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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. I'm a licensed financial advisor and fiduciary. And with me in the studio today is my colleague, David Franson, who will be reading your retirement questions. As always, you can submit those questions to (913) 363-1234.
Mike:Again, that's (913) 363-1234. David, what do we have for today?
David:Hey, Mike. I am comfortable taking risks even in retirement. For people like me, what type of portfolio would you recommend?
Mike:The first thing we need to address is the misnomer that more risk equals more reward. It's potential reward. And if you have a long time horizon, then, yeah, being more aggressive can be helpful. Ray Dalio, a very famous fund manager, once said that unless you're aggressive, you're not gonna make any money, unless you're defensive, you're not gonna keep any of your money. And the misnomer is in retirement that you're going to make money by taking more risk.
Mike:It's not necessarily true, and it's really based around, I don't wanna say the sequence of returns risk. What I'm talking about more is volatility. So David, before you worked here Uh-huh. Did you have a clue what the word volatility even meant? Just think back before you were educated in finance.
David:Right. Yeah. I mean, maybe not in the financial context, and, you know, I think we knew basically what volatility meant. As it applies directly to the markets and your personal finance, maybe not. And and sequence of returns risk is another sort of,
Mike:like, is that? Yeah. So let's define volatility is the movement in the market. Okay. K?
Mike:We like volatility when it's good, as in when it goes up. We don't like volatility when it goes down, but you can't have your cake and eat it too. So when you've got a shorter time horizon, then volatility or the bigger movements up or down can be good, or they can be bad, but you don't have time to kinda let things average out. So for example, if you had put money into the S and P 500 in February, there was a lot of volatility, a lot of ups, but also a lot of downs, and you ended up with around zero returns over a ten year period of time. Now from 2010 to 2020, you'd have averaged around 14% year over year returns.
Mike:That's good volatility, but no one knows the future of volatility. Yeah. It's the roller coaster, and roller coasters go up and down. Yeah. Oh, it's
David:gonna make some fun. Right? Yeah. Maybe not when it's your life savings, though.
Mike:Well, it could be, but No. Not really. It depends on Now what you're looking the second part is, well, if I just hold on to it long enough, it should recover. You've gotta have, in my opinion, a fifteen to twenty year period of time for that really to make sense. When you retire, it's not about shooting the moon.
Mike:It's not about trying to really, really grow your assets. If you need the money, you've got to lower the volatility and increase the predictability. Notice the difference there. We might be lowering the volatility, the ups and downs of the roller coaster, but we're increasing predictability. Okay?
Mike:So let me give an example. You could be invested in a bunch of stocks. They go up, they go down, and you hope overall they go up, but it's not certain. And they can go up as much as they want. Look at Palantir and what that's done.
Mike:That's insane. But Palantir in the beginning of twenty twenty five also had a 40% top to bottom. Can you stomach that, and what would that average out to be? So these are things to look at. Super Micro company also had a very highly volatile stock.
Mike:They've got huge swings going up and down. And then if you got other stocks like Costco or Walmart or I would even throw it's like Apple isn't as volatile as it may be because it's not incredibly high growth. It's just more it's slowed down a little bit in its volatility or its breath. That doesn't mean it can't have big swings. It just means it's maybe not swinging as big as it did originally.
Mike:Are you with me so far?
David:Yeah. It sounds like the big established players, Costco's, Walmart's, Apple's, their sort of peaks and valleys are much smaller.
Mike:They're just more predictable.
David:Okay.
Mike:Yes. They're more steady businesses. I mean, look at Coca Cola.
David:Oh, yeah.
Mike:Do you think AI is going to revolutionize the enjoyment of a bubbly beverage? I can't imagine that it does. So you can still grow your wealth with more predictable stocks as a part of your portfolio, but maybe maybe that's not what you wanna do. That's fine. But do you see the trades here of just predictability versus bigger swings?
Mike:Because when you need the money, it's gotta be there, and you can't draw income from assets that have lost money. Now let's continue down this path. Let's look at bond funds. K. Bond funds are less risky or less volatile, technically speaking, than stocks.
Mike:What does that mean? They've got less growth potential, but they shouldn't lose as much money either when things go sideways. But bond funds can lose money. Well, what if we looked at something a little bit different? What if we looked at something like a buffered ETF?
Mike:Yeah. Explain that. Yeah. So a buffered ETF is basically a very fancy ETF that uses contracts to give the investor up to typically, let's say, like around 7% of the upside of the S and P, for example, and rates will always change. Let's say you get the first 7%, that's called a cap, so you get up to 7%.
Mike:Anything above that was a contract that was sold, someone else got those gains. But you can't go backwards. So if you hold it during the duration or that one year period of time, if the market's tanked, you don't lose money. It resets, and now you've got the next year for that up to 7% growth. So do you see how there's still upside potential?
Mike:You still could grow your funds. You could still grow your money, but you can't go backwards. You have locked in your gains. As in you've sold some of your assets, you can't go backwards, you're still trying to make money, but you're okay not trying to make the most money. Now should all of your portfolio be in that?
Mike:No. One of the biggest red flags is if all of your portfolio is in all of kind of the same thing that is oversimplification, maybe an over generalized or risky portfolio. That's just my opinion. But what if you had a part of your portfolio that couldn't go backwards? Do you see how you're now maybe giving up some of that upside potential, but you're significantly decreasing that downside risk?
Mike:So you're kind of moving a wild roller coaster into a roller coaster that you could handle that still has reasonable upside, that still is gonna fit your legacy goals, your lifestyle goals, keeping up with inflation, outpacing inflation, things like that. You see the difference here?
David:Yeah. Absolutely. I think I do. That it sounds like you're saying that when you're going to need those funds, like, early in your retirement, right, to to draw income. And so we don't want them losing too much too soon, because as I think I've heard you say before, if you're drawing income from an account that has had losses
Mike:You accentuate those losses. It makes it more difficult to recover. Right. Now let's talk about averages and how they can be deceptive. Let's say your portfolio is a very volatile portfolio.
Mike:Let's say you've you've really purchased some nice stocks, but they're volatile. K? High beta. You could say if you if you're familiar with the term or looking at it on our Morningstar reports.
David:Okay. Industry terms there we get to learn about?
Mike:Yeah. Look them up. They're interesting. But let's say you're expecting you look back, and this year it did, you know, x percent, this year did x percent, the next year did x percent. And you put them all together, and you do a simple average, and you say it's about 10% is the average that you would expect.
David:Okay.
Mike:Okay. Well, what does that really translate to? If it's, like, nine percent one year, then 11% the other year, do you notice how the returns are close enough to each other? Then the 10% kinda makes sense. The larger that variation gets, the less accurate that average is going to be.
Mike:So let's do an exaggeratory example. Let's say that you're gonna get let's do 50% in one year, but a 30% crash in the the next year, which can happen. I don't remember a time where the markets made 50% on their own, like at the S and P five hundred, for example. So if the markets go down, let's say 30%, and let's say you have a $100,000 invested, you're now down 70,000. And then the market's increased by 50%.
Mike:You've averaged 10%, but your cash value is at a 105%. The cash value growth was really about two and a half percent. Mhmm. So do you see how the increased volatility, the increased exposure to the market might not always work out to your favor when you're looking at shorter time horizons when it comes to income planning or distributions or withdrawal rates. It may not be as effective if you're looking at legacy planning, charitable gifting, or just moving funds around for your lifestyle and legacy purposes.
Mike:But if you had 9%, 11%, 10%, 6%, If the averages are kind of in the same, there's a more predictable range, then it may make sense. Do you see the difference there?
David:Yeah. We wanna keep things within a a range, I guess, that we're comfortable in. And if there's a track record of it staying sort of similar, then we can hope that that continues.
Mike:And the most important thing that you could really do in this exercise is to not let greed take the wheel. Let me tell you a quick story.
David:Does it involve Gordon Gekko?
Mike:No. Oh, okay.
David:Well, continue on anyway. Yeah.
Mike:So when I was, I think, 11 years old, my family went we were going to Lake Powell for a nice kind of family boat trip. Right? Lake Powell was in Southern Utah, Northern Arizona, but we flew into Las Vegas, and then we we drove there. So we flew in Las Vegas. We stayed one night at the Circus Circus Hotel, and we just kind of had fun.
Mike:What do you do if you're a kid in Las Vegas? Well, you don't gamble. You don't you you do buffets, and you do roller coasters kind of Right. That's kind of it. Maybe a magic show.
Mike:So we went to the stratosphere. If you know what the stratosphere is, think of the Space Needle, but in Las Vegas. And on the very top, they have this ride called the Big Shot. I think it's still there. The Big Shot is two, three hundred feet vertical.
Mike:It goes straight up, k, on top of the stratosphere, on top of the building. So it's like the highest building, I think, in Las Vegas or one of the highest. K? We get to the very top. We're on the roof, and then we get into this roller coaster that's gonna pull three or four g's going up.
Mike:And then you free fall going down, and you can't see anything other than the city. And we do this at night. So I am a very scrawny, thin, light kid. I'm 11 years old. Four g's is a lot for a kid to handle.
Mike:I wish we bought the picture because here's what happened. The ride goes off, and they trick you. They go, alright. We're gonna launch in ten, nine, and then it just launches. They never actually do the right countdown.
Mike:Yeah. And so it catches you by surprise. Well, it caught me by surprise, and the force, the gravitational force was so powerful, enough blood came out of my head that I passed out. I could not handle the volatility. Oh, that's true.
Mike:To speak. And then when I gained consciousness at the top, because I was kinda scrawny and not really in my seat, I felt like I was falling out of the ride because I was lifted up in my chair, leaning forward thinking the ride broke, and I'm about to fall to my death. That sounds terrifying. And then it free falls 200 and some feet before it catches and then throws you back up again. Ugh.
Mike:K? Why do I say this story? The reason is the market is very similar to this. Most people I have met have most of their assets in the market, and they're very happy about the upside volatility. They love the growth, but they have forgotten what it's like to lose your money.
Mike:They have forgotten what it's like to be in a 02/2002 situation, which is a very normal situation for a market crash, or a two thousand eight financial crisis where it goes down very sharply, where you think the banking industry is going to collapse. The pandemic wasn't really that big of a market crash. It was a quick crash, but we printed a lot of money so it recovered quickly. And all the money the Fed printed basically made its way into the stock market, and all was well. And then we had a slow inflationary crash, which was difficult in 2022, 2023, but that wasn't that big of a deal because, again, we were printing money, and we still recovered.
Mike:It wasn't the end of the world. Those aren't normal crashes. They can be much worse than that, and we have forgotten what that's like. And if you look at the last ten to fifteen years, we are now used to a crash only lasting a couple of months, and that we're averaging 14% returns on our portfolio. That is not a normal situation.
Mike:Last time I can think of that being the standard was 1990 to 1999, then what happened in February? The reason why I bring this up is greed is a very powerful emotion, and FOMO, fear of missing out, is a very powerful cognitive distortion that prevents people from seeing reality as it is. All of that upside potential you have has an appropriate amount of downside risk. And so as people enter towards retirement, as they're looking towards keeping their money and staying rich, typically five to two years before you retire or when you retire is when you start locking in your gains and start moving some assets towards something that's protected, but still has growth potential. So not necessarily CDs that are at a fixed rate.
Mike:Like, if the markets boom, you wanna capture a lot of that growth. But if the markets go down, you want at least a part of your portfolio to not go backwards so that in the next year or in two years when the markets start to recover, that you're still participating in that growth. You just didn't go backwards.
David:Yeah. That makes sense.
Mike:It's not about getting rich. If you're gonna retire, it means you've already become rich. It's about staying rich. It's about lowering the range or threshold of the volatility, the ups and downs, so you have a more predictable threshold and that you can have a more predictable plan, a more predictable portfolio, and know how to more appropriately navigate through these treacherous situations. 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 podcasts. 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.