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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 by going to Amazon or go 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 pretty much discuss whatever's on your mind. 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 the studio today is my colleague, mister David Franson. David, thanks for joining me.
David:Hello. Thank you. Glad to be here.
Mike:David's gonna be reading your questions, and I'll do my best to answer them. You can send your questions in at any time really during the week by texting them to 913-363-1234. Again, that number is 913-363-1234, or email them to hey mike at how to retire on time.com. Let's begin.
David:Hey, Mike. Can you give a generic rundown of different investments and when they should be used?
Mike:Oh, okay. I'm I'm interpreting this. And, David, tell me what you think
David:k.
Mike:Is, understanding what tools might be in the toolbox and how to use them. Yeah. Does that sound about right?
David:That sounds I mean, we what are the tools? There are many. We've seen commercials. We see ads in our email from different companies. So what can be used?
David:What's out there?
Mike:K. So before we start, let's liken this onto a house. If you wanna build a house, you'll probably need more than a hammer to do it. Right. Just assuming I'm not a contractor, but for all the all the the contractors out there, they're probably laughing.
Mike:The few, DIY people have probably done some really dumb things using the wrong tools for the wrong job.
David:Mhmm.
Mike:The same I find in finance that people will try to force an outcome and try to make, you know, the oh, I'm gonna do this, and this is what's going to happen when that's just not always the case. I have a rule when I put together a portfolio that I follow. It's called the rule of diversification. It's not your typical, you know, diversify your assets among different asset classes, blah, blah, blah. I believe that diversification should be done by diversifying assets, by objectives and not into this investment ambiguity that so often happens.
Mike:What does that mean? Well, all of your assets don't need to try to just grow and solve magically all of your problems. You don't need to have everything kind of in one strategy. You can actually take a portfolio and create many portfolios. So maybe one portfolio is really to sustain yourself for the next couple of years and your income.
Mike:Maybe, this part of the portfolio is really invested for legacy. Another part of the portfolio is really for I mean, you can get very specific about many portfolios within your portfolio, bring it all together into a a cohesive effort to support your overall quality of life, your lifestyle plan, your legacy plan, and so on. Does that make sense?
David:Yeah. So, I mean, I guess I would want the let's let's roll up our sleeves and get down into the the nitty gritty here.
Mike:Let let me say it this way. Okay. I love salmon. Yeah. Love salmon.
Mike:K? I love how salmon tastes. I love how you can put maybe some avocado on the salmon or maybe some some lime on top. Right?
David:Okay.
Mike:I like salmon with with a nice bed of rice Yeah. Or some asparagus.
David:Now we're talking.
Mike:You can have that nice dish and one bite has the the asparagus, one bite has the salmon, and you're experiencing different things at different time. You could also take all those ingredients and blend it up and it would be nasty. We we want to have some sort of separation of objectives in your portfolio.
David:Yeah. I was in a good place there getting hungry, and then you ruined it with the blender.
Mike:Gosh. That sounds disgusting. Yeah.
David:It does.
Mike:I bet you someone out there has had to blend up their salmon or anyway. Okay. So, really, what we're gonna look at, there's around 5 or 6 markets or places you can put money. Let's just take them 1 at a time, and I'm gonna offer definitions on how I believe these tools could be used and many misnomer or many times they are maybe inappropriately used.
David:Okay.
Mike:Yeah. So Sounds fair. The first market is cash and cash equivalents. And the first one in that category would be high yield savings. High yield savings is a place to park money for near term purchases or your emergency fund.
Mike:It is not a place to say, hey. I think the market's gonna crash, so I'm gonna sell out of the market and go into high yield savings until it crashes. That is called timing the market, and historically, it has hurt people more than helped people, because that's an emotion based investment decision. Even the top people on Wall Street that I've had dinner with throughout the years have joked about how even their emotions get the best of them, and they'll time the market sometimes, and it usually bites them in the butt. So high yield savings is really for, in my opinion, short term investments.
Mike:You need liquidity. You need protection. You need to make sure it's there when you need it. No problem. And I would include money market accounts kind of in the same category.
Mike:It's very, very similar. Right?
David:Okay. Yeah.
Mike:And then the next one in cash and cash equivalents, and we're just talking about the more common tools that are out there, would be CDs. So in a normal environment, 6 months of time in a CD usually has a little bit higher return than 6 months in a high yield savings. I know things are weird right now, but as they're normalizing, you might say, you know, I don't need these funds now. I'm gonna be buying a house or a boat or a car or a new roof soon. So I don't wanna put in the market at risk.
Mike:I'll just put in the CD. It'll be there when I need it in 6 months time. I find CDs are typically more effective when you need the money in 6 months, 12 months, maybe up to 2 years.
David:Okay.
Mike:That's just kind of what it does. And the reason why is if you have a CD portfolio and you just continue to roll it over, yes, it's protected. Yes. It's growing at a fixed rate, but those rates can change when the CD matures and rolls into a new CD. So now you're at interest rate risk, which could hurt you when it comes to keeping up with inflation.
Mike:So I I have met people that had all of their assets in cash and CDs, and they because of their risk aversion, they emotionally struggled to handle risk. They lacked coping mechanisms to handle risk because of lack of planning or poor experiences. That they had to live significantly below their means because everything was in high yield savings and CDs.
David:Oh.
Mike:this does happen. Experiences shape our behavior. Behavior shapes our results. And I I do believe that maybe some counseling or comprehensive planning can help develop more healthy coping mechanisms. It's things like this.
Mike:If you put let's say, just for someone that would be in the situation, if you put 20% of your assets in the market that you knew you did not need to touch for 10 years, would you still be able to sleep well at night knowing that it could crash next year or the year after? But you don't need to touch it for 10 years and that the market has a history of growing faster than CDs and cash.
David:Yeah. Put it that way. I'm sure that I could rest easy knowing that, okay, well, I have my immediate needs taken care of.
Mike:10 years.
David:Yeah. That's way down the road. Sure. I could sleep.
Mike:K. So that's the idea of diversifying based on objectives. Objectives are your needs, their timelines, their I mean, go down the list. Right? Anything you could think of.
Mike:The next group would be in the bond market. The bond market might actually be I believe it's the biggest market out there. So you think of the stock market, how amazing it is. The bond market's bigger. Yeah.
Mike:And treasuries are a big reason why. The government debt. Oh. But that that's included in this market. Yes.
Mike:But you need to differentiate bonds and bond funds. This is often mistaken as the same thing. It is not. A bond is a debt instrument that you buy, and it maybe it's just a zero coupon, so you buy it. You don't get anything really until the end, and then it just matures and you get your your growth at that fixed rate.
Mike:You can do bonds that pay dividends or interest frequently, whether it's yearly or whatever it is. But you've got treasuries, municipal bonds, corporate bonds. It's just you're you're basically lending money to the the the entity, and you hope that you get your money back, and it's only as good as the entity's credit. So the United States government probably gonna pay back their debts. Yeah.
Mike:Probably gonna pay you the treasuries if you bought treasuries. Toys R Us didn't do so well. No. And here's the conversation. People think that they get very creative and that they win the game.
Mike:You know, they found the the secret corporate bond that pays well and has no risk. Why would any company issue a bond offering a higher than needed rate? There's no reason. So, David, if I were to say, hey. I've got this bond for you.
Mike:It's the best bond. Everyone loves this bond, and you can get it today and there's a 5% coupon rate. Would you take it? Yeah. Sounds good.
Mike:Right?
David:Sounds really good.
Mike:Seems reasonable today.
David:Take my money.
Mike:How about 7%?
David:Even better.
Mike:Would you like 10%?
David:I would love 10%.
Mike:How about 20%?
David:Yeah. Okay. This is working out well for me.
Mike:50%?
David:Seemingly. Wow. 50%.
Mike:You have to start to wonder. Okay. Yeah. What risk am I starting to take that I don't realize I'm taking? And for years, the joke was the Argentinian bond, which was, I think, like, near 40% at one time, if I remember right.
Mike:Wow. But they would go bankrupt or they would default frequently because it wasn't sustainable. So you have to understand that when it gets to bonds themselves, the higher the rate, the more risk you're taking. There's no other way to look at it.
David:Okay. Yeah.
Mike:Because there's no incentive for the company to offer a higher rate than they need based on their risk and their ability to satisfy their the rate. K? Now let's go to bond funds. Bond funds are basically a fund manager. Like, think of a mutual fund that's actively trading bonds.
David:Okay.
Mike:Which means they can lose money.
David:Uh-huh.
Mike:So bonds are protected by the entity that guarantees them, whether it's a a government entity or a business. A bond fund trades bonds to try and get a little more growth out of it. There's some speculation there. There's some algorithms, some models, some theory, whatever the philosophy is. And this is why it's so important.
Mike:People, over the last couple of years thought their bond funds was the safe part of their portfolio. Let's say they're 60 years old, so 60% of their assets were in bond funds, 40% were was in the stock market, and they were losing money and getting very upset because they did not understand the difference between bonds and bond funds. The same market, bond funds have risk. So there's more growth potential, but can lose money. Bonds do not.
David:So bonds themselves, individual bonds, are those still risky? Can they still lose money?
Mike:So if it's a risky corporation, sure.
David:Okay.
Mike:If you're a municipality that's way in over your head on debt like Puerto Rico has been, those can default.
David:Okay.
Mike:Yeah. Google search the Puerto Rican bond debacle. That's that's some great research there. But if if you're I don't know. What's a what's a well funded I can't think of a well funded state right now, but, Delaware.
Mike:Yeah. Tell this is Wayne's World. Delaware. I'm in Delaware.
David:Right.
Mike:The easiest way to look at this is states that offer a lower coupon rate are the more secured states. States that have more debt, more risk are offering a higher coupon rate. There's no charity when it comes to finance. This is just what offered based on risk. That's really how this works.
David:Okay.
Mike:So understanding those 2, do bonds make sense? They could. I have found that bonds, specifically treasuries or maybe municipals, even maybe some of the corporates, if you're willing to take the risk, you might use that for maybe needs from 3, 4, 5 years or so. It does a little better than the CDs in a longer duration or longer term period of time. Do you see how the tools are a little bit different?
Mike:CDs are shorter term, protected, fixed rate. Bonds might be a better one for if you need a longer term protection.
David:Okay.
Mike:A little bit of a difference there. And then bond funds, really their purpose is to it prevents you from your growth on the up years, so it holds you back a little bit. But it also helps hedge against the downside in the down years. It's kinda meant to be a stabilization feature within a portfolio. That's what Harry Markowitz did back when he did the the research on the 6040 split that people have now built entire businesses around, that you should put 60% of your assets in the market, 40% bonds or the inverse or a different combination of the 2, which, by the way, he didn't follow that himself.
Mike:That was an academic study just to see what would happen. The guy that did the study didn't follow it. Yeah. But it's a good rule of thumb.
David:Right.
Mike:There are some very good financial principles behind it. The next one here is insurance, and this is interesting. People think insurance is an investment, or they're sold the idea that it could be an investment on their money. It is not. Insurance is transferring risk to an insurance company knowing that the odds are in the insurance company's favor.
Mike:There's nothing wrong with that. I have term life insurance personally. Why do I have term life insurance? Because if I were to get hit by the proverbial bus, my wife needs to have excess funds to bridge the gap and to help them financially be taken care of. So I pay for term life insurance.
Mike:Right? I am transferring my, hopefully, not pending debt to an insurance company, and I hope that I never have to claim that death benefit or that my wife would have to claim that death benefit. Right. So let me just kinda go through some of the basic insurances on how they apply in retirement. Some people will use term life insurance towards the beginning of their retirement so that if one of the spouses passes, the surviving spouse has an additional bump in their overall assets to help them with longevity.
Mike:Sometimes I see that going to 65. Sometimes I see that going to 70 because they wanna file for Social Security at 70 years old.
David:Okay.
Mike:And so they're they're giving up some income because they're delaying their Social Security benefit. And if they were to pass sooner, they didn't wanna feel like they lost out. Now you're paying a premium to do this, but it is a strategy that exists for term life insurance in retirement if you qualify. Right. They're not going to insure you if you're on your deathbed.
Mike:Then you've got fixed annuities. Fixed annuities are kind of like a CD from an insurance company. I've found that their rates are a little bit more competitive in the 3, 4, 5 percent category. They're very boring investments. I'll openly admit, and expose to all the insurance agents that are out there.
Mike:If you're talking about a fixed annuity versus a fixed indexed annuity, a fixed annuity pays significantly less commission than a fixed indexed annuity, which I'll talk about in a second. So because fixed annuities are very boring, they don't pay much for a commission. They're not talked about a lot. But it's basically you can put money into an annuity, It grows. And then afterwards, you can either take your cash value and do something with it, or you could annuitize it, which means you're gonna get a certain amount of income for a certain period of time.
Mike:That's what an annuity does. Sometimes you can have lifetime income. Sometimes it will be for 5 years or for 10 years. That's how you structure it. But, yeah, fixed annuity, it's very boring.
Mike:Grows at a fixed rate, guaranteed for the duration, whether it's 3, 4, 5, 7, 10 years, whatever it is, and then it goes from there. Then you've got fixed indexed annuities. The idea is similar in that if the markets go up, the annuity could credit money to it. And if the markets go down, you can't go backwards and it resets every year or every 2 years. Fixed indexed annuities are often used as a bond alternative because it has more growth potential, at least in my opinion, than a fixed annuity, a CD, or a treasury, but it's not guaranteed growth.
Mike:So there's that risk versus potential reward factor in there. And then a fixed indexed annuity can be used for cash. So once it becomes liquid, you can pull out as much as you want whenever you want while it's still able to potentially grow. You can also turn it on as income for a certain period of time or for lifetime. But do you see how we're defining very specific
David:Yeah.
Mike:Purposes here?
David:I do. Yeah.
Mike:The income from an annuity is for this single purpose, to transfer longevity risk to an insurance company. They're guaranteeing if you set it up right, they're gonna guarantee a certain amount of income for as long as you live, hoping that you die soon enough so they actually make money. But if you don't, it's okay. They've pulled enough people together that it's fine. They'll still make money, and they can afford to pay out the outliers that lived a long time.
Mike:Now this does not guarantee that you're gonna get comfortable living. One of the risks is if you turn on income from an annuity, you may not keep up with inflation. And if taxes go up and you funded the annuity with pretax dollars, you're not gonna get as much money. Because taxes go up, your your net income goes down. So there's some risks there.
Mike:Then you've got index universal life insurance or whole life insurance. These are cash value policies. You're basically giving the insurance company money. There's a cash value that can grow, but it's probably not gonna grow as much as the market. K?
Mike:There's no such thing as a perfect investment product or strategy. However, there's a death benefit associated with it. So it's kinda like permanent life insurance. If you were to die while while you're funding the policy, you've got that peace of mind. But at some point, the cash value is close to the death benefit anyway.
Mike:So it's a nice perk for legacy planning and things like that, but it's not an investment. Unless you want to pay for the cost of the death benefit, it might not be worth it. I know a lot of people use index universal life insurance for tax planning and and so on, and and there are some wonderful strategies out there to do that. But you have to also want to pay for the death benefit. And then you've got traditional long term care, which really isn't around anymore because it's so expensive.
Mike:But it's the idea that you you pay into it and when you need it, you just you get benefits for a long period of time. Or asset based long term care, which is really you put x amount of dollars into a policy. And then if you were to get sick or qualify for long term care, then you receive help for 4 to 6 years usually. And this is the interesting thing. So I've I'm licensed to sell long term care.
Mike:I've never actually sold a policy to date because, typically, the people who need it can't afford it, and those who can afford it typically don't need it. The ones who have asked for an illustration and tried to get it were denied because they knew they were unhealthy, and they were they were trying to see if they could squeak by. Yeah. Insurance companies aren't dumb. If you qualify for insurance in one way or the other, you're transferring some risk to them and the odds are in their favor, which is fine.
Mike:Right. As long as we clearly define that these are tools to transfer risk at a premium for the peace of mind that you want.
David:Yeah. Good way to put it.
Mike:I mean, if you wanna drive a nice car, there's no problem. It's not financially in your best interest, but you really enjoy it. Yeah. And then there's people like me who drive an old Subaru and can't be bothered by what car I drive. So it's just I'd rather spend money on, you know, my copper pots and pans I cook with or my grill.
David:Now we're talking.
Mike:You know? Everyone's got a different hobby. Alright. Now let's talk about real estate. Yeah.
Mike:This is a bit long winded of a question, isn't it?
David:This person's getting their money's worth.
Mike:Real estate. I'm gonna put 3 categories in here. There is your typical traditional real estate portfolio of your commercial properties, your apartment complexes, your residential properties. It's actual real estate, and you're the landlord. And in many situations, if if that's you, great.
Mike:If it gives you purpose, keep it. Yeah. Real estate, typically, over the long term period of time at least, appreciates in value while also paying you cash flow. As long as it's properly managed, it can be a wonderful investment. Now let's be clear about real estate.
Mike:Sometimes you neglect it. You don't wanna pay as much in repairs or keep it up. And it's kinda like, you know, hey. I'm 70 years old, and I don't really wanna put another x amount of, dollars reinvest in this. I'm getting kinda tired of it, and you just want out.
Mike:That's kind of when you know it's time to stop. And that's where the Delaware statutory trust comes in. You can do a 1031 exchange into a a DST. You don't pay any capital gains tax. So even though your property is fully depreciated, you can still move the assets, not pay any capital gains tax into another qualified real estate option that continues to hopefully appreciate in value while paying you cash flow, kinda like income.
Mike:So those are very similar. And if you don't have real estate right now, maybe you just want real estate investments because you like it as a part of your portfolio. You can look into REITs, real estate investment trusts. The purpose of a REIT is to have fractional ownership of a company that has a real estate portfolio that's managing it for you, and you enjoy some of the benefits, the rent and the potential appreciation of the value of the portfolio. Kind of how it works.
Mike:Privately held REITs that are illiquid allow more of your money to be used for investment purposes. So you're typically, if you do your research, gonna get a better bang for your buck in privately held REITs, but you're also it's it's illiquid. Publicly traded REITs have to have more capital on hand, more cash, so less money is going towards the investment itself, which means your your yield or return on investments probably gonna be less. And then you've got the alternative investments. I find these for very specific situations like oil and gas partnerships.
Mike:The way it works is it purposely gives you losses in the 1st year so you can offset gains. Let's say you sell your practice, your business, and you have all these gains you're trying to offset. You can move funds into oil and gas partnership, experience a significant amount of losses that pass to you, and then for the next few years, hopefully, you get your money back. Yes. There's risk.
Mike:So if you put money in oil and gas partnership and it loses money and then they don't find oil, you're kind of out of luck. Usually, though, when you do your research and you're working with the big names, they kind of have done their research. They're pretty sure it's there. So there is some due diligence, but there's risk associated with it. You've also got qualified opportunity zones.
Mike:So it's it's a way to just defer your taxes, for a couple of years, but you still have to pay them. But the asset itself can grow tax free and and offer some options. I mean, these are all basically when you're selling a business, you're a doctor selling a part of your practice. This is kind of where the alternative space gets into play. And then you've got your limited partnerships and and and all the other things that could fall underneath this.
Mike:I think that's kind of you know, I missed equities.
David:Mhmm. Yeah. The big gorilla
Mike:market. The stock market. The the most simple one. Alright. So let's do the last one.
Mike:The stock market. The stock market, really, you have stocks themselves or equities. Yeah. Or you have mutual funds and ETFs. So let's do stocks first.
Mike:The stock market really is divided in 2 groups. There's the public stock market, which you're familiar with, and then you have private equity. So I think around 80% of all businesses are privately held. Only 20% are publicly held.
David:Surprises me, actually.
Mike:Public stocks, you can buy and sell pretty much whenever you want. And there's pretty much a market out there that if you want to sell it, you could probably sell it and get your money's, worth whatever the market value is. Private equity, though, it's less liquid. So you have to try to sell it, and there's only a certain amount of liquidity that they're gonna allow. So if there's a run on a certain position everyone wants to sell, they're going to limit that.
Mike:And you might be told, well, you can't sell now, but maybe the next time we'll we've got you on the list.
David:Okay.
Mike:And so when I think of the proper way to use these tools, publicly traded stocks, in my opinion, are really good for people that are gonna use it for income in the future. Maybe they want flexibility. They want that out. But when you get to legacy planning, you have a portion of your portfolio that you really probably won't touch. You might explore some of the private equity, and you're gonna buy positions that have significant upside potential, though there's risk associated with it.
Mike:But you you probably don't need to touch it for 10, 20, 30 years because you're really intending to have this go to a charity or to the kids or somewhere else. And then you have your funds, mutual funds or ETFs, which are really just it's a professional managing a fund or a bunch of usually, it's equities and bonds or bond funds. I mean, it's it's a combination of things, but think of it as a managed portfolio that you can just put money in and it grows based on their investment philosophy or take it out. So it for long term growth, the equities market is great. For short term needs, it's risky.
Mike:Because if the equities market or your stocks or your mutual funds, your ETFs goes down and you draw income from it, you are accentuating losses and hurting yourself. So we just spent 30 minutes going through the more basic investments that are out there and quickly assigning kind of the when you might use it, when you might not wanna use it. This is the thing that gets me. People say, well, you know, I I wanna diversify. So let's put maybe, I don't know, 10% in CDs.
Mike:We'll put 30% in bonds and bond funds. And, you know, we'll put 60% in equities. But we'll put a little bit, you know, over here in the private sector as well. And and why? Why are you putting the funds in those places or your assets in those investments or products?
Mike:What are you trying to accomplish? Why is it there? What's the goal? When I go through that simple question, most people I talk with can't answer it. They say, well, it's just a diversified portfolio.
Mike:What are you diversifying for? And we just went over high level what these investments are because within them, real estate, equities, bonds, there's different categories, different groups, different risk factors, different liquidity schedules, and all sorts of things. And if you can't say why you have a position, you may be at risk of investment ambiguity, and you may be just not getting as much out of your money as you could. Efficiencies and strategies are how you get more out of your money, in my opinion. You can't control the market, but you can control your strategy.
Mike:You can't control why you put, how much you put, and where you put it, and so on. You can control that. And if you wanna get more deliberate about your investments, your portfolio, really identifying to find these tools and how they're being used to support your lifestyle and legacy plan, then go to www.yourwealthanalysis.com right now. That's www dot yourwealthanalysis.com, and request your comprehensive and holistic analysis that can really pick apart and identify what your lifestyle plan could look like, what your legacy intentions could look like, and is your portfolio congruent with what you want your money to do for you? Go to www.yourwealthanalysis today and request your analysis at no cost.
Mike:It's incredible how much more you probably could get out of your money, and you may just not realize it yet. 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. 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.
Mike: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. Go to www.yourwealthanalysis.com today to learn more and get started.