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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.
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. Now that said, please remember this is just a show.
Mike: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 this duty today is my esteemed colleague, mister David Fransen. David, thanks for being here today.
David:Yes. Hello, Mike.
Mike:David's gonna be reading your questions, and I'm gonna do my best to answer them. You can send your questions in right now to 913-363-1234. Once again, that's 913-363-1234. Or email them to hey mike@howtorettime.com. Let's begin.
David:Hey, Mike. If the S and P averages 7%, then why would I not just put all my money in an ETF and take 6% each year?
Mike:No. I think I know where this question comes from. Uh-huh. Yeah. There there's a a TikTok video that was also on Instagram and YouTube reels or what all the different social
David:pushed out everywhere. Right? Yeah.
Mike:There was some alleged financial adviser, former portfolio manager that, solved retirement planning. He solved it.
David:Okay.
Mike:We don't need to be on the air. It has been solved. Everyone can go home Yeah. And that's it.
David:Nice knowing you.
Mike:Yeah. So if it is what I think it is, let me for all those who haven't seen this video, break it down. K? This video, which allegedly was from a quote, unquote experienced portfolio manager with 20 years of educational experience, which by the way, the if you look at his resume, spoiler alert, it was mostly in, like, English literature.
Mike:I looked at his resume. Those 2 people in his name according to broker check. And one person worked for less than 1 year in the industry then was gone whether he got fired or quit. And then the other person worked for 8 years at a firm that offered high yield mutual funds. But all that doesn't matter.
Mike:Right? This person solved retirement. Here's what he said. And by the way, don't do this. This is not what I'm recommending.
Mike:I'm just reiterating what he said. He said, if I had $3,000,000 well, first off, not everyone has $3,000,000, but I digress. If I had $3,000,000, here's what I would do. In his words, I'd put $2,000,000 into an index fund that tracks the s and p. Okay.
Mike:So he's alluding to buying s p y or v o o, but he can't say that because he's not licensed anymore or whatever. And then you'd say I would enjoy a small dividend around $25,000, Which is true. If you buy the S and P, you're gonna get a smaller dividend, but that's okay. Then I would put, in his words, the 500,000 into blue chip stocks. If you're unfamiliar with the term blue chip, it really means a good dividend stock.
Mike:Kinda like the aristocrats. You can Google that aristocrat dividend stocks. It's a a bunch of stocks that typically offer a good dividend. Okay?
David:Okay.
Mike:And of the 500,000 with good dividends, let's say they're giving you a 4 or 5% dividend each year, that'd be about $25,000. Okay. So and then you would put 500,000 into money market funds to get another 20 to $25,000, you know, around 4% based on today's rates. And then he says, why and I wouldn't wanna live off of $75,000 a year based on these dividends. So he would spend down his principal, and this is based on the 4% rule, but he goes one step further.
Mike:He says, I would dollar cost average every month out of my my $2,000,000 portfolio that's in the, the S and P in one way or the other. So I would take half a percent from my portfolio every month to quote unquote dollar cost average out of my funds, which is around 6% each year. So not 4%. Apparently, he's telling the world, you can take 6% out of your portfolio and be fine. Now, according to his philosophy, he's living off of $200,000 a year.
Mike:And in his words, he said this in the video. And never run out of money. Which, by the way, if he were licensed and a regulator saw this, he would get raked over the coals.
David:Oh, boy.
Mike:I mean, it would be it would be mayhem for him. Not like in the playful way, like those Allstate commercials.
David:Like,
Mike:it would really be mayhem to go on any media and say, I have figured it out, and I have solved retirement, and I can guarantee that you'll never run out of money. That is not possible. And if you look at the little disclosure, by the way, there was, like, in small text, the bottom right, Educational only, not financial advice. But in the comments, they're going, this is such great financial advice. Yeah.
Mike:So this is the crap that people listen to, or that the younger generation is telling their parents or their grandparents about retirement. And it's so oversimplified. Let me go back through what he said and break down the risks that were just completely omitted. I mean, it it it's a gross oversimplification, and I'm being nice about that.
David:Okay. Yeah. Break it down for us.
Mike:Yeah. First off, $2,000,000 in an index fund like the S and P 500. That doesn't guarantee growth. What it does is it says you've put all your money into equities. Equities have more risk than most other asset classes.
Mike:These equities also stocks. And he assumes that you're gonna get 7% each year. Well, you don't always get 7%. And if it was, you know, let's say 1 year it was like 5% or 6%. A couple of the other years it was like 789%.
Mike:It was within a small range. That would be a completely different thing than the historical averages of the last 120 years. Uh-huh. K? Let me just play this out real quick.
Mike:We're talking about sequence of returns. Let's say that you're you're suggesting or you're expecting an average of 10%. Some people are because over the last, let's say, 14 years, it's been really, really good. So let's say you're expecting a 10% average return on your portfolio. In year 0, you've got a 100,000.
Mike:In year 1, you've got a 110,000 because that's what you would get with a 10% gain. And then in year 2, you would have a 121,000 because it's that that's the dollar amount that's increasing by 10%. Are you with me so far?
David:Yeah.
Mike:K. So what if in year 1, you had a 30% loss and then in year 2, a 50% gain? That is still a 10% average return. Let's look at the cash value. A $100,000 with the 30% loss, you're now at $70,000.
Mike:And then in year 2, that 50% gain, you have a $105,000. Not a $121,000. You have a $105,000. So and I'm gonna try to make this as simple as possible. The variation or the range at which the S and P or equities or stocks can grow, that matters.
Mike:It's a gross oversimplification to say, well, it averages around 7%. So you can kind of just buff out all these things that could happen in the market. No. You can't. That matters.
David:Yeah. Are you with me so far? Very much. Yes.
Mike:Now there's a few other things that you need to understand too. And that's that if you take money out of an account that has lost money, you're not taking your 6% or 4%. You're accentuating the losses. So just for quick math, let's say your accounts go down 30%. Because historically, that's happened, what, every 7 or 8 years?
Mike:For the last 120 years. So assuming that that continues. Yeah. If your accounts go down 30%, it would require a 43% return to break even. So it's harder to get out of the hole.
Mike:If your accounts go down 30%, and you take out 4% of your portfolio accentuating the loss, you're now down 34%. Not that big of a difference, but now you have to have a 50% return to break even. 50. So this idea that, oh, well, if the market average is 7% and I take out 6%, I should be fine. No.
Mike:It's not that simple. Yet this is the the crap that you get on social media to almost fame to the idea that, hey, you're smart enough to to buy indexes. You can get a Robinhood account. You can get a Schwab account. You can get It's really easy to buy it.
Mike:You don't need anyone to guide you or help you manage these risks. That's It's a huge risk to assume your own competence when you're not you don't know the right questions to ask. But wait, there's more.
David:Oh, tell us.
Mike:Is that is that Billy Mays that says that? Probably. But wait, there's more. So in addition to that, did you know that the equities market can go flat for 10 plus years at a time? Now you're assuming a 7% average return, but what if you get the 7% average return after 10 years of no returns?
Mike:Hear me out on this. Let's say in a 20 year period of time, the 1st 10 years, 0 returns. The second 10 year period of time, 14% returns. Would you be okay? No.
Mike:No. No. So these are called flat market cycles. If you look back 2,000 to 2,010, no returns in the equity market. Generally speaking, right, you can cherry pick data, but let's look at that as a whole.
Mike:Let's take the S and P 500. That's the benchmark people use. 0 returns for 10 years. 1965, 66, depending on how you look at it, another 10 plus year period of no returns. 1929, another 10 plus year period of no returns.
Mike:So this idea that, oh, the market's average 7% and the long term, you should be fine. Yeah. If you don't touch it.
David:Yeah. Right.
Mike:But if you're touching it, it changes the game. It's not dollar cost averaging. That's a feature that's a benefit for investors as you're putting money into the market. When you're taking money out, it's not dollar cost averaging. It's called sequence of returns risk, and it hurts you.
Mike:But you need income in retirement, so you had to think out somehow. This is why I talk about the reservoir strategy. This is why I talk about the importance of principal protected accounts. Not all of your assets, just enough to get through these market crashes because that's how you curb this problem. But he doesn't talk anything about that.
Mike:No. By the way, I wrote an article in Kiplinger about this. Oh, gosh. What was it called? Retirement risks or risks that many retirees don't know exist.
Mike:Do you? Something like that. You can look me up. Mike Decker Kiplinger. I wrote it in January 24th this year, 2024.
Mike:Look that up. It illustrates this idea that you can't just assume a conservative rate of return and you'll be fine. It's more complicated than that. Goldman Sachs, by the way, you ever heard of them?
David:I have heard of them. Yeah.
Mike:Yeah. They they know a thing or two about finance.
David:Kind of a big deal. Yeah.
Mike:Yeah. Sounds like Ron Burgundy.
David:Yeah.
Mike:Kind of a big deal.
David:Who I had in mind. Yes.
Mike:But, you know, say what you want about Goldman Sachs. They're smart. Yeah. You know, there's a reason why they have the prestige that surrounds them. I don't work for Goldman Sachs.
Mike:I have no affiliation with Goldman Sachs, but I respect Goldman Sachs and the research they put out. Yeah. And they're now saying, confirming my bias, they're now saying that there could be a flat market in the next 10 years. Mhmm. Not within the next 10 years of starting.
Mike:That's they're saying the next 10 years could be flat. So anyone that took this TikToker's advice and just put it all in s p y or v o o is at significant risk of making their money not last long enough. But no one knows the future. These things matter. Now let's talk about the blue chip stocks for a second because he doesn't cover this at all.
Mike:Do you know dividends can just stop?
David:I think a lot of people might not know that. That might be a surprise.
Mike:They're not required by law to pay. Yeah. They just pay dividends to to get people to keep their positions. So, like, is Coca Cola a growth company? No.
Mike:They're just kind of a tried and true steady Eddie, good quality blue chip stock that pays a reasonable dividend. Yeah. That's it. They can stop their dividend. Walgreens and CVS used to be kind of good dividend stocks.
Mike:Those dividends are gone, and they're not coming back anytime soon based on what I understand and I've seen. So what happens if you're expecting $25,000 in dividends and then they just stop for 2 years because of market conditions? What are you gonna do for income? You're gonna sell your dividend positions? Well, then how do you get the dividend back when you need it?
Mike:And then the 500,000 in money market, that's kind of funny because it assumes you're gonna get 4% in in perpetuity. Well, this is called reinvestment risk. What if your 500,000 money market goes down to 1%? Are you gonna go to dividend stocks? Well, what if the dividend stocks stop paying dividends?
Mike:Are you gonna go to growth stocks? I mean, if this is all happening, it's probably because of a difficult economic situation. So what do you do? I mean, this is a singular strategy that puts the blinders on and says, you know, the markets just work. And this is the problem with young investment advisors.
Mike:I know I'm 36 years old. I know I'm quote unquote young, but I do my research. And you have to know either you have to either do the research or you have to have lived it. So either you have the 50 60 year old advisors who are probably gonna retire with you. That's a problem.
Mike:Or you've got the younger people who don't even know this stuff exists because they haven't lived it. I didn't live the flat decade. I was trained by 2 very smart I should say 3. I had 3 mentors all in their late fifties, early sixties. They are very smart individuals that all suffered through the the lost decade.
Mike:And they told me point blank, don't get greedy. Don't assume, you know, this is a hubris exercise. Don't assume that you could outsmart the market, that you could time the market. The markets trend. You can't control the market.
Mike:You diversify the strategies. You diversify in multiple asset classes because you don't know what's gonna happen in the future. So I got lucky not starting at a big brokerage firm that just says sell these mutual funds. I got lucky that I didn't start as an insurance agent saying just sell these annuities. I got lucky starting with good mentors who were independent and showed me this.
Mike:And then I continued the research on and even was able to teach them a few things, which was kind of fun. Yeah. Anyway, I digress. No. This this oversimplified strategy of just buy the s and p, which is constantly talked about.
Mike:The Wolf of Wall Street went on Tucker Carlson and said just buy the index and you'll be fine. He's right for younger people trying to grow their assets, but for retirees the game changes. Am I saying go buy an annuity and just turn on the income? No. I am not.
Mike:And for anyone that's read my book, you'll know why. I like growth and flexibility. Mhmm. But you can't have your cake and eat it too. And having all of your assets in growth with equities and maybe a few a little bit of money market isn't enough.
Mike:It's more complicated than that. And by the way, this isn't my opinion. This strategy he's talking about is called the 4% rule. Those who sell stock and bond fund portfolios love the 4% rule. Those who sell annuities hate the 4% rule.
Mike:Okay? Here's my my opinion. It can work in moderation if you have a strategy for up markets, down markets, or flat markets. It can work as a rule of thumb, but the actual implementation from a position of rigidity that you can only draw 4% each year. It's not true.
Mike:If you look up William Bangin's actual commentary on this, he said it was just a rule of thumb starting point. But people took it and created almost this monster out of it as a sales tool to sell people what they wanted to sell and to rationalize it by this this ideology that just kind of got distorted. Mhmm. And by the way, Stanford have you ever heard of Stanford?
David:Are we talking about the university?
Mike:Yeah. Yeah. You've heard of them? Yeah. In 2008, they published research on the 4% rule and called it dangerous.
David:Oh, wow.
Mike:Here's the actual quote at the very end of the abstract, which you have to understand how to read research papers to get this. It gets very nerdy in the math. Uh-huh. But here's the last sentence. I and I think the last nail in the coffin on these oversimplified strategies.
Mike:Quote, despite its ubiquity or simplicity, it is time to replace the 4% rule with approaches better grounded in fundamental economic analysis.
David:Mhmm.
Mike:In other words, don't do it. Please don't do it. We're living longer than ever before. We're actually getting sicker and being sicker longer than ever before, which is a health care cost risk. The markets are expected to go flat for the next 10 years, which is detrimental to anyone that's retiring in the near future.
Mike:And the list goes on. It doesn't mean you can't retire. It doesn't mean you should be concerned about retirement. It means you probably need a more comprehensive plan that explores multiple strategies that diversifies your plan and the strategies within by strategies. That's a weird way to say it.
Mike:But, you know, you don't go all in a one growth strategy. You go in on multiple growth strategies. You don't just have all their assets in one asset class. You have multiple asset classes. You don't just have one tax plan.
Mike:You have multiple tax plans. And that you can dynamically adjust as the future becomes the present. That good?
David:That makes sense to me.
Mike:So here's just some some ideas. And these are the common solutions that people will gravitate towards. Remember, humans love simplicity. A friend of mine actually came up this phrase. He said it to me this morning.
Mike:I thought it was rather profound. We're in a period of time where we've omitted critical thinking. We're trying to push out critical thought and just go towards simple concepts because we're overwhelmed. Okay. Well, when it comes to your finances, it's fair to say that you're not expected to be a financial professional.
Mike:It is unfair to say that you can just watch a few videos or read a few Kiplinger articles or whatever it is. Not right for Kiplinger. Right? So I'm not trying to say they're bad. It's just you can't know what to do if you don't know the right questions to ask.
Mike:Many financial professionals, especially the younger ones, struggle with knowing the right questions to ask, unless they have the right mentorship. So here are some common solutions that people have. You could go out and buy an annuity and have guaranteed income for life. But the downsides of the detriments are there is a cost of living risk. So your your annuity that has the flat income for life, maybe it erodes and it's not worth as much.
Mike:Maybe you struggle with costs in the future. You just you the the dollar doesn't stretch as far as it used to.
David:Right.
Mike:If taxes go up in the future, they might. I know Trump was elected, but the tax code's written in pencil. Whoever comes after could put out their eraser and rewrite some tax code.
David:Right.
Mike:What how much debt do we have? 36 some $1,000,000,000,000 in debt?
David:Trillions. That's all I know.
Mike:So anything could happen. And if taxes go up, your annuitized income stream, your lifetime income from an annuity, that could go less as far. If taxes go up, your income goes down. Right? Many people fund annuities with their pretax dollars.
Mike:So the the rigidity of that is an issue. And then also some lack of legacy potential because annuities aren't really a good if you turn on the income, annuities aren't really a good source for legacy planning. You could just include some non correlated assets in your portfolio. So JP Morgan produced a a interesting study where they took a typical stock bond fund mix portfolio and then added that, I think it was like 30% in the real estate market. So alternative investments.
Mike:And they found that they could lower the volatility, the roller coaster of the returns, but increase the overall growth itself just by adding alternative uncorrelated asset classes. So there's really 6 places you could put money. Cash and cash equivalents. So CDs, money markets, savings accounts. You've got the bond market which is the largest market of them all.
Mike:You've got the equities market or stocks. You've got the real estate market so you're looking at traditional real estate, rental real estate. You got REITs, real estate investment trust, Delaware statutory trust. You know, that that's a whole category unto itself. And then you've got the insurance products.
Mike:A lot of people don't know you can buy annuities as a bond alternative, and they offer a different series of benefits and detriments. And then the alternative space, well, that includes kind of the grab all of private equity, private debt, and that's the miscellaneous category. Oil and gas partnerships, limited partnerships, and other ways. It's it's everything else. So you can have a more comprehensive portfolio.
Mike:That's one way to try and get around this. K? You could implement my reservoir strategy, which I talk about in my book. And the idea is very simple. You put some assets in principle protected accounts so that when the markets go down, you draw income from those sources.
Mike:And And when the markets go up or recover, you could draw income from anywhere. But the idea is by lowering some of your upside potential, you can significantly decrease your downside risk because you never accentuate the losses. Most people I've met though that read the book don't implement the strategy correctly. So if you read the book or if you're listening right now and you wanna read the book, make sure you request that complimentary analysis so we can show you exactly what we mean. It doesn't cost you anything to get that clarity.
Mike:We wanna make sure we connect the dots with you so that when the time is right, you can do it on your own. You can manage your own plan so that we can work in a collaborative relationship. I mean, there's there's a lot of different ways it could be sliced but that's we wanna make sure it's implemented correctly because it is complicated. And the list goes on here but don't be seduced by these oversimplified social media influencers who lack experience and understanding. These oversimplified strategies have a cost.
Mike:And that's really what I'm trying to get in this segment. It's called the Dunning Kruger effect, by the way. If you want a funny YouTube video moment, just type in Dunning Kruger, d u n n. So d as in delta, u n n I n g dash krueger, kinda like the the kruger brand, k r u g e r, effect. Some videos will will nickname it why stupid people think they're smart.
Mike:Uh-huh. It's not calling people stupid if you really understand it. It's why uninformed people or new people overestimate their abilities or their confidence because they don't know what they don't know.
David:Right.
Mike:And they can't know what they don't know. It's kind of a quagmire of situations. Yeah. 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.
Mike: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. 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.
Mike:Go to www.yourwealthanalysis.com today to learn more and get started.