderful.
Mike:Having some assets in your bear market reserves, reserves being money set aside still growing to buy things at a discount. So not only do you have your income taken care of from a principal protected source, you've also got, if you want, extra money to then buy stocks at a cheap rate. Do you know how awesome that is to buy things at a lower rate so when they rebound, your accounts are able to leap forward, growing your cash balance. It's not about your average annual return. It's about how much your cash is growing.
Mike:You don't spend money based on your percentage. You spend money based on the dollars that are in there. And I think we often associate them to be the same. And then here's the last one. For those that have a large portion of assets in IRAs, this is really cool.
Mike:Let's say your stocks or your ETFs. Let's say a large part of your portfolio is an ETF. You know, it's nice and diversified, but the markets go down, let's say 50%, and let's say this ETF was a $100 per share. Markets went down. Now it's $50 per share.
David:Okay.
Mike:Well, if you think about it from an IRA to Roth conversion standpoint, you now can get twice as many shares from your IRA to your Roth because the cost per share is not a $100 per share. It's $50 per share. So you can put twice as many shares converted over as long as you pay the taxes from your bear market reserves.
David:Okay.
Mike:Protected accounts because taxes if you pay taxes out of the conversion, you're accentuating the loss. You're pulling money out. I mean, imagine taking 20% out of your conversion when you've already lost 50%. You're getting hit twice. That doesn't work.
David:Because you have to sell more shares to cover the taxes.
Mike:Yeah. It's like taking income. It's sequence of returns risk is the technical term. Ask your favorite AI bot about that. Yeah.
Mike:But when you understand that if your accounts go down, especially if you've overfunded your IRA, you want the markets to crash during the first part of your retirement.
David:And what does that mean to overfund your IRA?
Mike:Yeah. Let's say you only need a certain amount of income. You won't spend all of your money, but everything is in your IRA. You're going to get stuck in this type of situation, paying taxes every single year to do IRA to Roth conversions, or maybe you end up with an RMD issue. So '73, '75, whatever the date ends up being in the time you listen to this recording, you may be forced into higher tax brackets.
Mike:Let's say you need, I don't know, 60,000 to live the life that you want, but your army is a 150,000. You're paying taxes on that. You can't get money out of your IRA unless you pay taxes or you die. Yeah. And then you can send it to charities.
Mike:Now you can do qualified charitable distributions with your armies and other things to kind of maintain but still, you're not getting the money. You either get the money and get taxed, or you're giving it away. Either way, you're not utilizing your money that you worked for. But if the markets were to crash during the first part of your retirement and you were able to prepare for this correctly, you are significantly shifting IRA assets to Roth, paying taxes out of a principal protected source so that you don't accentuate your losses. And then when the markets recover, and they've always recovered, you would then have a huge recovery in your Roth, not your IRA.
Mike:Mhmm. Very tax efficient. So notice the three layers of a bear market protocol. I don't know why this is not utilizing other maybe other advisers are doing this. I I don't think so.
Mike:Typically, see stock bond fund portfolios and hope it grows, and if it doesn't, you know, that's we all have to deal with it. No. Mhmm. There's a huge opportunity if the markets were to crash sometime soon. Would love it.
Mike:Yeah. It stinks, the part of your portfolio that's lost money. But when you see it as the opportunity, your whole retirement plan shifts.
David:Just depends on your perspective.
Mike:But notice, a bear market protocol means you've got bear market reserves, growth with protection, and flexibility to maintain income, to buy positions on sale, and to accelerate your IRA to Roth conversions without paying more in taxes. That's a really cool playbook, if I do say so myself. Agreed. Now you might be wondering, well, how much should your portfolio be in a bear market reserve like product or asset or whatever? I don't know.
David:So if you had, like, a million dollars total, you couldn't say for certain right now, oh, 500 k should be in the bear market.
Mike:Couldn't say it. And the reason is there's not enough context. But here's how you answer it for an individual. You first need to put together their plan. So what is the cash flow look like?
Mike:Cash flow within the investments and the assets, the taxable consequences of that, the growth. You have to look at the plan from a projection standpoint, the flow of money standpoint. Then you need to explore what's the purpose of your money, and what are the efficiencies you wanna use? So efficiencies strategies. Do you need to do IRA to Roth conversions?
Mike:Do you not need to do IRA to Roth conversions? The truth is not everyone needs to do IRA to Roth conversions. I know it sounds like we're all supposed to do it. Not everyone needs to do it. People have different situations, and that's because they have a different percentage of assets in their IRA, their Roth, and their nonqualified or their brokerage account.
Mike:Everyone's different. Plan first, explore the strategy second to try and get more out of your money, and then you start putting together your portfolio. And you might say, based on my lifestyle and legacy goals, here is what I want. Here's how we're gonna get there, and then you can start to shape your bear market reserves, get ready for the bear market protocol, and so on. Don't be scared of bear markets.
Mike:Embrace them. It's just like, yeah, winter stinks for some people unless you're a skier. Not many skiers here in Kansas City, but for the rest of us that go to Colorado and ski or whatever. Yeah. The point being is markets are going to crash.
Mike:You can't control that. You can't time it effectively over and over again, and you don't wanna stake the ability for you to retire and stay retired based on hoping that the markets don't crash or stay down too long. We wanna be prepared for both situations. And the way to do that, in my opinion, is to properly put together your specific bear market protocol. Don't bake on outgrowing your problems.
Mike:Be ready for the good, the bad, and the ugly. 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. Just 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.
Mike: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, go to www.yourwealthanalysis.com today to learn more and get started.