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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.
Hello, and 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.
Mike: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 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 joining me today.
David:Yes. Thank you for having me.
Mike:David's job here is he'll be reading your questions that you've submitted in, and I'm gonna do my best to answer them. Now you can send your questions in right now or really anytime during the week to 913-363-1234. Save that number in your phone. So when you think of it, you can remember and submit the question then. That number again is 913-363-1234.
Mike:Or you can email them to hey mike@howtoretireontime.com. Let's begin.
David:Hey, Mike. I'm having a hard time understanding how income works in retirement. I don't have a pension. Can you explain how people generate income in retirement and why they pick certain strategies?
Mike:Yeah. One of the biggest disservices, I think, the 4 one k has done is it said, hey. You've got all this freedom, and you can make tons of money now, and you can invest and be in control. But many people don't realize or maybe it's the businesses that just don't want the responsibility. But when you have more control, you've got more responsibility.
Mike:The 401(k) has basically said to all retirees, hey. Once you've spent 30 to 40 years being a professional in your skill or trade, now you get to retire and learn how to be a financial professional. Mhmm.
Mike:You're gonna learn a whole new trade. And guess what? If you screw it up, you're on Medicaid and you're living with the kids or plan b or plan c or plan d or whatever it is is is happening. I mean, it really has been a huge disservice because it used to be. And I know I'm preaching to the choir here.
Mike:You'll learn to skill or trade whether it was through college or technical skill or whatever it is. You learned it really well, and you were a part of a group, and there's a pension when you retired. And then you just didn't have to worry about it. That is the plan that really is built, in my opinion, for I'm kinda talking myself out of job here. But that that really was built for the average person.
David:Yeah.
Mike:It made sense.
David:Right.
Mike:My grandpa was a Boeing engineer, a brilliant man, retired on a pension, and they had other assets they saved, and they enjoyed the other assets. That was their fun money, but they could live off of their pension and and social security comfortably. Yeah. Worked there his entire career. That's a great retirement plan.
Mike:Right. So what do you say? Hey. Here's a lump of money. It's in a 401(k) .
Mike:Now figure it out. That's rough.
David:Yeah.
Mike:I mean, really, that's kinda mean.
David:It really is if you think about it.
Mike:Yeah.
David:Gosh.
Mike:And the reason is the questions that I get make it so obvious that financial literacy on what to do with the 401k is very low. Many people do not realize that they can roll their 401k over into an IRA. Now you might think, oh, well, of course, that's how it works. There's a lot of people that don't understand that. Many people don't realize that when they change jobs, they can roll their 401k into an IRA and have more options on how to invest as opposed to your 401k rolls into your 401k, which rolls into your 401k, which rolls into your 401(k).
David:Yeah. Right.
Mike:So the rules of how the 4 one k works and how to structure it create a lot of anxiety. I don't use that word lightly. Genuine anxiety to where people keep working longer than they need to because they just don't know what to do, what question to ask, or how to take this lump of money and convert it into a plan. So let me let me address the question here of understanding how to generate income in retirement and why people pick certain strategies. And I'll use the 2 most common strategies that I see.
Mike:Probably the most common strategy is the 4% rule, which suggests that if stocks average, let's let's say, 7 or 8% year over year and bonds average, let's say, over the long term period of time, 4%.
David:K.
Mike:That you could put your assets into a stock bond fund portfolio and take out 4% each year and be fine. Because you're preserving principal. It's averaging a little bit more. So you're hedging against inflation and and you're generating income. And so what you would do in this situation is you take your your 401 k, maybe you roll it over to a, an IRA, and then you find some sort of adviser or you just do robo investing.
Mike:Maybe you just buy the s and p and a bond fund and and call it good and just do it yourself. And you just take out 4% each year. It's a very simple strategy because the 401 k conditions us to think that we just need to be in the market, ride the ups and downs, because that's what we did for the entirety of our our working careers. We put money in the market, we invest in it, and we rolled the ups and downs, such as kind of how things are. Experiences create familiar territory.
Mike:But when you transition to retirement, the rules change, yet we seek this familiarity. We want to keep the same idea of I I invest in mutual funds and ETFs. Are you with me so far?
David:Yeah. Right.
Mike:K. The problem with the 4% rule is that if markets go down, you accentuate losses. So for example, if the markets went down 10%, it would take an 11% return to break even. Not the end of the world.
David:Sure.
Mike:But if markets go down 30%, it would take a 43% return to break even. It accentuates the need for higher growth. So if markets go down 30%, let's say, and you took out 4%, you're now down 34% in this simple equation. It would now require a 50% return just to break even
David:Yikes.
Mike:Which may take several years to fully recover. And if history repeats itself, then it would suggest that the markets crash 30% or worse every 7 or 8 years. And then the the the caveat is the markets also can go flat for 10 plus years like it did from 2,000 to 2,010 or 1965. That was more than 10 years of no basic returns for a 10 plus year period of time. Let's see.
Mike:1929, I think, was another one. The Great Depression. And then, there's one more. Maybe it's 1916. Anyway, it just happens.
Mike:And people don't plan for this. And so that's a huge risk. When you keep all of your assets at risk, that's a problem. But this is one people like this strategy because it basically gives you the idea that you can invest how you've always invested, and you just withdraw and pay the taxes on an as needed basis. Lot of freedom, but there's a lot of risk there.
Mike:When people find out about these risks, though, they they panic. And so they go to the other common strategy, which is the annuity income strategy. Now annuities aren't just for income. Most people don't understand this. They also can be used as a bond alternative.
Mike:Yeah. Because they have growth potential, but they can't lose money. I'm talking about fixed indexed annuities specifically or fixed annuities, which are basically the a CD from an insurance company. But they'll they'll do the the annuity income, the insurance income stream, which is where you transfer longevity risk to an insurance company. Here's basically how it works.
Mike:Insurance companies will sell you an annuity, and they will pull together a number of people that are transferring their longevity risk to an insurance company so that most of the people will die off soon enough. The insurance company makes money, which is fine. A few outliers might get ahead, but the odds are in the insurance company's favor. But that's how it all works. I mean, term life insurance, they pull a bunch of people together.
Mike:Most people don't want to die when they're in their twenties. Yeah. Yet they all buy term life insurance. A couple of them do die. There's a massive payout, but the insurance company still makes money.
Mike:That's how insurance works. So you can give your money to an insurance company so that they can give you your own money back. You probably won't live long enough for it to make financial sense. There probably won't be much of a death benefit to anyone if you live at the expected rate, But you had the peace of mind. There's always a cost.
Mike:And in this situation, there's a cost of that peace of mind. But you may struggle with inflation.
David:Okay.
Mike:So most annuities that I see are flat income streams. So after 20 years, you're squeezed, you're on fixed income, and it's hard to make decisions. And if you funded it with your 401 k or your IRA, if taxes go up, your income goes down. So there's there's some nuance there. When people realize that, they go, oh my gosh.
Mike:How does this work? This is why I really harp on oversimplified plans. Humans want simplicity. We do. But if life were simple, everyone would be successful at it, and it's just not.
Mike:And finances are among the more complicated professions. Just look at the tax code. Oh. K. Now you have to do financial analysis on positions and modeling and you've got to understand these insurance products, which you kind of almost need an attorney to interpret it for you.
Mike:And it goes on. So
David:Right.
Mike:Here's my conclusion. At the end of the day, can I explain how people generate income in retirement? Yes. Some people are willing to take more risk, and they do the 4% rule. Some people don't want the risk, the the market risk specifically.
Mike:And so they buy annuities, and they they go to these extreme strategies. Really, what's happening is you just need one income. You need a certain amount of money each month. K? To generate that, you need to be able to create a system that generates income for markets are up or if markets are down without accentuating losses.
Mike:And then the last one is you need to be able to understand how to pull that income dynamically from your pretax account, your after tax account, like your brokerage account, and then your tax free account, like your Roth accounts.
David:Okay.
Mike:That's the most basic construct, and it gets complicated when you start putting multiple strategies for multiple situations. I write about this in my book, how to retire on time, of the reservoir strategy. Here's how I believe it should be done. I believe that the strategy should be plan first what's the life you wanna live. How much does it cost to be you?
Mike:Then you explore the tax strategies, the health care strategies, the Social Security optimization strategies, explore the strategies to get more out of your money, and then you invest your portfolio in a way that supports those strategies and supports the plan. And in that portfolio, I believe, my opinion, that everyone should have a portion of their assets in principal protected accounts so that when the markets go down, you can draw income from a principal guaranteed source and not accentuate your losses. That's my thesis. I write about the book how to retire on time. The amount that should be in that portfolio, people say, oh, 8 years or 5 years or 20 years.
Mike:That's a personal decision. And when you have the plan, you can make a more informed decision on how much your reservoir, your principal guaranteed part of your portfolio should be. And it can be CDs, treasuries, not bond funds, actual treasuries, corporate bonds, if you're comfortable with that. Fixed or fixed index annuities, if they're used as a bond or CD alternative. Maybe you have cash value life insurance as well, and you qualify for that.
Mike:Many people don't. So, you know, understand the fees are associated with it. But but that's in my mind. You've got one income that you really want. You've gotta be able to to take that income, to generate that income under 2 markets.
Mike:That's why I proposed the reservoir strategy so you can focus on growth, but you have the principal protected part for when the markets go down. And that you're able to take income from different sources so that you can be tax efficient. If you wanna learn more about how to do that, I get that it's kinda complicated. So request an analysis today so that I can show you what I mean. We can do a Zoom call or you can come to our offices here at Corporate Woods and really break it down.
Mike:Request that right now. Go to www.yourwealthanalysis.com. Or if you're driving, just remember yourwealthanalysis.com. We try to make that domain as simple as possible. Yourwealthanalysis.com.
Mike:Do you want yourwealthanalysis.com? Well, there you go. Go to yourwealthanalysis.com, or you can text analysis to 913-363-1234. That's keyword analysis. Text it right now to 913-363-1234.
Mike: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 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.
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.