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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. My name is Mike Decker along with David Franson over here, and we're gonna be taking your questions. Just text them right now to (913) 363-1234, and we'll take them one at a time. Again, that number, (913) 363-1234. Let's begin.
David:Hey, Mike. I want guaranteed income for the first few years of retirement, not for life. Is a bond ladder the best strategy?
Mike:When you think of laddered investments, David, what do you think of? There's the bond ladder, but can you think of any other ones?
David:Yeah. So a laddered investment. So you're you're saying like there's stages, I guess. So are you like withdrawing in in certain in a sequence? Is that what that means?
Mike:So I think that's what most people would assume. Those that that don't know, a bond ladder is basically you buy a bond that matures in one year, then in that year, then you liquidate it, and you spend it. But when you retire, you also bought a bond that matures in year one, year two, year three, year four, year five. They're all at fixed rates, and so basically, you're just spending when as it comes due. And you can ladder it out for three years, five years, ten years.
Mike:I mean, really as much as you want.
David:And when did this strategy first come about? Is this an old strategy?
Mike:I don't know. Twenties or thirties or something. I mean, it's the idea of laddering out income Mhmm. Has been around for a very long time. The three ladders that I'm most aware of is you've got the bond ladder.
Mike:So you're buying treasuries or bonds and laddering them out on the maturity dates. You could do a CD ladder, but CDs aren't really offered past five years. Generally speaking, I know there's always exceptions, but generally speaking, you'll ladder out to five years or so. Fixed annuities, if you're past the age of 59, you could buy basically CD from an insurance company. So it's a fixed interest rate, a fixed growth rate for a preselected period of time, and they can be laddered out to about ten years or so.
Mike:So these are different ways that you can structure your income, and there's a benefit to that. Structured income means it doesn't matter if the markets go up, down, or stay flat. You have predictability for a certain period of time. That's the idea behind it.
David:So it's like, here's my 200,000 insurance company now. Pay it back to me over five years at this rate.
Mike:Or bank or treasury. Okay. You've laddered it out. The problem with bond ladders, before we talk about other ways to do this, is and any ladder, if that matter, is inflation. So these are all what I would call cash or cash equivalent accounts.
Mike:And if we experience hyperinflation, it doesn't matter. You have your fixed rate. So if we have hyperinflation, and let's say, cumulatively over two or three years, there's a 30% inflationary, like we just recently experienced, your bond letter's worth 30% less. Mhmm. So you need to be proceeding carefully with this.
Mike:The reason why I say this is I've met enough very high net worth individuals who say, well, I just wanted security. I got out of the market, and I just did a bond ladder for the next I've I've even seen twenty to thirty years. And I went, how are you handling inflation risk? I said, what do you mean? I don't have market risk, but how are you handling inflation risk?
Mike:And that's typically where they'll stumble a little bit, and they say, I didn't really think about that, or, oh, well, I'll just and then they kind of try to talk themselves out of the risk instead of saying, yeah. That's a good point. How do we solve that? There are other ways to do this. So this person, if the question's right, they don't want lifetime income.
Mike:Correct?
David:Yeah. They want guaranteed income for the first few years of retirement.
Mike:K. So they must have read my book, and what they want is structured income with a small reservoir. So just to translate what that means is structured income, they want no ambiguity on the first couple of years so that when they wanna retire, they know they're gonna walk right onto the first year is principal protected income. The second year is principal protected income. The third year, it's a nice transition into retirement, but there's still assets in the market.
Mike:There's still assets and growth. You're still able to offset inflation. You're not as concerned about market risk and so on. It's a very balanced approach. The way that I have seen more people resonate with that usually have no idea this option even exists is called period certain annuitization.
Mike:Okay. K? So let me explain what that is. So most people seem to believe that when you buy an annuity, you turn on lifetime income. That's not actually how it works.
Mike:Lifetime income is, from what I understand, a relatively new concept that the insurance companies have offered. And if you think I'm pitching lifetime income right now, sorry to inform you, I actually wrote the entire book, how to retire on time, to protest or try to talk people out of doing that. K? I don't think it's financially in people's best interest, personally speaking. Now I have clients that ask for it.
Mike:That's fine. I understand the emotional side of the comfort of lifetime income, but people typically associate annuities with a lifetime contract with lifetime income. Annuities have been around since, I believe, somewhere between the seventeen hundreds and eighteen hundreds.
David:Really?
Mike:They've been around for a very, very long time, but the original version of an annuity is under the term annuitization, which is where you receive payments for a certain period of time. That's the old school definition. Why do I bring this up? People typically are concerned about lifetime income because they want control over their money, but they want some structured payments for some periods of time. So what you could do and read the contracts, do your due diligence, but you could buy certain annuities that offer the period certain annuitization option.
Mike:And so let's say, David, you've you've got a couple million dollars.
David:Oh, I like where this is going already.
Mike:I love this. Yeah. Yeah. Congratulations. Merry But you're working, and you still enjoy working.
Mike:You don't know exactly when you wanna work. That's a difficult situation when it comes to how do you line up your your treasury letter or your bond letter or your CD letter, because you don't really know what's gonna work. So what you could do is you could put some assets into an annuity knowing that at any given moment, you could turn on annuitization for a period of certain time, and it could be five years, seven years, or ten years. K? I like the five year option because I like more flexibility in the portfolio personally, but everyone's gonna be different.
Mike:But the idea is the day you have that last day, you're like, I'm done with this. I am sick of these people. I used to love them, but this things have really changed. The culture has shifted, and I don't recognize the company anymore. I don't need to do this anymore.
Mike:I'm ready. What if that moment happens when the markets crash? What would happen? This is where buying an annuity within five years, two to five years of what you wanna retire. You don't buy them ten years or twenty years before you wanna retire.
Mike:You buy it when you're near retirement, and that moment that you're ready to turn on income, you turn on the income. You gotta know how much income you need, but you'll take either half the majority or all of the income you need in retirement, and you turned on annuitization for about five years. So in that moment, because it's dynamic, you can turn it on whenever you want. The first five years of retirement are completely guaranteed, like a CD ladder that can start whenever you say it starts. So the asset or the annuity would have growth potential.
Mike:Markets go up. You're making money. You're not gonna get rich off of this, but hopefully it grows better than it would a bond or CD ladder would. Has no downside risk, and it turns on the day you wanna retire whenever that day is. It's a way that people can transition to retirement while still keeping the majority of their assets in the market for growth, for future flexibility, to offset inflation, and so on.
Mike:Is this right for everyone? No. Sometimes the treasury ladder is gonna make sense. Sometimes the CD ladder is gonna make sense. Sometimes buying a smaller annuity, knowing that it's gonna cover the first five years of some or all of the income, depending on what your plan looks like, could be a right option for it depends on what you want.
Mike:So I don't want this to sound like a product pitch. I hope everyone that's listening and understands, I am defining a tool as it is. You would never use a hammer to cut wood. No. But you would use a hammer if you need to put some nails into a wall or whatever that is.
Mike:You would use a saw to cut wood. I'm not a contractor, but you get the idea. Right. This is a tool being defined for a very specific purpose if that makes sense. But the idea is you need to live your best life.
Mike:Sometimes that means you keep working. But when that day comes, are you going to be prevented from retiring on time? Even though you could have afforded it, but maybe the markets turned or something happened, are you prepared for that that dynamic evolution of the markets of your lifestyle and so on? I found most people seem to have a plan for when the markets go up, but there's very little downside protection. So there's not really much of a plan for when the markets go down.
Mike:They might say, well, but we've got these bond funds over here. Bond funds can lose money. If the markets crash, Iran has that scare and things go the way we don't want them to go, and they clog up in oil, inflation's gonna get out of control. And if inflation gets out of control, even when the markets are crashing, then they're gonna jack up interest rates. And if they jack up interest rates, then the bond funds are gonna lose money.
Mike:If bond funds lose money and the equities, your stocks lose money. Is that really a a sound retirement plan? No. It's not. Yeah.
Mike:So the idea that, oh, we have these bond funds. They're less risky. That's not a plan, in my opinion. That is how to sell someone a stock and bond fund portfolio to either charge them a percentage of fees to keep them all in something they can charge you on, or they can get back in commissions because they gave you bond funds instead of bonds. I mean, just just understand the nuance of these situations.
Mike:Is it possible that the day you wanna retire, you can walk in a retirement and take income from a principal protected source regardless of what markets are doing? Most people that come in the office, they can't say they know how to do that, and it's explained away by their current adviser. So I really wanna push hard and say, yes, there's more than one option. The bond or treasury ladder or CD ladder is an option if you know exactly when you wanna retire. And if you don't, you wanna keep things open, it may not be appropriate for you.
Mike:It just depends. But this is the kind of conversation I think people need to have individually with someone that understands how to do comprehensive and holistic retirement planning. 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.
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