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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 retirement questions. Say goodbye to the oversimplified advice. This show is about getting into the nitty gritty so you can determine what is right for you. My name is Mike Decker. I'm a fiduciary financial adviser, and with me is my associate, David Franson.
Mike:As always, text your questions to (913) 363-1234, and we'll feature them on the show. David, what do we got today?
David:Hey, Mike. What causes people to go broke in retirement?
Mike:There's several layers to this.
Mike:Okay? Because what people want me to say and probably are baiting me to say is, oh, it's bad investment management, or, oh, they didn't buy an annuity, and they didn't turn on guaranteed income for life. Like, those are the cliche answers that I'm getting baited to say. Yeah. It's not that simple.
Mike:Okay? So let's take it from kind of two different perspectives. First off, investments, and then David hold me accountable on the cash flow side of it, because they both play a huge factor into it. So from a kind of macro scale, large scale, reasons why people go broke in retirement is mismanagement of their investments. And here's what I mean.
Mike:In my opinion, oversimplified portfolios where you're just in a bunch of stocks, because you've heard, well, the S and P beats out financial advisers on growth, so why not just do that? And there's people walking around the woods of Vermont having millions of views touting out this advice. Just buy the S and P. That's good enough. The problem is called sequence of returns risk, and sequence of returns risk would suggest that the sequence of the return or the performance, basically, how much did the market do that year is going to matter.
Mike:Okay? So if you're 20 years old and you buy the S and P 500 for growth, then you're looking for maximum growth, great. That's a great strategy. And it's great because Because you don't care about the sequence of the return. You care about what's it gonna be in ten to twenty to thirty years.
Mike:Uh-huh. So the ups and downs are irrelevant to you. Okay? But if that's your strategy and you're like, oh, this is gonna be the best growth strategy, I would recommend doing a little bit more due diligence. Look at things like VUG.
Mike:It's a Vanguard Growth Fund or QQQ. It's the Nasdaq one hundred. Or maybe you buy the S and P five hundred, and then you pick out a couple of stocks that are good quality boring companies. I mean, you could do more than than just that. But when you're young, you don't need to be worried about the sequence of the return.
Mike:In fact, you want the market to crash when you're young. Because when the markets crash, they've recovered a 100% of the time, but everything's on sale. It's kinda like, why do we buy a lot of things during Amazon Prime summertime, which is basically Christmas halfway through the year. Right? And then all the holiday sales.
Mike:Right? Christmas, Hanukkah, whatever, the after Thanksgiving sales. We buy more things than because it's on sale. Sometimes. Right.
Mike:Sometimes we'll manipulate the price to make you think it's on sale. Sure. Which could be true about the market crash. But the reason why I'm saying that is you're used to this idea, well, the markets always recover. I'm not taking income out.
Mike:It doesn't really matter. Until you retire, the rules change. And so that's where this gets tricky. The sequence of the returns matters. So let me give you my classic example.
Mike:Let's do this. Let's say that you get a 10% average return year over year. Okay?
David:Yeah. Would take
Mike:that. It's not that bad of a deal. Yeah. But when you look at your cash, you're gonna wanna look at the sequence of the return. Okay?
Mike:So let's say the first year you get a 50% return. K? You're doing really, really well. The second year, you get a 30 hit. K?
Mike:30% crash. Not the end of the world. Right? Look at 2022, 30% crash and whatever. What's your average return?
Mike:It's not that from a percentage standpoint, it's 10% each year, but when you look at the reality, it's like two and a half percent.
David:Mhmm.
Mike:And for all those listed, let me just do the math real quick, because I recognize I'm I'm probably getting a little bit into the weeds here. But you got okay. A $100,000 in the market. You assume a 10% average. So a 100,000, 10% growth, 110,000.
Mike:Are you with me? Yep. So after then the next year, 10% growth, 10% increase of a 110,000, you're at a 121,000 of cash growth. Right?
David:Okay.
Mike:So now let's assume we have that first year of a 50% growth. It's just gangbusters. So your 100,000 grows by 50%. You're at a 150,000. You did really, really well.
Mike:Great job. Yeah. $150,000. Then the next year, the markets crash. You lose 30% of that 150,000.
Mike:You're at a 105,000. Right. Cash value. So taking kind of the sequence of the return, that's gonna distort what you need in retirement, because the cash value may not advance as you would expect. And then you've you can look at the inverse of it.
Mike:Well, what if the markets crash? A $100,000, 30% crash. Let's invert it real quick. 100,000, 30% crash. You're down now at 70,000.
Mike:Right. Increase by 50%. You're at a 105,000. You end up in the same place. But these shifts in the market, the big ups and the big downs, they make a difference.
Mike:And here's why it matters. If you take income out of an account that has lost money, you accentuate those losses. So let's say you have the 30% crash in the market. K? You would need a 43% return to break even.
Mike:So you're down. You now need to overcompensate that growth. So 30% down, 30% up. It's not even. You have to grow more than you lost to make it back.
Mike:Are you with me so far? I mean, I know we're getting a little technical here. Sure. For all the listeners, whether it's YouTube or podcast or on the radio, like, hopefully, you're following me here. So if you lose 30%, you need a 43% return just to break even if you don't touch the account.
Mike:Yeah.
David:Just to get back to where you were prior to the Yeah.
Mike:And if you're in twenties and thirties or forties, you can just let us sit there and recover. But in retirement, let's say you need to take 4% out to pay your bills. So now you're down 30%, you take out 4%, you're now down 34%.
David:Uh-huh.
Mike:You see how that works? Uh-huh. Now you need a 50%, 50% return to break even. That might take a couple of years. It might be a quick recovery, and one of the big problems I've seen is a lot of people have become accustomed to these quick recoveries.
Mike:The corona crash. We just printed a bunch of money and it recovered, and then all the wealthy were fine because inflation actually helps the wealthy. It hurts the not so wealthy. Because when you inflate things, the market inflates with inflation.
David:Uh-huh. And if you have a lot of money in the market, then
Mike:Yeah. But if you're stuck on Social Security or you you did buy an annuity and turn on lifetime income streams, you're stuck with that. So there's a lot of nuance in, again, why people go broke. This specific point I'm talking about is sequence of return, that the sequence of the return will matter. Here's how you solve it.
David:Yeah. Yeah.
Mike:Okay. Want to know the secret? The quote unquote secret? Sure. Let's do it.
Mike:So don't put all of your assets, maybe, in stocks, thinking you can outgrow your problems. What if you put a portion of your assets into here's a couple of examples. CDs, treasuries, or fixed annuities. They all grow at a fixed rate. And if you ladder out the liquidity, you can tap into it.
Mike:So when the markets go down, you don't accentuate those losses. You're just taking income from a principal protected source.
David:A source that can't lose money.
Mike:Yeah. Yeah. It can't go backwards. Can a CD go backwards? No.
Mike:It's growing at a fixed rate. As long as the institution or the bank or the insurance company that backs it doesn't go under, you're good.
David:Right.
Mike:K? Or you could use buffered ETFs or fixed indexed annuities as a cash growth vehicle that can't go backwards. Again, you have this what we call like a reservoir, so it's just there when you need it. Think of like Joseph in Egypt, you know, the seven years of famine, seven years of plenty. In the plentiful years, they stored for when that happens.
Mike:Why in the world are people not putting some of their retirement assets, knowing that the markets are overvalued, that were at all time highs, just locking in some of those gains and putting into a protected vehicle to help them get through a couple of years, when the markets crash, they can take income from a protected source while they allow their other accounts to recover.
David:Makes sense.
Mike:K. So that's one of the reasons why I think people can go broke, and through my experience, is that when the markets crash, they accentuate losses because they went all in on maximum growth potential without understanding that maybe you should have something protected, so that when things happen, when the markets go down, you have this source to help you get through those difficult times. Yes. One example. Yes.
Mike:Another example where people go broke is inflation.
David:Okay.
Mike:People think, oh, well, you know, inflation's been solved, and it's inflation can't be controlled. The Fed is there to help control inflation, but it can't control inflation. It's not in some backroom saying, let's jack up inflation today because we wanna screw over the American people. That's not at all what's going on. I feel for the troubles that Powell is going through.
David:Jerome Powell, the Fed chairman.
Mike:Jerome Powell, the Fed chairman, he is a political target. Whether you agree with Trump's position or not, and there's an argument for it, and there's an argument against it, and I can see both sides to it. I'm not doing that as a cop out. This is economic theory. Okay?
Mike:So he's in a tight spot.
David:Mhmm.
Mike:I personally don't believe he's doing anything for political reasons. I think he is being cautious, and I think if you wanna do your homework, ask chat GPT about this or whatever your favorite AI is and have it educate you about the issues in the nineteen sixties and the nineteen seventies with hyperinflation, how it came roaring back several times. But I believe he's trying to prevent that from happening again. He doesn't want history to repeat. And so maybe he is being slow, but there's a reason for it.
David:Yeah. He doesn't have to worry about sort of getting reelected so he can just do his job. Right?
Mike:I don't think he wants to get reelected. I think he's like, let me just finish this out, and I'm done. But who knows? Sure. Poor pal.
Mike:And and these are thankless jobs. I mean, gosh. The Fed chair, it's a thankless job. Yeah. You can't do right.
Mike:Right. And hindsight's twenty twenty, and that's all you're judged by. And I'm not an apologist for Powell. I just can argue for and against him. But the the point being is, in retirement, many people gravitate towards the oversimplified strategy, which isn't wrong.
Mike:You just need to be aware of how it can cause you not necessarily to go broke, but to feel very, very poor. If inflation gets out of control, inflation may increase with the CPI, but that's the CPI w, not the CPI. CPI w is based on workers' compensation, which has lagged inflation over the years. So if your retirement's based on inflation, that could be a very painful situation that could cause you to feel broke because your increases may not actually keep up with inflation.
David:Right. Everything you need to buy costs more, but your income hasn't risen with it. Yeah. Those costs. Now what about cash flow?
David:We're gonna
Mike:Well, we'll get there. But I wanna touch on buying an annuity, turning on flat income stream. Yeah. Yeah. If inflation gets out of control, it could cause you to feel poor.
Mike:Okay? And then other things to understand too is long term care insurance isn't guaranteed to prevent you from getting broke. Its purpose really is to help cover costs if you were to need long term care earlier on than expected in retirement. It's not an investment. Life insurance is not an investment.
Mike:Any form of insurance is not an investment. And so you need to understand that medical costs could still bankrupt you, and having a portion of your assets in growth vehicles to try and just grow them out of dollars so that you can pay for the benefits, so that medical costs don't bankrupt you or your surviving spouse, so they don't end up in those difficult situations where you're saying, oh, do I need to divorce my spouse just to preserve my ability to stay retired and and send them to Medicaid? Mhmm. I mean, these are very difficult. So it's not just income.
Mike:It's understanding the variations of how the economics and the financial environments can evolve over time, and how you're going to take income in retirement. The biggest lie that I think is perpetuated is the suggested idea that you could have a riskless retirement. You can't. No one can have a riskless retirement. The goal is to understand the risks that you're taking and to make mindful steps through diversified strategies, not just buying a bunch of whatever.
Mike:Yeah. I honestly don't believe anyone needs to have what I would call a cliche diversified portfolio, large cap, mid cap, small cap, international, emerging markets, high yield bonds, the real estate sector over here, you got all these things. And, yeah, there's a lot of literature saying, like, you need all this, but how does that help you in your retirement? How do you implement it through their various market cycles, through their independent risks? Is it really helping you?
Mike:Warren Buffett's famous of saying, you just need a couple of stocks to get you rich. I would echo that and say, and you just need a couple of stocks, maybe an index to get you rich or to go through retirement. You don't need to overcomplicate this, and maybe have some assets and protected accounts. So when the markets go down, you can sail through those situations and allow those other accounts to recover. It doesn't need to be this complicated.
Mike:You don't need to be scared to death to retire, but let's not take the alleged easy way out. It's not as easy as you may think, and there's just different risks. And that's the biggest awakening moment that I have had over the decade I've been doing this, is how people focus on one risk. Usually, it's market risk, and they wanna get out of market risk, and they don't care about all of the other risks that they're inheriting. So let's talk about cash flow risk.
David:Okay. Yeah.
Mike:Cash flow risk is the other one. People don't like the word budget. Oh, yeah. People don't wanna be on their allowance, and I get that.
David:Yeah. It sounds boring. It sounds restrictive.
Mike:But here's the reality. If you've saved more, you've got more flexibility. If you've saved less, you're going to be on a budget. It depends on how much income you have, and are you maximizing the withdrawal rate of your portfolio. I've got clients that only need 3 or $4,000 a month, and they've got multiple millions.
Mike:So they have a lot of flexibility, but there is going to be a a balance between how much you have saved, how much income do you need to live your desired life, and is there lifestyle creep? Lifestyle creep's a very real thing in retirement. You think you know how you wanna retire, and then you get there, and oftentimes, it'll be either, I don't need to spend this much money, and it goes back, and you're now more focused on legacy. Or it's, oh, I wanna do this. I wanna do this.
Mike:I wanna do this. And you start doing all of these other things. And then that becomes a problem.
David:Like, what are some examples? Like, oh, I need a newer car, or I need these other subscriptions, or we need to travel more.
Mike:The two most common things that I see
David:Uh-huh.
Mike:I'm not saying this is for everyone, is bleeding hearts.
David:Okay.
Mike:Wanting to help the kids get ahead in life. Oh. Which for everyone listening right now, look, there is a healthy way to help your kids get set up for success. Yeah. And then there is an enabling bit that actually hurts them.
David:I didn't see that coming. Yeah.
Mike:Yeah. You you can actually stunt your kid's development by helping them in a way that avoids life teaching them very difficult lessons. You want your kids to experience pain. You want your kids and grandkids to have uncomfortable times.
David:Yeah. That might seem like an oxymoron. Right? Like, oh, I don't want them to experience pain, but there's such a thing as like sort of good, healthy pain?
Mike:Yeah. There's a great book, Coddling of the American Mind. Read it.
David:Okay.
Mike:If you're trying to retire and your kid's still at home, find a therapist or a coach to broach that subject. It's not good for either of you. That assumes that the child is of healthy body and mind. There are situations to where you might want to have the child at home. Drug and abuse, if they're in rehab or things like that.
Mike:If there's clinical anxiety and depression, there may be a reason to have them at home, but there's a very difficult line here of clinical anxiety and depression, or they just never learn to cope. And I think we make this a gray area when professionals can help with these situations. There is, well, I need to help my my son or daughter get into a house. You don't need to. You may want to.
David:Right.
Mike:How does that affect your situation, and can you afford that or not? So bleeding heart is a very real problem that many people have had. You want your kids to struggle, at least for a little bit, because if they struggle, there's a high chance that they will develop a healthier relationship with money, because they'll understand it, and they'll value it more. And if they value it more, then they're more likely to make healthy financial decisions later on in life and be set up for the rest of their life. But if you're taking care of their basic needs while they're going out to nice steak houses and living these lavish trips, and you're helping them pay, like, that doesn't make any sense.
Mike:Yet it happens all the time. Wow. So lifestyle creep, and then also you've got bleeding heart risk is a very real risk. Be careful of these risks. And then with your cash flow, again, inflation's a huge deal, but also just changing your lifestyle.
Mike:Medical needs, maybe you wanna travel a lot, maybe you want to understand what you're working with, and then reach acceptance towards whatever that is. Everyone's plan should be built differently. The cash flow projection should be built differently. How you work with, oh, my mortgage is paid off here, and do you want to front load your travel income here, and do you want to have extra medical costs available later on? Do you want legacy?
Mike:All of these things summon into a beautiful customized plan. That's how it's supposed to be done. Too often it's, alright, here's your income. We're gonna pair it with Social Security, and this is what you have to work with. Turn on the income, maybe save a little bit, maybe pay the taxes, whatever.
Mike:That's not, in my opinion, what's right for people. You want to get into the nitty gritty. You wanna have backup plans. You wanna have flexibility, so that not if, but when your lifestyle desires change, you can adjust as well. I mean, for goodness sake, how many of you thought you need an iPhone or an Android, a smartphone fifteen years ago?
Mike:Probably none. Now how many people are putting into their budget the costs of the little robot that's gonna clean your house in ten years?
David:Yeah. Alright.
Mike:Probably very few people.
David:Nope.
Mike:But that may be a cost that everyone's gonna wanna have. Are you incorporating those conveniences? I mean, what if your long term care needs, instead of buying a policy, what if it ends up being that you rent or lease an in home care robot that takes care of your ability to shower, helps you cook and clean, helps that's a very real thing that could happen in ten years.
David:Yeah. It sounds sci fi, but it's maybe not far off.
Mike:So having flexibility, that's all about cash flow. Understand that lifestyle is gonna change. Life is dynamic. Be prepared for the dynamic nature of life. Am I saying that you should not buy an annuity that has guaranteed income for life?
Mike:I am not saying that. What I'm saying is every investment or product you could think of, anything that's ever been talked about, whether it's on the show or not on the show, is a tool. It has a purpose. It has something that it's supposed to do. It has something that it's not good at.
Mike:Treat the investments and products as tools. Understand their benefits, understand their detriments, and then use them appropriately, and blend them together. Maybe your Social Security is not enough, and you just want an extra $10,000 a year just to have a better foundation. Maybe that's appropriate for a lifetime income stream. You're not doing it for financial prudence.
Mike:You're doing it to just have that comfort, to give yourself permission to be able to retire. I've met very many wealthy people who said, look, it's not about legacy. It's not about financial prudence. I can't let myself retire unless I take that path. And I'm openly saying, is it in their financial best?
Mike:It's just probably not. But it helps them live within their emotional and economic limits, and that means a lot more, I think, to people than just, you know, oh, well, this is what the math says. We're humans. We're emotional, and that's a beautiful thing, but we wanna plan around that. So just be cautious about cookie cutter situations, be cautious about the different ways that you can go broke, market volatility, flat market cycles, which we really didn't talk about a lot today, cash flow problems, health care problems.
Mike:There's so many ways that you could go broke, but proper planning helps prepare you to know what to do in those situations, so that the odds are in your favor.
David:So you're being proactive instead of reactive?
Mike:Be proactive. Know what you're gonna do before it happens. That's why whenever we do an analysis for someone, the first visit isn't about the solutions, it's about going through the risks that they may or may not know exist, so we can proactively decide what's the right way for them to approach that risk. That's how it should be done. That's all the time we've got for the show today.
Mike: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. 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.
Mike: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.