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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. My name is Mike Decker, founder of Kedrick Wealth, and joining me in the studio today is Mr. David Franson. David, thanks for being here.
David:Hello.
Mike:Get your questions answered on our show by texting them to (913) 363-1234. Again, that number (913) 363-1234. David, let's dive in.
David:Hey, Mike. I'm scared about the market, and I'm in all cash and short term CDs.
David:What risks, if any, do you think I am taking by doing this?
Mike:One of the most common misconceptions about financial planning or investments or really your portfolio, is that you can get out of risk. You can't. There is no such thing as a riskless retirement, and a lot of people think, oh, well, that's the case. No.
Mike:It's just not true, because it's a trade. To get rid of one risk, you have to take on another risk. So I get these situations quite often, actually. People will say, well, I've timed the market, or Liberation Day scared me, so I want all the cash. But whatever the flavor is the week, there's always a reason to be scared to be in the market, and it's a misunderstanding of the word risk.
Mike:So let me define it in a couple of ways. First off, most people will go to cash because they are scared of a market crash. So they are de risking market risk. Are you with me so far?
David:Yeah. And so quickly to define what it means to be like, is that literal like in cash?
Mike:Yeah. Like in a bank. Okay.
David:Just like your checking account, whatever.
Mike:So let's open it up a little bit. Okay. It's typically cash or cash equivalents. So checking savings, high yield savings Uh-huh. CDs are cash equivalent products.
Mike:You even could consider like a MIGA, a multi year guaranteed annuity, potentially as a cash equivalent, because it's just lower rate, fixed rate, it's due at some point. You've also got, like, a treasury, for example, that's a low yielding product, but it is lower risk overall, but we're defining market risk, not all risks. There's around 60 risks that we have found that are relevant for retirement. So if you are going into these low risk assets, does that definition help? Yes.
Mike:The low risk assets. Alright. These low quote unquote market risk assets increase other versions of risk.
David:So you're trading one risk for the other, really.
Mike:Yeah. You cannot not have risk. You like that double negative? Yeah. So why are we scared of the market?
Mike:Because of a market crash. In every seven or eight years, the market will crash. Got it. But you know what has happened every single time eventually, the markets have recovered. 100% of the time, the markets have recovered after a market crash.
Mike:You just can't sell. You have to wait. So notice the time here, you just have to give your assets enough time to recover. You know what's worse? Hyperinflation or inflationary issues, that is much, much worse.
Mike:So let me give you the example. If you were all cash in 2020, and we experienced hyperinflation, you had an inflationary crash where you lost 20 or 30% of your assets, but there's no way to recover. Notice the difference. A market crash, can recover if you just leave it in there. But when inflation gets out of control, as in twenty twenty, twenty one, 2223, this inflationary ride we just had, it's not going back.
Mike:You lost your value. The cash value has lost around 30% of its value of its purchasing power. So in other words, you had a different version of a crash. It was an inflationary crash in that symbolic sense. Are you with me so far?
David:Yeah. So, yeah, we we've traded market risk quote unquote with, like, inflationary risk. Yeah. Or or the money we have sitting and then the cash or cash equivalent is just lost value.
Mike:It's not going back. Mhmm. You don't de inflate, and we could talk a whole show about de inflation, what that really means. It's very painful. Usually, it's just inflation happened, we slowed it down, and we move forward.
Mike:Kinda like if you get stuck in mud or whatever, you kind of have to make a few steps, and then now you're at a new level, and then you have to keep just walking at that new level and kind of a weird analogy. But the reason I say this is because a lot of people say, well, inflation's not that big of a deal. That was a one time thing. The pandemic, we printed our money, not true at all. Consider, for example, World War one.
Mike:In 1918 and 1919, we experienced hyperinflation. The peak, I think, was, like, at 20% for a twelve month period of just hyperinflation, where a war affected supply and demand, the supply systems affected our economy in a way that, yeah, we experienced hyperinflation for a short term period of time, and that's The United States. After World War two, we experienced another period of hyperinflation. We didn't go backwards. It's just everyone's money, monetary value lost its value significantly.
Mike:In the sixties, seventies to the eighties, we experienced a very long period of hyperinflation. You may remember that. Most people listening here, these are different versions of market crashes, except for you don't recover unless you're in the market. Because when inflation happens and you're not in cash, but you're in, like, a stock, the stock's value might increase at a higher or more rapid rate because it's also adjusting for inflation potentially.
David:Okay.
Mike:That's a very oversimplified explanation of a very complicated economic situation, but I wanna really highlight the importance of this point. You can't not have risk. If you're going all to cash and cash equivalents, you're either saying, I am okay ignoring inflation risk, and inflation could come roaring back. If Trump trips on his tariff policies or these deals that he's trying to do, if something goes awry, we could experience hyperinflation again. No one knows.
Mike:But are you okay with that risk? We have to be aware of that. The other risk that we haven't talked about is reinvestment risk. So let's say that you've got all of your money in cash and cash equivalents, and you're averaging three to 4% on these assets, and then the markets crash. Well, you were really smart because you didn't go down with the stock market.
Mike:Right? Well, you're living off of these rates three or 4%, and you just live off the profits. Forget about inflation because that's not even a consideration in this situation. But when the markets crash, it's very common that the Fed will drop its interest rates to try and make money cheap again so that the markets can recover a little bit faster. So now you're living off of three, four percent inflation or the Fed interest rates go down.
Mike:Now you've gotta live off of what? 2%? Mhmm. Your income just got cut in half. And again, forget about inflation because we're not even acknowledging that.
Mike:Oh, but, Mike, the older I get, the less I'll spend. No. It just changes. Beginning of your retirement's more focused on travel. The end of your retirement's probably more focused on health care costs.
David:Yeah. Have you noticed that? That's like people thinking that they're gonna spend less in retirement because maybe the kids are gone, so you lose that expense, or maybe is that like a fallacy? When your kids leave the house and you got grandkids, do you spend less or the same amount on your kids?
Mike:What I have noticed, and this is an anecdotal observation, is that those who have had parents pass in their earlier years, so like fifties or sixties, or they did not have to take care of their parents because they were healthy, are unaware of the expenses. But many people who are entering retirement now are still taking care of their parents, and they realize how expensive it is. And they're the ones that are putting money in the market with the intention that in ten, twenty, thirty years, that money is there for health care reasons. They're not buying long term care insurance. You don't need to buy long term care insurance.
Mike:Look. Let me say that differently. I'm licensed to sell long term care insurance. I've never successfully sold a policy, Because if you need it, you probably can't afford it. And if you can't afford it, you probably don't need it.
Mike:Because after ten, twelve years, there's a break even where if you just put the money in a reasonable portfolio, you'd probably have more benefits or dollars to use or to spend than a long term care policy. The policies today are not like the policies that used to exist. If you got a policy ten years ago, maybe you got a good deal and you got lucky, but they're gonna probably keep increasing the premiums on you to try and recoup some of the costs because they priced it in wrong, but that's another conversation. But the point being is there are many people who say, well, we're really, really smart because we've amassed a lot of money, and we don't need to take risk anymore. We're just gonna live off of treasuries, and cash, and high yield savings, and CDs, because we can't stomach market risk.
Mike:And that's just one half at best of the conversation while being completely blind to the other risks that are associated with it. And then people will talk it away or explain it away by saying, well, we don't really even need all this money. And well, if we had to, we could strap down our budget. It's like, well, if that's the case and you're really able to be that flexible, then why are you sitting on all of your money doing nothing? Let me say that differently.
Mike:I have no problem with people having cash or CDs or treasuries or buffered ETFs or structured notes or products that are less risky than the stock market. But should all of your assets be in that? Notice the extreme. Because if you put some money in the market, and let's say Trump just destroys the economy, do you think the American economy will recover within ten years? It's always done it.
Mike:Now maybe it's the first time that it doesn't recover in ten years because flat markets exist. Maybe it's twelve years. No one can promise you anything. Right? The market has risks associated with it.
Mike:But over a long term period of time, stocks tend to recover. They've always done it. And if you don't need the money for ten, fifteen years, what are the chances Microsoft is a larger company in ten years than it is today, and that their shares or their their stock has grown in value ten years from today? What are the chances that Costco is a bigger company ten years from today? Probably pretty good chances.
Mike:I don't think they're going bankrupt anytime soon. So you have to ask yourself, are you really getting rid of risk, or are you unknowingly taking on additional risks and not realizing it? This is the problem with oversimplified advice. This is the problem with what's called the Dunning Kruger effect. It's overestimating your own abilities because you don't know the right questions to ask.
Mike:You don't know the right risks that you're taking on. You cannot not take risk in retirement. It is impossible. It's understanding which risks are you inheriting. Are you okay with that?
Mike:And then what's your backup plan in case you're faced with that sort of risk? But no, for all those listening into the show, whether it's podcast, YouTube, the radio, please don't make the egregious error of thinking that you have no risk in retirement. It is impossible. Even the income for life annuity income stream has risks. It's just, are you willing to put in the effort to dive in the details to understand the risks?
Mike:Are you willing to have the grit to face these potential risks? And then are you willing to put in the time to plan and prepare for the risks, so that when they happen, you know what you're gonna do?
David:This might depend client to client or person to person. Like, what percentage of their portfolio should have some cash in it? If any, or how much, or is that hard to answer?
Mike:It's hard to answer because I believe a portfolio should be built around their emotional and economic limits. So I have no problem with a portfolio is 40% cash and cash equivalents. Notice it's not a 100%, and it has to make sense for a very specific reason, and the timeline has to make sense. So let's say 40% of their assets, and this is a very arbitrary thing. Don't do this.
Mike:You put your plan together first, then you put your strategies together, then you put your portfolio together. But let's say they wanna live a lavish lifestyle for the first five to seven years. Okay? Great. No problem.
Mike:They're laddering out to have a lot of cash on hand. Just that's what they're spending down, and it's in high yield savings. It's in CDs. It's in treasuries, and it just kinda laddered out until that portion of the portfolio dries up. And the 60% of the portfolio was laddered with maybe there's some stocks in there.
Mike:Maybe there's some buffered ETFs to hedge out that market volatility, aka the roller coaster. Maybe there's other components associated with that part of the plan, so that it has more growth potential than cash. It can be there to hedge against inflation, but it's balancing things out, and it is within their emotional limits. Just because it might be, I don't know, the best way to grow money according to many people that you just put all your money in the stock market, that's not the purpose of your money in retirement. The purpose of your money is to serve your lifestyle needs.
Mike:That means there's a good chance that all of your money should not be in the stock market. I would even say there's a good chance that all of your money should not be in the stock and bond market. There are other markets to consider, and the cash and cash equivalents market is a very realistic and often appropriate part of at least part of a portfolio. 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 podcasts.
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