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 on Amazon, or by going to www.how to retire on time.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 advisor, insurance agent, and 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.

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 Fransen. David, thanks for being here.

Yes. Happy to be here. Thank you.

So David's gonna be reading your questions, and I'm gonna do my best to answer them. You can send your questions in by either texting us to 913-363-1234. That's 913-363-1234, or email them to hey mike@howtoretireontime.com. Let's begin.

Hey, Mike. Do you recommend the 60 40 portfolio for a retiree, or do you follow the rule of 100?

Oh, this person's trying to put me in a box.

Well, tell us why. Yeah.

Yes. The the reality here is I don't subscribe to either. Uh-huh. But I wanna give both philosophies a fighting chance. Yeah.

So let's break down what the 6040 is for those who don't know or are familiar with the term. Let's break down the rule of 100 and give them both the rationale behind them.

Sounds fair.

And then I'll I'll explain why I don't agree with them. So first off, the 6040 split. Basically, the idea is if you put 60% of your assets in equities or stocks, they're intended to grow. Mhmm. Bonds or bond funds would be 40% of the portfolio, and they're really intended to have some growth.

Bonds really don't grow as much as stocks overall in the long term period of time. But if the markets crash, historically speaking, the Fed typically drops interest rates. And if the Fed drops interest rates, that usually means that bonds increase in value. Does that make sense? Or do you want me to explain why there's an inverse relationship?

It's so tricky.

Yeah. It is tricky. So

yeah. Let me give you the chicken analogy.

Oh, yes. Yes.

Alright. So, David, if I were to sell you a chicken for a $1,000 that's guaranteed to give you 3 eggs every single week, You know what you're getting. Right? Yep. Alright.

So let's say you buy a chicken from me. Great. You got 3 eggs for 10 years for the rest of your life. Three eggs every week.

Is it every week? Yeah. Okay.

Yeah. Three eggs every week guaranteed for 10 years. And, look, foxes can't kill this chicken. This chicken is protected.

Alright.

K. Don't worry about that. Now science has a breakthrough. I'm now selling chickens. They're gonna give you 5 eggs every week.

Do you think your chicken's still worth $1,000 when there's something better that I'm also offering? Not anymore. No. Okay. So that's why you'd have to sell your chicken at a discount to compensate for the lack of eggs that the person who would buy it from you would receive.

Right.

That's how bonds work. So if interest rates go down, that's like saying, hey, all the chickens that we're selling now are offering 1 to 2 eggs. So your chicken with 3 eggs is more valuable because it's producing more eggs. But if interest rates, for example, go up, it's like saying my chickens are now offering 5, 6, 7 eggs per week. So my chicken's now more valuable than your chicken.

So your value, that $1,000 is now, like, $800 or whatever it might be because you have to offset the difference. That's why there's an inverse relationship. K? It's comparing what has been issued versus what is being issued and where the better deal is. At the end of the day, it's how much are you gonna get out of your money.

Right.

So if markets crash and the Fed decides, hey. We need to lower interest rates to try and make money cheap. And if we make money cheap, that might stimulate the economy. That's where the rationale comes in. And if you look at 2,008, bond funds killed it.

They made so much money in 2,008, and all I remember is that banking was about to collapse and, you know, equities had fallen off a cliff and so on.

Right.

So that's the rationale is that if equities are going down, the markets are crashing, the fed would drop rates, and the bond market would normally act in increase in value. Well, if you haven't noticed recently, the bond market isn't really acting normally. The equities market, couple of years ago, went down, and the bond market went down at the same time because inflation was an issue and there were unforeseen circumstances. Debt keeps getting to be worse. Bonds, like 10 year treasuries, for example, aren't reacting the same way they used to with the fed and all of that.

And so I would question the validity of such a simple concept of putting 60% of your assets in equities and 40% in bonds because bonds aren't acting normally. Maybe they do in the future, but maybe they don't. And the question is, maybe you need income, but there's no situation where maybe you don't need income. Like, you need income. Right.

So you need this to work, and you can't guarantee that the 6040 can't lose money. You do not draw income from the account that's lost money. If your accounts go down 30%, you would need a 43% return to break even. If markets went down 30% and you took 4% from your portfolio, you're now down 34%. It's now you need a 50% return to break even that might take you a couple of years.

Yeah. And you're drawing income along the way. So you're just limping along. So that that's why I pause in such an oversimplified concept. I know it won a Nobel Prize.

Mhmm. But back then, bonds were operating more normally. Things have changed. We need a more modern portfolio, in my opinion. Now let's talk about the rule of 100.

If you haven't heard about the rule 100, here's basically what it says. Your age is the percentage of assets that you should have in bond funds.

Okay.

So if you're 60 years old, 60% of your assets should be in bond funds. You're 70 years old, 70% of your assets should be in bond funds. It's that's it. And the idea is the older you get, the less risk you should take. Though it's a well intended concept, I believe, and there there's research to back up my opinion.

It's not just me talking on a soapbox here, that the day you retire is the day you take the least amount of risk. And that as you continue on in retirement, you can afford to take more risk. Why is that? Well, when you retire, let's say you retire at 60 years old and you live to 90 years old. Okay?

60 years old to 90 years old, 30 year retirement. Great. Let's say the markets crash every 7 or 8 years. You've got maybe 3 to 4 market crashes significant market crashes in that 30 year period of time. Let's say 4.

Okay? So why are the bond funds there? The bond funds were originally there in the rule of 100 or in the 6040 split because they were there in case the markets crashed. If markets never crashed, you'd just be all in equities. So if you have 30 years left in your retirement before your assumed date of death, okay, you just need to get through roughly 4 market crashes.

So after you've gotten through 1 or 2 market crashes, do you really need to have that much protection in your account? Maybe not. You just need to have enough to get you through 2 or 3, at most, probably 2 market crashes. Is this making sense?

Yeah.

So when I created this concept of the reservoir, the idea was so simple. It was just basically saying, hey, If you could put enough aside into principal protected accounts, CDs, treasuries, fixed or fixed index annuities, maybe you're young enough, you can fund a cash value life insurance policy. Maybe we use structured notes. Maybe we use some buffered ETFs, whatever it might be. But you have assets that cannot lose money.

So when the markets go down, you draw income from them. You just need to have enough to get through roughly 4 market crashes, in theory. Mhmm. That means once you've gone through 2 of them, you only need 2 left. The rest can be more focused on growth.

And what's the rest of the portfolio supposed to do? Well, maybe you can't spend it all or you don't wanna spend it all. So maybe you're investing in more towards legacy purposes because you don't need all this money. Maybe you're putting on a side account to do charitable gifting because you have charitable intent. The options are there, but, like, why do we have protection, or why do we lower our risk to get through market crashes?

So instead of us taking this oversimplified asset allocation balanced concept that pays no attention to the market patterns, why not build a plan and then start looking at how often new markets crash? How often new markets go flat? What's the amount of protection that I have in my portfolio? How do I get through those market crashes without accentuating losses? Do I have strategies that can help offset or lower the risk of these crashes?

And then you just kind of start to create strategies or plans. Strategies within your plan, it would be more specific, to then support the quality of life that you want. This is why I say put a plan together first, then explore the strategies to help get more out of your money, to help find efficiencies, and then you build the portfolio. And that's where, again, you don't need to have your age and all these bond funds in there that might struggle to keep up with inflation. So you don't need to have this constantly rebalanced, perfect, alleged, silver lining attempted portfolio that really hasn't always worked, isn't guaranteed to work, and that maybe you should take a part of your portfolio and put it into principal protected accounts so that when the markets do crash, you've got this reservoir to draw from while your other accounts recover.

I mean, the concept is so simple, yet so many people seem to miss it because it goes against this traditional cliche old school mindset of, well, 6040 split won a Nobel Prize, so I'm gonna stop thinking and just do that. Or, well, someone once told me that the rule of 100 is the way to go, and so I'm gonna do that. I mean, have we suspended critical thought, really, in the financial services space? Let's let's start addressing practical application of more detailed strategies. Let's get into the nitty gritty.

Let's explore people's lifestyle and legacy potential and then how to maintain that plan in an up or down markets. I don't I don't think I can explain it any other way.

No. No. I I think I followed along with that, and then I I I get it. The reservoir sounds like, like, a a good option to, have that protection. Right?

Yeah. That you got. I mean, I didn't pay you to say that, but, I mean, you're part of the company.

Yeah.

But, I mean, the reality is we've done our research. Yeah. Yeah. Yeah. If it was if it was better to do the 60 40 split, our lives would be easier.

If it was if the rule of 100 really made sense, we'd be doing it and our lives would be easier. It is more difficult for someone to implement the reservoir strategy in their plan. But based on a research, it increases their probability of success. It increases their future flexibility for lifestyle expenses or health care expenses in the future that you might not even know exist. And this list goes on and on and on.

I mean, really, at the end of the day, we want growth, and we need some protection to help us through the difficult times. 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.

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.