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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.
Don't get hung up on averages. Labor over the details of different sections of your plan, and then acknowledge market growth and market potential and inflation. Welcome to the Retire On Time podcast. I'm Mike Decker here with David Franson from Kedrick Wealth. This show's all about answering your questions.
Mike:We wanna get into the nitty gritty and not just go over the oversimplified advice you've heard hundreds of times. As always, text your questions to (913) 363-1234, and we'll feature them on the show. Just remember, this is not financial advice. Consider it educational, eye opening, raising your awareness, good information. David, what do we got today?
David:Hey, Mike. How can you claim that a lower average return can grow your money overall?
Mike:Many times we gloss over in finance the deception of averages, Thinking that if if it averages this amount, that your money will track that amount. And it's just not true. So important fact, k, let's say you've got let's say you've got 5% over five years.
David:Okay.
Mike:5% over five years return. You bought a a MYGA or CD or whatever.
David:Mhmm.
Mike:I'm not saying that's what the current going rate is. I'm just using this as an example. K? You got a MYGA, five years. Let's say six years.
Mike:K? And but it's growing at a 5% rate. Okay. That's not that bad.
David:Mhmm.
Mike:What if though, instead, you bought either a buffered ETF or a fixed indexed annuity, their index products, and they gave you, let's say, eight or 9% for the first two years and then like 2% over the next couple of years, Which one would you take? Well, the five percent's a higher average. But because the first the the buffered ETF or the fixed indexed annuity, if they were purchased correctly and and you're able to do an annuitization schedule or something like that, they would the first two years, the cash would advance or grow at a faster rate. So it kind of like it's like in a race, it jumps ahead. Mhmm.
Mike:And then the the, you know, the turtle what is it? Tortoise and the hare?
David:The hare
Mike:and the tortoise, whatever. Yep. The the turtle never actually catches up in this situation because the the 99% or 88%, and then the growth at a lower rate, you're still way ahead from a cash value standpoint. So even though it's a lower average, you have to remember that each year, the percentage is based on the dollar amount. Let me see if I was that did that even make sense?
David:Let's attack it a different way.
Mike:K. So in year one, let's say you've got a million dollars. Alright. One's gonna grow at 5%, one's gonna grow at 9% in this particular year. K?
Mike:Million dollars, 5%, what? $50,000?
David:Okay.
Mike:K? The 9%, you've got $90,000. Okay? Alright. You with me so far?
David:I got that image in my head.
Mike:K. Makes sense. One is $40,000 ahead. Oh, yeah. Now the next year, you're gonna have a percentage of growth on that.
Mike:K? You with me so far? Yeah. Not a dollar amount. It's a percentage of growth on the dollar amount.
Mike:So if you had 5% for both, who's ahead? Oh. The the 90,000
David:Yeah.
Mike:It's 40 thousand ahead. So the additional 40,000 is growing at a better rate
David:Mhmm.
Mike:Because the percentage is applied to the dollar amounts.
David:Okay.
Mike:So one way you can lie with statistics is by glossing over the dollar amounts and how it advances or or goes down by just looking at the average percentages that washes out the dollar advancements or retractions, if that's the right word. So do you see how it's it's about the dollars and each year how the dollars are affected.
David:Okay.
Mike:So 5555%, you know exactly what you're gonna get. 9922%, well, you advanced further, faster, and so you're way ahead. So and this really boils down to a point that I make often in that if you're going to retire tomorrow, you may want to create growth predictability for a part of your portfolio and have one to three years or so of you know exactly what you're gonna get. A CD ladder, a treasury ladder, or a MICRO ladder. K?
Mike:Let's say four or 5%. You know exactly what you're gonna get there. And then maybe a part of your portfolio then is just ready, you know, we call the bear market reservoir. Right? If the markets go down after three or four years, that there's a part of your assets you can tap into that are principal protected, but they can't go down.
Mike:Mhmm. But you could tap into income and it provides income for three to five years. You with me so far?
David:I am.
Mike:So it's a second second wave of income options. Right. But during those first three years, they had more growth potential. So instead of just laddering out seven, ten years and I've seen I've seen twenty years of a bond ladder. Mhmm.
Mike:Instead of laddering all out in very fixed numbers, you have your second wave of income coming from index numbers, whether it's buffered ETFs with the max or max buffer. That's not principle guaranteed in that buffered ETFs can lose money. If the markets go down, let's say, 60%, you might lose 10%. I'll be very clear about that. Only really fixed index news can have a 100% guaranteed on the downside.
Mike:But how often does the market go down 50% or more in a twelve month period of time? I can think of, like, maybe two times in a hundred years. Oh. So not likely, but it is possible. Anyway, so if you have something that can grow slightly better during those first three years, your dollars have a chance of advancing at a greater rate, which then gives you more money potentially.
Mike:It's not guaranteed for then year four, five, six, and seven.
David:Mhmm.
Mike:So do you see how you're kind of sectioning off Yeah. Different amounts?
David:Yeah. So the the ones that have the very consistent, like, 5% returns every year, they're they're just going steady, and they never have a chance to, like, catch up to the ones that jumped out of the gate really fast.
Mike:If the markets are up.
David:Oh, okay.
Mike:If the markets are down, it would have been better to buy a fixed account. And so therein lies the conundrum. We don't know the future of the markets. K? But even if the year one, the markets tank and you got a zero and then you got nine nine or whatever the 77%, you still can make up the difference.
Mike:Oh, right. It just it's it's a it's a understanding of growth potential and the risk you're taking and does it make sense. Uh-huh. So there's different ways to strategize with that, different ways you can blend different investments or products to make that happen. But the point being is don't get hung up on averages.
Mike:Labor over the details of different sections of your plan, and then acknowledge market growth and market potential and inflation. And that's kind of the key component here that when I talk about this, I'm really trying to hit home. Mhmm. If inflation gets out of control again, which it could, no one knows if the tariffs are gonna have some delayed inflationary issue or if they won't. No one's gonna know if Trump gets elected.
Mike:I shouldn't say Trump gets he already got elected. If if Trump elects or nominates who's the guy? He said it recently. The name slips my mind.
David:Anyway. Another treasury secretary?
Mike:The new Fed chair.
David:Fed chair. That's what
Mike:Scott I Besson, I think, is gonna stay as as secretary sec treasury secretary. But, no, the new Fed chair has already been floated as the possibility. Now whether it's him or not, maybe he's just playing a game with the media, getting a response. Who knows what's in his head? But Sure.
Mike:If this person, whoever it ends up being, goes into the Fed and drops interest rates quickly, that could create hyperinflation. You know what really hurts when you have hyperinflation? Fixed products.
David:Because they can't they're they're stuck. They're static, and so they can't adjust at all.
Mike:They don't yeah. Inflation's when you run the economy too hot. So the markets are going up like crazy, but you're stuck at a fixed rate.
David:Oh, right.
Mike:So this is where balance comes into play as well. You don't wanna, in my opinion, set up, you know, twenty years of a bond ladder because of inflationary issues. Now five years of income
David:Mhmm.
Mike:No problem. Because that would require you to or suggest that you would have other assets in the market that would offset the inflationary risk. So again, the the question, the details, what matters is pay close attention to the annual return that you get or the sequence of the return that you could get, for better or for worse. And then also pay close attention to how the cash value increases or decreases. And if you wanna go on Excel or Google Sheets or what's what's Apple's got
David:Numbers.
Mike:Numbers.
David:Yeah. Does anybody really use that? It looks nice,
Mike:but Yeah. Yeah. Whatever your your sheet is Yeah. To run numbers, play with it. I highly encourage people to play with it and run different numbers in different scenarios, and then look at the average return of the the percentages that you put in there, and then look at how the dollar amounts may not match up with with the average returns.
Mike:Sometimes they do, but when you have some big drops or or large swings, then things start to get out of place, especially if those are in the early part of the the scenario. So be careful about being deceived by averages. Look at cash balances. Look at your your income strategies. If you don't do the lifetime income, which we typically don't recommend that you depend on lifetime income.
Mike:We have clients that do buy it. It's more of just stability, helps with with the baseline. Got it. No problem there. But but for those that really follow what's taught in the book, the the bear market reserves.
Mike:Okay? Mhmm. A lot of it hinges on having the first couple of years guaranteed fixed rate easy. The second wave is more able to absorb inflationary risks, and that's with buffered ETFs, indexed annuities. For the younger people, you might be able to use a cash value life insurance policy if it's funded correctly, if the death benefit is as low as you can make it so the cost of insurance is low.
Mike:Lot of nuance with that one. But there are a few products that would work in that dynamic situation, but they can work. But just don't get hung hung up on averages. Cash advance. Not cash advance.
Mike:The cash growth. Yeah. We're not a lending company here.
David:No. No. Cash advance. Cash advances are very rarely good. Right?
Mike:I don't think yeah. It's predatory lending.
David:Yeah. Let's stay away from that.
Mike:The the cash value and how it how it grows. That's that's well said. There we go. Thank you for for enjoying the show. Don't forget to like and subscribe.
Mike:It helps the channel as the channel gets bigger, whether it's on YouTube or wherever you subscribe to us via podcast, that helps us, which then in returns helps you by giving you more resources and so on. So make sure to tell your friends, like, and subscribe. If you want help putting your plan together, whether it's with one of our workshops and or individual attention, you can always go to retireontime.com and click the button that says discover what's possible to get yourself connected with the right solution for you. As always, from all of us here at Kedric Wealth, we wanna thank you for spending your time, your most precious asset with us today. We'll see you in the next show.