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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.
How many years of living expenses do I need to hold in cash or short term bonds or bond funds to survive a prolonged market crash?
Mike:So a a typical market crash is gonna last three to five years from down to recovery.
David:Okay.
Mike:It's the COVID crash was very very quick. It's unlikely to be that quick.
David:Mhmm.
Mike:Okay. We had the flash crash of twenty sixteen. Most people never even remember it. It was scary the moment, and then it recovered. It was like, that was it.
Mike:Uh-huh. Earlier this year, the markets were down 7% and they recovered. So those aren't crashes like a real crash like 2000, which in my opinion is a similar situation that we would experience soon.
David:Okay.
Mike:Lasted three years. And then it recovered over two years, so that was fine. But that was a five year gap, and then you started making some money in the 2008 hit, and just wiped out all the returns anyway. Yeah. So in in my mind, it's not about how much of the dollars need to go there or how much of the portfolio needs to go there.
Mike:Those are the wrong questions to ask. The right question to ask is when I retire, how much do I need each year of income? And then build yourself a more dynamic strategy. So first off, you can there's three three different ways you can do what we call the reserves. Let me answer it this way.
Mike:Alright. Reserves are assets that have growth potential, but no downside risk. So no market risk. Mhmm. CDs, treasuries, index annuities, buffered ETF, structured notes, take your pick.
Mike:There's a lot out there. There's even more than I I just mentioned. But you have to ask yourself, if the markets were to go down this year, do I have enough liquidity to pull it from an account that hasn't lost money? Markets are up, pull income from everywhere. But the day you retire, based on the research and what I talked about in chapter four of the book, which by the way, everyone can get for free on retireontime.com.
Mike:If you haven't downloaded it, download it today, digital book or audio book, is you need to have two strategies. When the markets go up, you could take income from anywhere, but when markets go down, take income from a source that cannot lose money, and the day you retire is the day you have the least amount of risk or the largest amount of reserves. Because let's say you have enough reserves for three market crashes. After the first market crash, do you really need to fill up the reserves again? Probably not.
Mike:Because you only have two expected more crashes and you've already allocated enough there anyway. So if we take the rule of 100 and say, oh, you're supposed to have 65% of your assets in bond funds. Well, what if you just need to put 50% of your assets in laddered out anything that qualifies for the reserves so that you're okay. It changes it to make it more personal as opposed to this idea that everyone needs to have a certain allocation. Allocation based plans are products.
Mike:Plans that then determine the tools and the amounts of those tools that are needed are better in my at least in my opinion. Those written plans make sense. Okay. So I think that's that's the more appropriate question.
David:Okay.
Mike:Or the answer is is that. Now, three different ways you can you can structure this. The first five years of retirement are the riskiest. Many people who come through our office want laddered reserves. How what does a laddered reserve work?
Mike:First year of it let's say you're retiring next year, so your first year of income is in a money market.
David:Okay.
Mike:Boring, liquid, good to go.
David:Yeah. So 2027, I'm retiring, and so I'll put my twenty twenty seven's income in just Money market. Money market.
Mike:Or maybe you do a laddered CD approach.
David:Okay.
Mike:That works too. Alright. Okay. Maybe in two years, you do a treasury. They're they're not that like, they're a pretty good rate right now.
David:So you buy the treasury now, and then in two years when it matures, hey, there's the cash for my income.
Mike:And you plan to hold it. That's the point. You plan to hold it. When it matures, you spend it.
David:Yes. Not before then.
Mike:Not before. Then you might do year three, four, five in MIGAs. Multi year guaranteed annuity.
David:Okay.
Mike:It's not really an income product. Technically, you could, but it's not really built for that. It's built to be a CD from an insurance company. That's the best analogy.
David:So you give the insurance company your money, and they hang on to it for three to five years?
Mike:Uh-huh. And it grows at a fixed rate, contractually fixed.
David:Okay. Nothing's going to influence that. It's it's in the black and white.
Mike:Uh-huh. Okay. Now after the term Uh-huh. It can change, but you just liquidate it anyway and you spend it. That's the purpose.
Mike:You're laddering out the bucket system.
David:Okay.
Mike:But the first five years, that's very common that people will ladder out income from a fixed standpoint. Because it just says, if the markets crash, who cares?
David:Yeah. This is growing at
Mike:a fixed rate. I'm gonna spend it at a fixed rate. I'm that I'm good. Yeah. And it gives you plenty of time for the markets to recover.
Mike:Mhmm. So that's the kind of the laddered approach. The other one is the lifetime or the baseline income. So right now, lifetime income, because the ten year treasury is at a higher than normal rate. Lifetime income is very competitive.
Mike:So hypothetically, not quoting any products here, but if you could get, let's say, a 7% return of whatever you put in there, guaranteed for life. The cash value is gonna grow like a bond fund, not competitive. So you might spend it down, but you have structured income for life.
David:Yeah. That might make people feel good.
Mike:That's that's the my opinion, one of the best strategies to hedge against a flat market cycle. Oh, yeah. Because if the markets are down, you get 7% of whatever you put in there. Markets are up, you still get 7%, it's still a good deal. Mhmm.
Mike:I mean, and here's here's some context. If you look back from 2000 to to the end of twenty twenty five, the S and P made around 8% year over year returns. So people say, oh, the S and P makes double digit returns. Yeah. Over the last couple of years.
Mike:Yeah. But if you look back from 2000 to 2025 or end of twenty twenty five, 8%. This gets you guaranteed, let's say 7% growth every year for the rest of your life. That's pretty close Yeah. To market returns.
Mike:And it's not that the insurance companies are taking on extra risk or any of that. It's because the ten year treasury is really high right now, So they can offer you more. That ten year treasury goes down, the new people who buy these products, it's not gonna be competitive. It won't be worth it. In my opinion.
Mike:So things to consider, but that's the baseline. A lot of times I'll see people that will take their social security at 70, and they'll say, well, I need 50 or 60 thousand more. So let's just guarantee 20 to 25,000 of it. Let's guarantee half of it.
David:Mhmm.
Mike:Great. It brings portfolio stability. It brings lifestyle stability, and you're still getting a good deal out of your money. Yeah. And if you truly understood how these products work, it's not like typical insurance.
Mike:It's a structured note wrapped around an insurance guarantee.
David:Okay. Yeah. Some people some really smart people think of this stuff and they the the products
Mike:I interviewed the guy that created it, by the way.
David:Really?
Mike:Back in the eighties.
David:Really?
Mike:Yeah. He had the patents
David:and never enforced He came up with it in the eighties.
Mike:No. He he he made this in the eighties.
David:Oh, yeah.
Mike:When this whole thing first started. Okay. And they're they're completely different today than they were. Yeah. I met the guy who had the patent that like invented the very construct of how this all worked.
David:Fascinating. And when did you talk to him?
Mike:I I met him on the New York Stock Exchange.
David:This a handful of years ago? Yeah. Okay.
Mike:Right place, right time.
David:Yeah. Alright.
Mike:Really cool guy, but he created the patent, he never enforced it. So now anyone can do the structure that he invented. And then it went through this weird period of time because variable annuities are expensive and just garbage, but he invented the first index annuity. And it was a way to basically guarantee the baseline through long term products, actuarially put the odds in the insurance company's favor that they could afford these things, and then have upside potential. That's the index components of what's called an option budget that then sustains this.
Mike:Brilliant how he figured all this out, right? Yes. But that revolutionized making annuities not just an expensive product, but now an affordable product that is competitive on the cash growth to bond funds, but contractually guarantees a payout structure that right now is similar to what the markets have historically done over the last twenty five years. Mhmm. Very similar to that.
David:It could change what you're saying.
Mike:Yeah. Well, and here's my honest opinion about it all. I'm I'm painfully transparent about it. Mhmm. A couple of years ago, I hated these products.
Mike:Yeah. They were they were not a good deal. Right. Now they're a good deal. And then later, they're gonna be a terrible deal.
Mike:I mean, look, you wanna buy groceries at the grocery store, buy what's in season. I know we're privileged in America to buy buy whatever you want whenever you want. Right. But the watermelon doesn't really taste that good unless it's in season. Yeah.
Mike:The sweet corn doesn't really sweet unless it's in season. Right now, this product is in season. At some point it's gonna go out of season. I don't care what's in season. I just wanna build plans that are built with the products that are in season that are competitive and a good deal.
David:Yeah. That's a good way to put it.
Mike:That's it. Yep. But most people are saying no to something they don't even understand. That's like, you know, saying I I like horses. I I don't like the cars.
Mike:That looks too dangerous. I'm gonna stick to horses. I mean, it's just Right. And and when things shift, they're gonna say, oh, everyone's in a car. Well, it's like, well, what if everyone started getting accidents in cars or they became unsafe for whatever reason?
Mike:Maybe wanna go back to the horse. Yeah. It's kind of a weird analogy. I'm glad you indulged me. Thank you for Always.
Mike:That charity laugh.
David:Happy to do that. And then
Mike:the last one's the dynamic reserves. So if we're gonna this is a blend of buffered ETFs, max buffer. So you're not gonna get as much upside potential, but you have a significant downside buffer. Okay. Markets go down, let's say 40%, maybe you don't lose anything.
Mike:Depends on what you buy, or indexed annuities, which lack liquidity for a certain amount of period of time. Right? Five, seven, ten years, whatever it is. But it has upside potential, no downside risk, and you're just trying to beat bond funds. That's it.
Mike:That's the benchmark. Yeah. And if you could beat bond funds, it's a good deal. And if you can't lose money, then when the markets recover, if you have uncapped participation rates, that's a really good deal too. So where I'm getting at is, many people are trying to build a plan based on what they understand, not necessarily the right tools.
Mike:I mean, gosh, David, you know me quite well.
David:Mhmm.
Mike:I built a house with the tools that I understood, I would condemn it the day it was finished. Yeah. Because it would not be livable. Right.
David:There are a lot of tools out there.
Mike:I mean, know what a saw is. I know what a hammer is. I I know some basic things, but there is no way that I'd feel comfortable with anyone living in that house. Yeah. The plans that I see walk through my door are based on the tools that they understand with the understanding of the last fifteen years of how those tools work without the seasonality understanding of how they could work moving forward.
Mike:Mhmm. That's I think one of the biggest risks that people face today. So that's all the time we've got for the show. Though if you enjoyed this show, make sure you do tell a friend, leave a rating, find us on on podcasts, How to Retire On Time or on YouTube as well. How to retire on time is the channel name.
Mike:Join our newsletter to join us live and you can submit your questions here every single week. Also, if the time is right, retireontime.com. Click the button that says talk to a planner. Schedule a thirty minute call, let's discover what's right for you. Is it a one time plan?
Mike:Do you wanna work with us as a flat fee advisor? That's right. Like, we don't charge a percentage of your assets, we just it's there's so much cost to do the job. What job do you want done? We'll help support you with that.
Mike:It's really fun. How open we can be with that kind of transparency, with that kind of position that we're in. And if as always, join the newsletter, get our the content that we're putting out there. We do have classes coming up. Look for those coming out in the newsletter as well.
Mike:We're gonna get very detailed in how to construct a portfolio design that's able to hedge against flat market cycles. We've also got another class of 10 ways you can take income in retirement.
David:And these are on Zoom, these classes?
Mike:Zoom Wednesday night. We're most Wednesday nights at 06:30. We are holding live classes. Ask us anything. We are teaching you how to fish.
Mike:All that's available for those on the newsletter. Thank you all for joining us. We'll be here at the same time, same place next week.