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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
How do you preserve your assets so they keep growing to offset inflation, to pay your bills, to sustain your income that you need for the rest of your life? It's not ten to fifteen years, which is the old retirement. It's like twenty, thirty plus years. Welcome to the Retire On Time podcast, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times.
Mike:This show is all about getting into the nitty gritty. Now that said, remember, this is just a show. Everything you hear should be considered informational. This is not financial advice, so do your research. As always, text your questions to (913) 363-1234, and we will feature them on the show.
Mike:David, what do we got today?
David:Hey, Mike. Many of my friends have fired their advisers, put everything in the S and P 500, and are now dollar cost averaging out of the market to generate income. Does that strategy really work?
Mike:Well, first off, let's address the the elephant in the room. They fire their advisers. You would expect me to say, oh, no. You need it. You don't need a financial adviser.
Mike:So let's kind of play around with this a little bit. So why do you would someone need a financial advisor? For a specialty and expertise information that you do not have. Okay. Fine.
Mike:I find that's more about like tax situations or planning around tax regulations, maybe some strategies. You want to get things organized, which that is typically more focused around retirement planning than maybe growth planning. I mean, did you read that story about the the janitor up in the the I don't know, Northeast Of The United States, it's like Vermont or something, that had like millions of dollars and all he did was just buy companies he understood?
David:This sounds like a Matt Damon movie you're describing. Is this Goodwill Hunting? Was his name Will by any chance? No. Oh, okay.
David:Sorry.
Mike:No. He just a janitor. Oh. And he bought companies like Apple. He goes, well, Apple's a good company.
Mike:I'll just buy some stocks here. And so whenever he had extra money, just started buying companies and never sold them.
David:I I do think I've heard the story.
Mike:Yeah. You don't need to be a financial genius to just buy high quality companies. And chances are, if you've heard about them, there's a good chance they're probably a good company. I'm not gonna endorse anyone, but let's use the cliches. Apple probably will be around until Jesus comes.
Mike:Yeah. Not to be, you know, what, sacrificial? Not sacrificial. Sacrificial. Yeah.
Mike:Not to be sacrilegious, but I don't see Apple going away pretty much ever. Yeah. I don't see Google going away pretty much ever. Like, these are companies that play the infinite game. So do you need a financial adviser to tell you exactly how to do your portfolio?
Mike:A lot of advisers will argue and say, well, and I've been guilty of this. Well, what if you could get one or 2% better returns with us? Well, what if you don't?
David:Yeah. If you don't, are are you saying, well, it's not worth it?
Mike:You can't promise returns. Yeah. So the reason why you hire a financial adviser is because you don't want to do the work. Now you could also just buy some ETFs and call it good. That's broad diversification.
Mike:Let it ride. Is that the best thing? Who's to say? So with that premise in mind, let's go back to the question. So they fired their financial adviser.
Mike:I have no problem with that because a lot of, in my opinion, portfolios are really boring. They're held. They're not really adjusted. No one's really watching it. I mean, they're watching it.
Mike:They have to. Yeah. But are they really paying a lot close attention? I don't know. I I've I've not been impressed by things that I've seen being in this industry for the decade.
Mike:So okay. Got that. Understandable whether people people hire or not. But then what's the second second part is Yeah. So the strategy good?
David:Their dollar cost averaging out of the market to generate income. So that means.
Mike:That is dangerous. So in this situation, if I had to paint the picture, they're probably going all in on the S and P 500. And they've probably heard people say, know, S and P, it's it's across multiple sectors. You're diversified, 500 high quality companies. All of that is true, but it's all in the equities market.
Mike:That's the fancy way of saying the stock market. So when you're looking at that as a whole, you have to understand that markets will go up and they'll go down. Yep. People get that. Yep.
Mike:But it's when they go down, what do you do? If you're 20, 30, 40 years old, you're probably gonna keep working that you can recover what the market's not trying to time. The market, in fact, when the markets go down, you'd wanna put as much money into the market because that's dollar cost averaging in. And I think that's where they get this this idea they can dollar cost average out. It's not the same.
Mike:When you buy into a market at a discount, the markets go down, you're buying in, that's a positive. When you reverse the flow of things, it's called sequence of returns risk, which whoever did the naming convention of this Yeah. Yeah. Needs to get a life. It's the same thing.
Mike:Uh-huh. It's just think of it as when you're buying into companies, you're the buyer. So you wanna buy companies at a discount. Now that you own the company, you're a shareholder, do you want to sell shares of your company on sale or at a premium? Most people build their companies up to sell them at a premium.
David:Yeah. You buy low, you sell high Yeah. At the maximum.
Mike:So when when people say, well, rules change, they don't really change. Your position changes. You're not buying into a company. You're selling your company. Do you wanna sell at a discount or not?
Mike:So that's why when people dollar cost average out, they kind of miss the idea, oh, well, you know, it goes up and it goes down, but overall, it smooths out. Not really. Because if let's say let's say the portfolio goes down 30%, you would need a 40 what was it? 43% return to break even just to get back. K?
Mike:So now you're not really a a shareholder necessarily. We're just saying, how do you preserve your assets so they keep growing to offset inflation, to pay your bills, to sustain your income that you need for the rest of your life? And income, by the way, and longevity, it's not ten to fifteen years, which is the old retirement. It's like twenty, thirty plus years. I read like some guy, is it in Utah, that's trying to like live to a 150 years old or something.
Mike:Is he like a tech guy? Yeah. He's a tech guy that now is dedicated to longevity. Yeah. And he takes like, I don't know, a suitcase full of pills every morning, and he's like on some machine.
Mike:Right. He looks like a robot because his complexion's too perfect or something. Anyway, so so longevity is an issue, all that. So you need to keep your portfolio increasing overall. So so if your port back to this.
Mike:If your portfolio goes down by 30%, you need a 43% recur return to break even. If you're young, you can endure that. If you're in retirement, you can't. You need to take money out. Well, if you take out 4%, your 34% drop in the portfolio is now down 34%.
Mike:That would require a 50% return to break even. So now it's harder to get back to so it's when you sell your shares, when you sell your positions, when you sell your portfolio at a discount, you're making it more difficult to recover. Therefore, dollar cost averaging out of the market is a great way to generate income when markets are up, but it's a terrible way to generate income when markets are down because you're just shooting yourself in the foot. And is that making sense?
David:Give us the, like, the layman's version of dollar cost averaging. Like, how how can you explain that so that we I don't even I don't I don't know if all of our listeners will know what that means.
Mike:Yeah. So think of it this way. You tend to buy more things when they're on sale because your money goes longer. Yes. Yes.
Mike:Yes. So dollar cost averaging is the expression of buying things on sale as you put money into the market. Dollar cost averaging out of the market is basically saying, hey, I need money, so I'm going to sell my company for whatever the market price is for better or for worse. Do you want to be forced to like let's let's see what's an example. I mean, you're forced to do something, it's typically because there's a life event.
David:Okay. Yeah.
Mike:You don't don't plan for those. So if you have money in the market, markets are down and a tragic accident happens, your son's in the hospital and you've got to pay for the expenses, you're stuck. You have to just kind of deal with it and you're gonna you're gonna sell your shares at a loss, but you're keeping your son alive. It's worth it.
David:Okay.
Mike:You know what is planned? Retirement.
David:It should be, shouldn't it?
Mike:Yeah. And this goes back to the whole crux of, well, what do you do? And this is where the annuity salesperson comes in. They'll say things like, well, know, forget about market market volatility. You can buy an income stream for the rest of your life, which isn't what this person is saying, but it it bears repeating.
Mike:Dollar cost averaging, the the opposite of the risk of it's called sequence of returns risk. And with with that situation, when you sell at a loss, you're giving away your your assets at a discount. I mean, a business can't run if they sold everything at 50% off. It's not profitable. They're just trying to move inventory because they need cash, and they're willing just to give up some some cash or give up some profits for short term cash.
Mike:They're trying to clear their shelves. You're not trying to clear your shelves, like, out of a panic. You're not it it's a you're it's a different situation. So, where was I going with that? When you retire, this people will say, well, I I don't wanna I don't wanna be concerned about market volatility.
Mike:I don't wanna run out of money, and so they'll buy an income stream for lifetime income, which is fine if it's a part of your portfolio at most. The book How to Retire On Time talks about it's an argument against the lifetime income, but but the argument for it is you can get lifetime income, there's no market risk, you're guaranteed a paycheck for the rest of your life.
David:Sounds good on paper.
Mike:Yeah. But you trade, you you get you get rid of market risk, and you bring on inflation risk. So from 2020 to 2025, you lost 30 some percent of your buying power for the rest of your life, and you'll never get it back. Everyone that turned on lifetime income before 2020, 30% of their buying power from all of their annuities and or pensions that did not increase with with inflation, so there's no cost of living adjustment. So that's why people want it in the market, and they want a dollar cost average out, as this person explains, which is sequence of returns risk, but they wanna grow and they wanna take income off of the profits of their growth.
Mike:That's a one-sided strategy for a two sided market, and that's the problem. And this is why I I I tell people over and over again, just have a part of your portfolio in bear market reserves. Just something that has growth potential, whether it's CD, buffered ETF with over 50% protection, 50% buffer, treasuries, just something that can't go down when you need it. So that when the markets go down, you can take income, you can dollar cost average out of that part of your portfolio, as this person's saying, while your other accounts have time to recover. That's the critical part.
Mike:You've got to have two parts to your portfolio. One is how to draw income when the markets are up, and one's your backup plan, your bear market reserve, your bear market protocol, so that markets go down, you have the ability to take income without accentuating losses. That's how you can dollar cost average or solve for sequence of returns risk because what if you had a business and you knew that you could sell the business at either x price or better, but it can never be worse? That's not that bad of a deal. Yeah.
Mike:That's that's what what's going on here. And so it's it's what do you think about your 64 and this is another point too I wanna bring up. When you when you look at a sixty forty bond fund stock portfolio, right, forty percent's in bonds or bond funds, sixty percent's in stocks or or equity funds. The reason why they did that isn't to slow down your growth, it's to give you stability in your portfolio. It's a portfolio you could stomach.
Mike:Markets are down, let's say, 50%, you're only down 30%. That still sucks, but it's not as bad as it could have been. So hopefully, this person is building in some sort of and I'm not saying 40% is the magic number, whether it's 50%, 20%, something that's gonna help them find stability so that when markets go down, they don't panic, they don't accentuate losses, they're able to they're able to have a a backup plan. Yeah.
David:And so just to answer the question then, does it work to fire your advisor and dollar cost average out of the market to generate income?
Mike:The answer is yes, it works to fire advisor. No problem with that. I'm a very loud voice. I think I am. I don't know.
Mike:The Internet will tell you otherwise, but that that a comprehensive plan that you're able to follow on your own, You might need help making the plan, but that can save you a lot of money and fees. And if you have a simple situation, why wouldn't you do that? So and then the second question, dollar cost averaging, it it works when markets are up. It doesn't work when markets are down. So make sure you have a part of your portfolio that's principal protected.
Mike:And and, again, CDs, treasuries, buffered ETFs, those are more liquid. Do we know how you stack them? Some people will use fixed indexed annuities. They have to have what's called a five year period certain. So just for context, the typical market crash takes three to five years to recover.
Mike:Uh-huh. So you could buy a fixed indexed annuity, not for lifetime income, but say, this amount divided by five provides me the income that I need. So if markets go down, I can just turn on this income, and it takes care of five years. There's more than enough time for your assets to recover. That's a quick, like, anyone can push that button on their own, turn it on.
Mike:Very, very simple. So that these are different techniques that you can use for your bear market reserve that allows you to kind of get through those difficult times. That's how you solve for sequence of returns risk that allows you to dollar cost average out. Remember, you you can dollar cost average out if the markets are up. If they're down, you've gotta have that backup plan.