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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.
You need to have a financial plan. A plan is your projections. One plus one equals two. If you average a 6% portfolio and you take the income out that you want, though, do the numbers work out. Welcome to the retire on time podcast, a show all about getting into the nitty gritty instead of the oversimplified advice you've probably heard hundreds of times.
Mike:We wanna bring context to the conversation. That said, remember this is just a show, not financial advice. Text your questions to (913) 363-1234, and we may feature them on the show. David, what do we got today?
David:Hey, Mike. Why do you minimize the importance of a financial plan?
Mike:I don't minimize the importance of it. I minimize the predictability of it. Let me clarify. You need to have a financial plan. A plan is your projections.
Mike:One plus one equals two. If you average a 6% portfolio and you take the income out that you want, do do the numbers work out.
David:Okay.
Mike:That's all it can really do.
David:That's a financial plan. What other kinds of plans are
Mike:there then? I don't know. Okay. There are there are
David:very
Mike:technical plans. There are simple plans.
David:Uh-huh.
Mike:There are plans through software that you can pay for. There are plans that are in your Excel sheet. There are all sorts of different plans. A plan is just basically the futile attempt of predicting the future.
David:Okay.
Mike:What you need to know is based on a modest portfolio, do the numbers work out?
David:Modest meaning that we're we're we're being modest in our projections of what the gains might be?
Mike:Yeah. So the S and P 500 is the benchmark everyone wants to hit even though most people can't hit it.
David:Mhmm.
Mike:K? Well, let's say you put 60% of your assets in the S and P 500. Don't do
David:this. Okay.
Mike:Don't do this. But if you do that and then you put 40% in bond funds, k, you're probably not gonna get the eight to 9% that the S and P historically averages. I think it's at, like, 10% now. You're not gonna get that. You're gonna get maybe six, maybe 7% on average.
Mike:Probably on more on the six side because why bond funds will average around two, maybe 3% if you're getting junk bonds.
David:Okay.
Mike:Which are called high yield bonds. That's how they sell them.
David:Alright.
Mike:So so why why that portfolio? Why won't you just take the 10%? Well, the 10% is volatile, and if the markets go down and you take income, you accentuate your losses. So the bond funds are really intended to be there as kind of your stability factor, your governor. It's like why you can't race golf carts.
Mike:They make sure you can't drive them too fast. Uh-huh. So and could see, you know, the guardrails on roads, the the thing in the the strap that's in the roller coaster. Uh-huh. The bond funds intend to smooth your ride out.
Mike:It's not guaranteed. It's not protection. It's just it's a governor. That's it. So the point being is you cannot predict the future.
Mike:So to assume that your plan is perfect is asinine. I've met too many people, and it's almost always the same. It's either an engineer or someone that was like a CFO at a company that just that they they model risk, and they just say, I can't take market risk. And so what do they do? They ladder out twenty years of bonds, not bond funds, of bonds.
David:Okay.
Mike:They say, I have no market risk. I don't need you. And then I say, why did you call? Uh-huh. I need some tax planning.
Mike:Okay. We can help you with that. Yeah. But what they fail to see, and it's not that they can't see it, it's that they they don't want to see it, is that just because they got rid of market risk in their plan
David:Mhmm.
Mike:They failed to plan for inflation risk.
David:Okay. And so if you're laddering out twenty years in just bonds, you the bonds won't keep up with inflation. Is that what we're saying?
Mike:No. They're they're growing at a fixed rate.
David:Okay.
Mike:So inflation is when the market runs too hot. It's when the market grows too fast. If the market grows too fast and you're growing at a fixed rate, you miss out on the growth.
David:Oh, right. Right.
Mike:So that's like saying, hey, David. You're gonna get a salary, and your salary is gonna increase by, let's just say, don't know, 3% every single year, and that's it. And you're not allowed to change your job. You're not allowed to develop a different skill, and you're not allowed to really do anything. This is what you're going to do for the next twenty years.
Mike:And then halfway through those twenty years, inflation gets out of control. You say, hey. Can I get a raise? I say, no. And I just pocket the extra money.
Mike:You'd be pissed.
David:Yeah. I don't wanna be locked in. I wanna participate in
Mike:Yeah. Gains.
David:Yeah. Profit sharing.
Mike:Well Yeah. But think of it, like, when inflation gets out of hand, like it did recently over the last five years, everyone felt it. And what did they do? They either renegotiated their salary. Mhmm.
Mike:Hey. Inflation was 30%. I need to make more money, or I need to find another job. Right. And then the boss will smugly say, oh, you know, we're a good culture or what whatever.
Mike:You know, we're a family. You can't leave us. And they guilt trip you, and then you go find a new job. And now you're making the appropriate amount of money based on the inflationary rate.
David:Mhmm. So you can buy those eggs, those pasture raised eggs.
Mike:Yeah. So you can, like You can afford eggs.
David:Cost a lot. Yes. They do.
Mike:But do you see my point? You don't like, think about the income that you made in the eighties, the nineties, and early two thousands.
David:Right.
Mike:Now think about what you need today. Yeah. Very different situation. So and you could say, well, I factored in inflation. You factored in probably a two or 3% inflationary rate, which should be fine.
David:Yeah. Under normal circumstances, that's a decent guess.
Mike:But it's not a guarantee. Yeah. Because between 2020 and 2025, really, could even say 2023 or so
David:Mhmm.
Mike:Inflation grew as, like, 30%. That's rough. That's not 3% every year. That's 30% in in a couple of years.
David:Mhmm.
Mike:So what do you do? Just tighten the belt and deal with it?
David:Right.
Mike:There's a reason why you wanna have some assets that are protected, they can get you through the market crashes, and some assets that are in the market to hedge against inflation. You gotta have the best of both worlds.
David:Yeah. Do you you you combine those strategies and then you have some flexibility to to move or recover or what have you. Yeah. Is that right? Okay.
David:Yeah. So minimize the importance of a financial plan. Did we answer that? Do you minimize that?
Mike:It's don't bank on your plan. Understand your strategies.
David:Okay.
Mike:That's what matters, is having a couple of strategies that you can implement in any given time. You're not locked into one strategy. You've got multiple strategies available to you because the plan's gonna need updates. You're gonna use different strategies along the way, and you're gonna need different investments and products to implement those different strategies. Life is dynamic, and so should your implementation of your plan.
Mike:Let me say it differently. If you ever go on, like, a 50 miler hike
David:Mhmm.
Mike:You have your plan, you kind of know in these moments, you're gonna you're gonna go like crazy. In these moments, you might just hike a day or two or a couple of miles in that day because you've got difficult terrain. But you map it out. And then halfway through the weather changes. So well your hiking routes.
Mike:So well your your trajectory, so well the amount of miles you do in that day. Things change. Yeah. You've got to have the flexibility to change along the way. And the problem I have found is you're either all at market risk and you're reactive to whatever happens, or you're all rigid and you're having to deal with whatever happens.
Mike:In both situations, you are letting life happen to you. That's a disadvantaged position. Whereas you could be more dynamic, and when the markets do this, you take advantage of it in that way. The markets do that, you take advantage of it in this way.
David:Mhmm.
Mike:You wanna have those abilities.
David:So if you're if you're an NFL team and your starting quarterback goes down, you're not probably not gonna have the same plan next Sunday, are you?
Mike:I probably.
David:Yeah. Yeah. You're you're gonna you're gonna have to plan differently because this What's other
Mike:Andy say about that?
David:Yes. Well, just ask the Denver Broncos about that recently. Yeah.
Mike:Sorry, Broncos. Not sorry, really. But that that's a legitimate question. When the unexpected happens. I mean, in retirement, when your health goes down, what are you gonna do?
Mike:When your medical bills go up, what are you gonna do? When tax laws change, what are you gonna do? When the markets go up, what are you gonna do? When the markets go down, what are you gonna do? And I can, you know, get on this podcast and say, well, here's some ideas.
Mike:And I'd be happy to share them. I mean, I'll share some right now. Why not? But it's not necessarily what's right for you. It's it's like, you know, think of all the ingredients you could cook with.
Mike:Knowing which ingredients you wanna use is important. Right. So generally speaking, I think it's nice to have the first two or three years guaranteed income.
David:Do you have first two or three years of retirement
Mike:guaranteed income? Retire next year Uh-huh. So it's 2026, then just buy a CD or a treasury that's mature. So January 1, you know your income comes from that treasury, and that's kind of the just you've you've got a fixed rate product, whether it's a treasury, a CD, or a MYGA. MYGAs are typically two plus years.
Mike:CDs are typically less than a year. But just have your first year income come from a very predictable source.
David:Okay.
Mike:That way, if if you I mean, you just you decide to retire. If the markets go down, you're like, well, whatever. Mhmm. This is a fixed rate product. And then in year two, maybe that's a fixed rate product.
Mike:So the first two years are there. So if the markets crash, you've got two years for the recovery. And then maybe you decide you want more flexibility. Maybe you buy a fixed index annuity that has a five year period certain. This is a very rare clause in most annuity contracts.
Mike:But in some contracts, you can have, you know, the the S and P 500 gains. And I'm not quoting a particular product. I'm just saying, you know, what if you get up to eight, nine, or or some sort of percentage, but there's no downside risk? That's a nice way to still try to outpace CDs and treasuries and so on for the next couple of years, but know that you can't go backwards. So it's still principal protected.
Mike:Then if the markets go down in the fourth year or the seventh year, because you don't know when they're gonna go down, You turn on the five year period certain, and now you've got laddered income, kinda like it turns into a CD ladder. It's not an incredible rate, but it gives you that protection for five years, which gives then the rest of your portfolio ample time to then recover. You don't need to time the market. You need to say, oh, the markets are down 40%. How am gonna take income next year?
Mike:I guess I'll just take this for the next five years and let my other assets recover.
David:Mhmm.
Mike:That's not timing the market. That's just addressing current market conditions and different ways that you could hedge against a market crash. So it's and this is just tip of the iceberg of the different strategies you could implement. There's over 10 ways you could take income in retirement. Which way is right for you?
Mike:What combination is right for you? Yeah. But notice how you do need to put a plan together. Does one plus one equal two? That's the first part of it.
Mike:Then you need to explore which strategies are more important to you. Is it more hedging against market risk? Are you more concerned about inflation risk? Are you more concerned about health care risk? Or whatever the risks might be.
Mike:Then you pick out the appropriate investments and products that allow you to implement those strategies based on the guidance or trajectory of the plan. That's it. You cannot engineer a plan perfectly. And I think sometimes we fail to understand the diminishing returns of trying to get the plan just right because we're concerned and don't understand strategy. You win by strategy.
Mike:You don't win by the plan, in my opinion. That's all the time we've got for today's show. If you enjoyed the show, tell a friend, leave a rating, and subscribe to us wherever you get your podcast or on YouTube. The best stuff's on YouTube. And as always, go to retireontime.com for the book, the workbook, the workshops, and many more calculators and resources that can help you plan to retire.
Mike:As always, thank you for spending your time, your most precious asset with us today. We do value it, and we're excited to see you in the next show.