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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.
Hello, and 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 you can go to www.how to retire on time.com to get the book and some bonuses as well. 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, an insurance agent, and a tax professional, which means when it comes to financial topics, we can pretty much discuss 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 personal financial advice, at least if you want it from my team, you can request your wealth analysis at no cost by going to www.yourwealthanalysis.com. With me in the studio today is my esteemed colleague, mister David Fransen. David, thank you for being here.
David:Yes. Thank you. Good to be here.
Mike:David's job, you got an important role, is to read your questions, and I'm gonna do my best to answer them. You can send your questions in now or later, but just save this number, 913-363-1234. That's 913-363-1234. You know what's fun is you can submit those questions anytime in the week. We collect them all, and then we address them on the show.
Mike:So you can send them in 913-363-1234 or email them to hey mike at how to retire on time.com. Let's begin.
David:Hey, Mike. I just read your Kiplinger article titled 5 ways to lower your risk in retirement that was published this morning. I want growth and protection, but I'm concerned about not having enough liquidity. How do you find the right balance?
Mike:Alright. Yeah. So this article, wow. That was fast. It was it was on, Kiplinger, and it it basically suggests that there's no such thing as a perfect investment product or strategy.
Mike:Nothing does everything well. And so we all want 3 things for our investments. We want growth, we want protection, and we want liquidity, but you get to pick 2. So if you choose protection and liquidity, you're looking at a high yield savings account, a checking savings account, money markets, that's kind of it. Right?
David:K.
Mike:If you choose growth with liquidity, you're looking at mutual funds, you're looking at ETFs, stocks, bond funds, you know, that kind of category, private equity. We'll talk about private equity in a second. But in traditional sense, the public markets, you got your stocks, your bond funds, your mutual funds, your ETFs. More growth potential than any other category, but can lose money. And then you have the 3rd category, growth potential with protection, so it can increase in value.
Mike:But it also it can't go backwards, but it's, say, a liquid. Mhmm. You can't have your cake and eat it too. In the alternative space, it gets a little bit more convoluted, like private equity and private debt or private credit. There may be more growth potential, but you've got liquidity issues.
Mike:So you gotta be careful of that. In the privately held REIT space, you've got some liquidity issues is there. So alternate space gets more convoluted. Doesn't make it bad. It just makes it different, a little bit more complicated.
Mike:So let's stick with the basics, the public markets, and what most people seem to be working within. K? So if I've said this once, I've said it a 1000000 times, don't try to figure out your allocation percentages in your portfolio until you have a plan first and you understand the strategies you want to implement. Why? How in the world can someone determine how much protection they need without a plan?
Mike:On what basis has that conclusion been made? I mean, really. Oh, I took a suitability questionnaire and they said, well, I should have 60% in bonds and bond funds. Where's that coming from? Oh, it's because I can only handle so much potential loss?
Mike:Well, bond funds can lose money. Mutual funds can lose money. So you're just saying this is the perfect balance between how much growth potential I want and how much downside risk I want, but no one really knows. It's just kind of trying to find that perfect balance. I mean, it it's such an impossible game.
Mike:Yeah. I mean, really. Then to to give people a questionnaire, and it's this is so manipulative. How much loss would you be comfortable experiencing? And they put it in the dollars, by the way.
Mike:So you got a $1,000,000 and well, would you be okay losing a $100,000 of your $1,000,000 portfolio? Yeah. I could live through that. How about $200,000? How about 3 hun could you lose $500,000 and people start panicking?
Mike:Oh, well, based on that, I guess we need to put 60% or or 50% in these less risky assets. Notice the term less risky. There's still risk, which almost defeats the purpose of growth. Do you wanna grow your assets? Oh, well, yes.
Mike:Okay. But you're allocating it based on this arbitrary suitability questionnaire based on how much you're concerned about losing that you shouldn't have that much growth. Because it's it's it's simple as more risk equals more growth potential. And so when you have less risky assets, you've got less growth potential. And how do you offset inflation with less growth potential?
Mike:It's without context. You might as well just look at a dart board or a couple of dart boards, put a blindfold on, start throwing darts. I mean, I just I I I can't explain it. I know that's how the industry does it. When I got my licensing, they talked about this.
Mike:I get the idea behind it, and it's well intended. But those suitability questionnaires, I have found are really built to rationalize how to sell you a stock and bond fund portfolio. That's what I've seen. I could be wrong. There's always exceptions to the rule.
Mike:It's just my opinion. There there's someone in particular that I I'm thinking of that took the questionnaire and basically told the person, hey. Look. I don't want to lose money. He said, got it.
Mike:So he put this person all in bond funds, and then the person proceeded to lose money. Because that's what the suitability did, and the suitability disclaimer, if you read it, says, well, this is your portfolio based on how you answer these questions. So if you don't like the portfolio, it's because you answered the questions wrong.
David:Oh, boy.
Mike:That's like walking to a doctor's office and saying, hey. I want this procedure. Okay. Yeah. I want this medication.
Mike:Okay. Answer these questions this way, and you'll get the medication. I mean, it just it's without context. Right. So here's what the article is trying to to suggest.
Mike:Bond funds aren't safe because they can lose money. It doesn't make them wrong. It just means they might have less upside potential, but they've got less downside risk. And if the markets were to crash and the fed were to drop rates, it could offset some of your losses in the stock market. There is a reason why people use them, but it's not the only way.
Mike:There are 5 other investments or products that could be used as bond or bond fund, specifically alternatives, that actually protect principal, at least as good as the the entity behind it, the creditor, right, or whoever it is, the business, the insurance company, the the creditor, the bank, that can maybe give you more of what you're looking for. So here's how you find the right balance, and this is how I I believe suitability should be done in some sense. Put your plan together first. You need context. Let's say you're gonna retire next year.
Mike:Got it. What do you invest in? All stocks and and bond funds. Okay. Are you comfortable with that much risk?
Mike:No. Not really. Okay. Got it. What do you want your life to look like next year?
Mike:Do you wanna travel? Do you wanna have extra income next year? Do you wanna have additional income for the 1st 5 years of your retirement and then let it drop off? What what does your lifestyle look like? Let's articulate that first.
Mike:Then, what do we need to know about your your efficiencies? Are most of your assets in pretax accounts? Do we need to be doing IRA to Roth conversions? What's your Social Security look like? How old are you, and how close are you to Medicare, and do we need to prepare for that?
Mike:Do we need to bridge the gap of Medicare? And if so, then what are the tax strategies need to be before Medicare so we can help you get a better deal from the affordable care act before Medicare starts? And do you see how it's all connected? Mhmm. Yeah.
Mike:You've gotta know the strategies and the efficiencies you're gonna work with to get you the lifestyle plan, then you can start talking about the investments of products to build a portfolio. So once you have all of that figured out, and it's hard to do on your own, then you start saying, okay. This is the income that I need for the next 5 years. The markets could go any way over the next 5 years. It could be a horrible crash next year, or we could experience wonderful growth in the near future.
Mike:No one knows what it will be. So to sleep better at night, maybe you use CDs and bonds, not bond funds, but bonds, and ladder out your income needs for the 1st 2, 3, 4 years. Now you know regardless of market conditions, your income is from a principal guaranteed source. Everything else is able to grow for a couple of years. So if the markets do crash, you've given your portfolio time to recover.
Mike:Do you see how this becomes much more deliberate?
David:Yes.
Mike:And no questionnaire can really answer these these questions or these needs? Right. Just doesn't exist that I have found. Actually, I'll put that disclosure. That I have found, and I've looked far and wide.
Mike:And then you might say, okay. Well, after 5 years, what do I need? Okay. Well, maybe maybe you look at these investments or products that offer some protection, so you've got enough from principal guaranteed sources that you can just kind of maintain as a part of your portfolio, so that the other part of your portfolio can grow. And if it if the markets go down, you don't need to draw income from it.
Mike:Remember, there are 2 parts to a portfolio. There's growth with risk, and there's growth with protection. The protection means you lack liquidity, so you need to ladder out that liquidity so you always have enough liquidity to support your lifestyle. Some people, they might put 10, 20% in the growth with protection category, and the rest is able to grow. They're more comfortable with risk.
Mike:Mhmm. Other people, doesn't matter what their plan looks like, doesn't matter what the market looks like. They just need to know that they can't go backwards with the majority of your portfolio. Maybe they put 60% of their assets in growth with protection. We need to live within our economic and emotional limits.
Mike:You've got to be able to sleep well at night even if you were to experience another 2,008. It is so, so important. So how much do you put in each category? It depends on your plan. It depends on your lifestyle.
Mike:Most people I have met, and this is just my experience, are much more comfortable taking a portion of their assets and putting it in the market at risk knowing they don't need to touch it for 7 to 10 years. But if they think they need to touch it next year, they're concerned.
David:Yeah. That makes sense.
Mike:They emotionally, they start trying to time the market by going to cash and cash equivalents, like all in CDs, all in cash or short term treasuries, and wait for the market to crash. I think about 1953, specifically 1954 in this situation, and here's why. 1953, we were in a recession. It was a rough time. The market basically were just going down.
Mike:It was it was very scary for a lot of investors then. And then 1954, it just kinda went up. It was it's, I believe, the 2nd best year ever in the market. Wow. And people did not expect it.
Mike:We do not know what will happen in the future. But if you allocate a portfolio, growth with risk, but you don't need to touch it for a longer term period of time, You could touch it earlier on if you want. You could access it if you want, but you don't have to. And another part of your assets with growth with protection, you really alleviate a lot of these lifestyle concerns. That's deliberate planning.
Mike:That's what the book, how to retire on time, is what it discusses. But you can't get the balance right unless you plan first, explore the strategy second, focus on growth, and then design the portfolio. That is the order. For those that didn't read the article, I don't think I mentioned it, but the 5 growth categories that you of growth with protection, you've really only got 5 options.
David:Okay.
Mike:CDs, treasuries, or bonds that are not high yield. Right? So high yield is a, is also known as junk bonds, reasonable credit behind the bonds or US treasuries. You got fixed annuities, which are basically a CD from an insurance company. Just make sure that you don't need it until after 59a half because you can't access annuities until you're 59a half, or else you get a 10% penalty.
Mike:And then fixed indexed annuities, which I believe have more growth potential than CDs or treasuries. And we could spend a whole hour just on that on why that is. Mhmm. Most people don't realize how annuities actually work. Many insurance agents can't really explain how annuities work, but you can use them as a bond alternative to grow your cash with protection as long as you don't sign up for the fees and the riders and all these bells and whistles an annuity is never gonna be a long term care policy.
Mike:In my opinion, it's not appropriate. Guaranteed income for life has a cost to it. Do you understand that cost to it and the limitations that it brings? Because it is risky from a tax and inflationary standpoint. So if you get rid of the bells and whistles and do good due diligence, a fixed indexed annuity, in my opinion, has more growth potential than a CD or a treasury.
Mike:So if you're focused on growth and you blend them together, could be a good option for you. And then you've got cash value life insurance if you're young enough, if you're healthy enough, and if you've got 5 to 10 years that you don't need to touch it, but you can fund it correctly. That's a very complicated situation as well, which you can look at my Kiplinger, articles and read more about that if you want as well. But no one should be in the same category as another. We're all different.
Mike:Everyone has different needs, different emotional limits, different lifestyle expectations. So there really is no one right answer. It's understanding how to use the tools in the toolbox and to paint your picture. 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.