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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 questions about all things retirement, including income taxes, Social Security, health care, and more. The 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. 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 cover it all. Now that said, please remember this is just a show.
Mike:It's not financial advice. If you want personalized financial advice, you can request your wealth analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today, mister David Franson. David, thanks for being here.
David:Yep. Happy to be here. Thank you.
Mike:Yeah. David's gonna read your questions, and I am going to do my best to answer them. You can submit your questions at any time during the week by texting (913) 363-1234. That number one more time, (913) 363-1234, or you can email us at heyMike@howtoretireontime.com. Let's begin.
Mike:Hey, Mike. I am in my forties. I have maxed out all of
David:my retirement account contributions for the year, and I have more money than I want to save. Where should I
Mike:put that money? Okay. So let's first address, I have more money than I want to save as a like, he has a surplus of cash flow.
David:Okay.
Mike:This typically happens towards the latter part of your career. So for example, like if you're an airline pilot Mhmm. You don't make much money out of the gate. But those last five years, you're earning exponentially more money, and there's one or two things that will happen. One is you have more cash flow, so your lifestyle inflates, and you just spend more money, or what this person seems to be doing is he has established a lifestyle that's comfortable, and is saying the excess is basically to buy the future.
David:Okay.
Mike:So you know how people say, oh, I need to do more savings. No one likes to save. Yeah. I mean, really. Who likes to say, hey, let me enjoy some delayed gratification.
Mike:Yeah.
David:It's kind of a boring, unflattering, kind of unsexual saving. Right?
Mike:Yeah. But if you think about buying your future, money is literally buying time.
David:That reframes it, doesn't
Mike:it? Yeah. You are serving someone in your occupation to receive money
David:Mhmm.
Mike:So that someone else in the future can serve you. It's just a matter of, you know, do you want them to serve you tomorrow or the next day Okay. Or in five years or ten years? And if you take that money and invest it, then, well, you might have more that you can enjoy in the future. So they're in their forties.
Mike:Yes. They have excess money, and they wanna be proactive about their retirement.
David:Yeah. It sounds like wants to buy his future, and he's invested it all in the market that he
Mike:can in in his qualified accounts. Yeah. The four zero one k, which you have a max on. Yeah. So people immediately think, okay, I need to invest it.
Mike:Uh-huh. That is the wrong thing to think about No.
David:Tell us why.
Mike:No. It's a financial show. Why don't you encourage people to invest? No. Hold on.
Mike:Alright. What does your plan say? If you're in your forties, you're kinda getting closer to retirement, fifties or even closer. You can start putting together a plan, and then put the timeline together. Do you wanna retire at 50 years old?
Mike:Could you afford it? Could you retire on time at 55 years old, at 60 years old? When is that moment going to happen? Because where you invest, and how you invest will be predicated on your timeline, on what you want.
David:Yeah. What do you mean by that?
Mike:Yeah. So if all of your assets are in retirement accounts, so IRAs, Roths, four zero one k's Uh-huh. You can't touch it until you're 59, or you can separate employment at 55 or later, and then take some out of your four zero one k, but you can't have it out of your four zero one k. You can't roll it over. Like, you have to.
Mike:There's all these rules about it. So if they have excess money, well, where does it need to go? What do you want to do? And then what risk are you willing to take? So let me let me explain that a little bit differently, and I'm gonna be a little facetious here for everyone that's listening to the show, you know my whole book was written about not buying an annuity and turning on lifetime income.
Mike:Yeah. So if he's in his forties, and he's like, hey, I really like this guaranteed income for life business for whatever reason. Mhmm. Which is fine if that's what you like. I I recognize some people really like that.
Mike:We just don't really subscribe to something like that. But let's say he's like, oh, I've got extra money. I'm gonna buy a bunch of annuities, so that later on when I retire, I can turn on this guarantee for life income. Sure. Your income is gonna be pretty low if you turn it on, if you could turn it on, depending on what asset you're doing in your mid to early fifties.
Mike:That can be a problem, and an annuity you can't tap into until you're 59, because it's technically a retirement product. Now, yeah, there are things in the IRS code like 72 t, 72 q, you know, ways to get around it, but it's very limiting on your cash flow. And if you're gonna retire at 50 years old, you probably want some flexibility. You wanna do something with your time. Time's your most precious commodity.
Mike:So do you see how the asset, the risk, how you're kind of putting this all together? It's the plan first. So if you're in your forties, when do you wanna retire? That will help dictate then what you put your money into. Second thing, taxes.
Mike:Okay. How much income do you want in retirement? If your income's gonna be around, I don't know, $60.70, 80,000 in total gross taxes, then taxes may not be that big of an issue. But if you want more income in retirement, you're gonna be going into higher tax brackets, maybe you should be investing in something that would allow you to enjoy long term capital gains. So you're getting taxed at like a 15% rate instead of the 20 to 25% effective tax rate.
Mike:That's a 10% tax difference.
David:Yeah. That could be significant.
Mike:Another thing on this is when you look at your forties, where should you invest? Look at your life insurance. Now a lot of people in their forties will have term life insurance. Why? Because if you're 40 years old, and you wanna retire, let's say 60 years old and you die, in your highest income earning years, the surviving spouse has a significant disadvantage to try and figure out how to bridge that gap.
David:Oh, right.
Mike:So a lot of people will have term life insurance up to or close to the day they wanna retire. And then the day you wanna retire, you should have enough money, you don't really need to pay for term life insurance.
David:Look,
Mike:I cannot say this emphatically enough, Okay? Okay. But for whatever reason, it doesn't seem to get through to people. Insurance is not an investment. Uh-huh.
Mike:Could I say that more clearly?
David:I think we heard it.
Mike:Have I confused you in any way?
David:No. No. Well, tell us why it's not
Mike:in our get rich off of insurance products?
David:Oh, wow.
Mike:No. Unless you die. And even then, if you tried to die Yeah. And like it was premeditated, the insurance company might say, well, no. That counts as against our clauses, and so we're not gonna pay you out.
Mike:Yeah. And the reason why I say this is there are so many agents that will manipulate permanent life insurance as a way to quote unquote get rich quick or whatever. I've seen many many posts. I think permanent life insurance is going back through regulatory scrutiny for a number of reasons, because it's being manipulated to portray as something that they're not. Oh.
Mike:Actually, in fact, I went to a quote unquote tax planning workshop a couple of months ago. Do you know what it was? I don't know. How to sell life insurance? I went, this is a scam.
Mike:And they said, no, it's not. And then they quoted their numbers and said, yeah, you manipulated the numbers to do that one thing. And then you took a flat market cycle saying that that's always gonna happen. It doesn't. It only happens every twenty years or so, and even then it's unpredictable.
Mike:If you look at a twenty year standpoint, it's still anyway, they'll manipulate the numbers and say, look at all of this extra benefit that you got your kids because you bought life insurance. Well, let's just pause real quick and just ask one simple question. If it's that good, why are insurance companies offering it? They don't have a special market. They don't have any proprietary way to invest into the stock market or buying special contracts.
Mike:I mean, they might get a slightly better deal, but no, you're not gonna manipulate your death benefit to win over some grand prize. If you do a proper analysis at your life expectancy, you might have a 5% IRR, internal rate of return, on your death benefit. It's not competitive if you live to the normal life expectancy. And if you live longer, it's even worse. As in, I've seen policies where it's like a 2% internal rate of return or return on your investment, basically, a more accurate number to record on that.
Mike:So let me say, David. Hey, David. Yeah. Do you wanna buy a massive life insurance policy today so you can get rich, grow tax free, and in your nineties, you'll know that you made around a 3%, let's say. I'm just throwing out arbitrary numbers here, but 3% every year.
Mike:Wouldn't you feel great about that?
David:I don't know if I'd feel that great. I don't know. I don't think so. 3%?
Mike:There's very strategic blind spots that people put when selling life insurance. Uh-huh. And they'll look at how much less you paid in taxes, but they don't compare the actual end of life comparison. It's just this crap really bugs me. So I go back to this person in the forties, they probably have term life insurance.
David:Which is appropriate when you're younger.
Mike:Yeah, it's appropriate when you're younger, but it may be appropriate to have some sort of life insurance, knowing what risk you're willing to hedge. You may want to take, not your term life insurance, but maybe your term ends and you start moving some cash flow into a indexed universal life insurance policy. For an example, just in case you were to die between the age of 40 and 70 years old.
David:Okay.
Mike:Why is that? Because when you file for Social Security, before you file for Social Security specifically, there could be missed income. Maybe you unexpectedly pass in age 55. So you might have a cash value policy that's basically paying your term and growing some cash value, but the second you don't need it, you drop that death benefit as much as you can, so that you can lower the cost of insurance as much as you can.
David:Okay.
Mike:Notice the difference here.
David:Yeah.
Mike:If you're trying to prepare for a risk that may happen, I get it. The odds aren't in your favor. It probably won't happen, but you're paying for the transference of risk to an insurance company just in case. Just for the surviving spouse, just in case. But you're paying a premium for that.
Mike:That's why we buy term life insurance. However, once you don't need it, once you've amassed enough wealth that you don't really need a death benefit anymore Mhmm. Then you drop the death benefit as much as you can without what's called meching the policy.
David:Okay. K? That's a technical term.
Mike:Yeah. Modified endowment clause. It basically means you turned your tax free life insurance policy into a taxable policy.
David:Oh, okay.
Mike:Don't wanna do that. Yes. Insurance companies will help you not do this. They don't want this to happen to you either. Okay.
Mike:But when you drop the cost of insurance, the death benefit, there's less risk to the insurance company. So you pay less on the cost of insurance. So whatever the remaining cash value is can grow, not at a rate that's as good as the stock market, but let's say competitive with the bond funds that you've got in your portfolio. Sure. It's growing tax free, you can borrow against it tax free.
Mike:Maybe he wants to look into a permanent life insurance policy that can bridge the gap more cost effectively, that he can then drop a death benefit later on, and then have some have whatever's left over be a tax benefit on the overall scope of income.
David:Okay.
Mike:That was a lot there.
David:Yeah. Know. This is good.
Mike:And by the way Yeah. They won't tell you this, but if you drop the death benefit or if you lower the cost of insurance, the agent's gonna get paid less.
David:Agent. Yeah. Okay.
Mike:Who wants to admit that?
David:Very few people.
Mike:That should be the subtitle of the show. What financial professionals don't want to admit.
David:Little confessions here, like diary of an agent. Yeah. So to kinda recap here then, they've got their emergency fund, they maxed out their retirement contributions, and they still have some extra cash, some kind of permanent life insurance policy is a good option.
Mike:If if they don't have enough term. Okay. Or if they want to convert it, and if taxes are a concern in the future, that may be an option. If that's not a concern, then it doesn't make sense. Okay.
Mike:In that situation, you want to look at ways that you can grow assets, and remember, you've you've got to have a basically two portfolios. One portfolio for the up markets that you can invest. Yeah. There's some risk. Yeah.
Mike:It can lose principal for a period of time. Mhmm. Hopefully it recovers. And then you've got your down market, your your bear market, you know, bad news bears. Yeah.
Mike:When the markets go down, if you're retired, you need to take income from a principal protected source. So another way to look at that is maybe you put some funds, some after tax non qualified funds into a couple of buffered ETFs, and you blend it. Some are max buffers. A lot of people don't know these exist, by the way. Oh.
Mike:There's several companies that do it, vet these things appropriately. If you don't know how, then, of course, call us, but you can put some in a max buffer. So the idea is maybe it gets up to 7% of the S and P, but no downside. So there's no downside risk. And overall, you might outpace, let's say CDs or high yield savings.
Mike:There's no downside risk, and it's liquid. You could pull the funds out at any time if you want. You might not get all the gains, but it's still liquid enough that you can work with that. And then you do like a deep buffer. A deep buffer is where you'll get up to, let's say, it depends on what rates are, so these are arbitrary numbers, but let's say you get up to like, I don't know, 12, 10, 12 percent on the upside, and then on the downside, you might get the first five percent of risk, but then there's this 20% buck.
Mike:This is complicated. Yeah. Again, it's a lot, but it's a way to basically put some assets that have built in protections. You're not gonna get all the upside, but you'll get enough of the upside to still be competitive, but you've taken out some of the downside risk, allowing you to have this bear market portfolio specifically for if you retire, you need to take income from a protected source, you could work with this. And if you don't use it, it just rolls over every year.
Mike:There's no capital gains because it just rolls over, it maintains that tax efficiency. And then you can take everything else into your typical portfolio for growth. Whatever that might be, and that could be in stocks. Maybe you do a sixty forty split stocks and bonds. Maybe you explore some REITs.
Mike:JPMorgan did an interesting study. They found that if you put 30% of your portfolio in alternative investments, specifically real estate, you could increase your overall growth and decrease your overall volatility. Oh. Who wouldn't want that? Yeah.
Mike:But yeah, for this person, I would totally be saying, make sure you've you've covered the risk that you want, and if you don't want life insurance, no problem. Just be aware of the risks that you're taking. Explore ways to hedge against market risk, when do you want to retire? Yeah. Put the plan together first, make sure the timelines work, then explore efficiencies.
Mike:So look ahead at the taxes, the income that you want, the tax brackets, your effective tax rate, where the assets are between pretax like an IRA, after tax like a non qualified brokerage account, and then a tax free like a Roth, understand where your assets are and how to pull out of them, and then you can start to say, okay, here's where the investments make sense. Here's what I should be putting my money into. Mhmm. And then proceed. What you've taught me
David:here is that this is a much more sort of deeply, like nuanced thoughtful question. You could have just listed off a few like investment options for this person. We we've kinda moved
Mike:on to the question. Which is what I feel most advisors would do. Oh, you got some extra money. Hey, take this quick questionnaire, and here's your custom portfolio. Yeah.
Mike:Garbage. Yeah. Garbage drives me crazy when people get into that crap. And I'm not saying the portfolio is crap. I'm not saying the advisor is stupid.
Mike:Yeah. I'm saying I'm tired of the oversimplification of this kind of check it off, got a new client, I'm making a residual. I mean, reality is this 1% fee on everything. Mhmm. People say I hate annuities.
Mike:You're the annuity to your adviser.
David:Oh, yeah. That's right.
Mike:You're the residual. Do you think they say don't spend your principal? You spend down your principal a little bit, they're making less money. I mean, anyway Yeah. Yeah.
Mike:I'm getting a little little ahead of myself here. But at any point in your life, don't work with an oversimplified person. We're not the only people that do comprehensive planning, but we hound on the importance of being very deliberate in your decisions moving forward so that you don't paint yourself into a corner of tax inefficiencies, of liquidity issues, of whatever it might be. 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
David:and
Mike:get started.