In essence, this is two different ways to solve for the same thing. Now, the detriments of this. Welcome to the retire on time q and a podcast. I'm Mike Decker with David Franson here from Kedric Wealth. As always, text your questions to (913) 363-1234.

This show is about getting into the nitty gritty, not the oversimplified advice you've heard hundreds of times. That said, remember, this is just a show. It's not financial advice. Do your research. This is education only.

Alright. David, what do we got today?

Hey, Mike. I was told to put around 60% of my money into a lifetime annuity Mhmm. And that would basically be the same as the 4% rule. Tell me, is that true?

So let's break it down. First off, we're assuming the portfolio is based on the rule of 100, which suggests that your age is the amount of asset you would have in bonds or bond funds or bond equivalents. So a 60 year old, 60% of your assets would or could go into a less risky category. That's not a red flag necessarily. The four percent rule to understand it, by definition, is saying that if stocks average, let's say, three or 4% year over year Mhmm.

And that your, you know, stocks, the S and P, for example, average seven to 9% year over year, you should be able to take out 4% and be fine. And when you break it down, the portfolio, if you have let's say a retiree is gonna be a little bit less aggressive. You got 60% of assets in bond funds or in that. You're gonna get around $6.06 and a half percent growth Okay. Average rate.

Yeah. Average between those two asset categories.

Yeah. 60% growing at 4%

The bonds.

Really, let's say 4%.

And then let's say you've got 40% growing at 9%. It's actually 6% is what the portfolio would grow.

And so if you take out 4% each year, you've got 2% that your portfolio will advance. What's inflation typically? 2%. So it offsets inflation. It kinda keeps things going ahead.

That's how that all came about. Mhmm. So there's a reason for it. People don't just show up throw out random numbers for no reason. It's that you're gonna take out 4% on average for income, 2% your portfolio progresses, and you rinse and repeat every single year.

The problem with that is sequence of returns risk. We've forgotten what it's like to really have a significant market crash.

Hasn't really happened since 2008 because the COVID crash, yeah, that was a global pandemic. Yeah. It was a scary time. The Fed printed money. Mhmm.

So it was going to recover. And then 2022, 2023, the market slowly burned because of inflationary risk and then so on. And, like, yeah, that was predictable, but it wasn't it wasn't like the two thousand eight financial crisis.

It wasn't like the issues of capital expenditures. That's the infrastructure build out for the .com bubble that then just burst and things just went sideways. It wasn't .com companies going bankrupt. It was all of the money that was posed to to have profits to these companies, promised money for the infrastructure that then just fell and broke and just a disaster. That was three years the markets went down.

So the sequence of the returns are a very real thing. That's the problem with the 4% rule.

Now if you use the 4%, well, let's say a million dollar portfolio, you're expecting around $40,000 of income.

Each year. Okay? So let's just assume for a moment that you're gonna take 40,000 out each year, and let's just simplify things. 40,000 out for ten years or twenty years. Now would you adjust it?

Yeah. You'd adjust it over time, but let's just make things really simple. K?

40,000 for ten years or twenty years, that's the fixed amount for that period of time. K?

As income. That's 4% of your 6 Yep. 600,000? Yeah. Yeah.

No. 44% of of the million dollars.

Oh, million. Sorry. Yeah. Yeah. Yeah.

So so now let's now let's look at this other option. The other option suggests that you take 60% of your assets, put it into a lifetime annuity, k, at a fixed flat rate. So you're gonna get more money upfront, but never gonna increase in value over time, but it's guaranteed for the rest of your life

To be paid out. And let's say it's offering around 7%. I'm not quoting a product here. Yeah. I'm just saying if you take flat income, it's gonna be a higher rate.

If you take lower income, it's gonna start lower rate, but it could increase over time. Mhmm. Pip typically, I see people do the flat rate upfront, and this is why. 60% of your assets, let's say with a 7% lifetime payout, is going to be $42,000 a year. Alright.

Let's round down and say 40,000.

So you just took 60% of your assets, and you've guaranteed that 4% baseline for the rest of your life. Then you take the 40,000, and you put it in the market for more, let's say, aggressive growth. Because the income stream is taking care of your income that you need, so you can be more aggressive, maybe more equities in there because the whole portfolio as a whole, you could could grow. You You don't really need to touch the money. You've got your income coming in.

Yeah. It's the same thing in a different way. Right. What are the benefits and detriments? Well, assuming 9% growth on the 400,000 or the $60.40 split as we discussed, after ten years, the $60.40 cash value should be slightly ahead.

After twenty years, again, you just never really touch the income. We don't want too many variables in a in a conversation. The $400,000 would have compounded and should have grown at a greater rate, you'd actually have more money in that situation.

Mhmm. Yeah. Because you're not touching it. It's just sitting there.

You're just sitting there.

So there's there's the the sequence of returns have kind of

There is no sequence of returns risk because you're not taking money out of, an account that's lost money. Uh-huh. So is the question you want control? Is the question you want 4%? And I don't like the way that all of this is framed because it says you're gonna take out 4%.

I think a retirement plan should be built around, well, how much do you need for the first couple of years, for your travel years? Let's solve for that. Mhmm. And then let's solve for kind of when you turn Social Security on, what's that baseline? I think that you should have more complexity and more conversation to the whole equation.

But in essence, this is two different ways to solve for the same thing. Now, the detriments of this is if you put money into a fixed income stream for life, the cash value is going to go down that's associated with that income stream Uh-huh. Faster than the the sixty forty or forty sixty split of the 4% rule. What I mean by that is if you die in the first five to ten years, there's probably gonna be less in the estate to go to the kids. Oh.

Probably won't be much, if anything, coming from the annuity. It would have spent down most of the money by that point. And then the the leftover 400,000, whatever that grew is what passes on to the kids. Mhmm. Okay?

If you live fifteen years or more, because the 400,000 was able to grow in this very simple kind of example Mhmm. You may have roughly the same, if not and I'd say roughly the same amount of money going to your legacy plan with still a continuation of of of lifetime income coming in there. See, what people don't realize is with lifetime income streams, which I wrote the book against Mhmm. I openly admit that I don't necessarily love the strategy. I understand it.

I understand when it makes sense. Mhmm. I understand why people don't do it. It's like buying term life insurance. You don't buy it hoping you're going to die.

You don't buy lifetime income hoping you're or expecting yourself you're gonna die in the next ten to fifteen years. You're buying it to transfer longevity risk to an insurance company, and if you live to full life expectancy or later, it probably was actually a good deal. Yeah. If you buy it and you die sooner, it probably wasn't as good of a deal. The odds are in the insurance company's favor.

So if you go down this path, eat healthy, exercise, keep your mental, you know, your mind clear and active and all of that, it's not a bad strategy. It's a different strategy with its own basket of benefits and detriments. Right. Now, some of the risks with this is in both situations, have the market to be concerned about. Yeah.

So the 400,000 may not actually grow for ten years. If we're in a flat market cycle, then it ends up being around $404,100,000 in ten years.

But then you'd argue with the sixty forty split. Well, you're taking income. So in a flat market, markets go up and they go down, then they go up and they go down. You'd probably actually be worse off with the sixty forty split because in the years it went down, you accentuated the losses.

Mhmm. By taking income, you're making the loss worse.

Yeah. So trying to to to help the sixty forty argument, maybe you don't have 60% of your assets in bond funds, Maybe you use the reservoir or the bear market reserves and have some protection in there to sell through those times. And you have to you have to open up that conversation and say, we need to be more dynamic and more strategic about how we're managing those those funds in case of market crashes, flat market cycles, and so on. You inherit more responsibility if you want a more dynamic plan. If you want a more predictable plan, you buy the lifetime income annuity.

That's 4% of your there's just you're losing out tax strategies, dynamic strategies. I mean, you're you're losing out on some things, but you're gaining stability. You can't cheat finance. You can't cheat economics, and no one knows the future performance. So you have to pick which way you wanna solve it.

You can do the 60 lifetime strategy, solve for the 4% baseline, and then take the four percent and pepper in to solve for inflation. You can do a sixty forty forty sixty split and have, like, a reservoir or the bear market reserves. So if the markets go down, you take about five years of income and have more responsibility, but you can be more aggressive with how you're managing your money. You can have everything in the market and just hope it works out too. I mean, you can but they're all different.

Uh-huh. You can ladder out your income if you want. That's another strategy. Ladder it out so you've got, you know, the first five years of guaranteed income laddered out, and then you've got some in reserves that are indexed. You can kinda blend strategies together.

Uh-huh. You could take dividends. So there's so many ways you can solve income in retirement. This is just one of the ways that you can can do it.

And how do we know which one's right for us? Or, you know, the individual person?

Yeah. You know what's interesting about that? I have found that many financial practices are built around one strategy, and their job is to sell you that singular strategy. It's here's our process. Here's why we believe everyone should do this.

Here's why we believe this is what's right for everyone, and do you want it or not? And they're just looking for confirmation bias. If you're willing to believe our sales pitch or our philosophical argument, then you'll be a client. You're a good fit. If you're not, go away.

Uh-huh. I don't like that strategy. All of them are easy to, in my opinion, easy relative

To manage, but you have to ask yourself some tough questions. For example, when we are working with someone in the planning process, we'll always start with the risk analysis.

And what is that? What's what's part of that?

It's just it's sixty minutes of looking at different risks. Okay. I'm trying to understand which ones will keep you up at night and which ones won't.

And everyone's different. I get so many different answers.

So for example, I'll say, alright, here's your plan. One plus one equals two. You can retire. Congratulations, mister and missus Smith. And they go, well, this is fun.

I say, yeah, now let's figure out the the income component. Does this income satisfy your lifestyle goals? Yes. Do you want to adjust in any way? Yeah.

We'd like to travel for the first couple of years. Great. We'll put it into the software. We'll add additional expenses. We're gonna travel extra 10 k here, extra 30 k here, whatever you wanna do.

Yeah. You know, get those travel years out of out of your way.

And once we get the plan massaged out, then we say, alright. This column right here, this is your income from your assets. This is what we're solving. Okay? Here's how much it needs to be.

Let's say it's, I don't know, $4,040,000 dollars, and they've got 2,000,000 in there. So you're we're taking around 2% from your portfolio. That's low risk. Do you want it all in the market? Do you want it all over here?

How much of this do you want guaranteed? Well, I mean, this is really how I do it. Say, much of how much of this income do you want guaranteed? Uh-huh. You've got Social Security that let's say that's guaranteed.

At least 80% of it's probably gonna stay stay around because 80% of it or so is paid by FICA tax the year before. So that's gonna keep going in, at least 80% of it. Here's the amount that you need from here. How much of that, if any, do you want guaranteed? I'm indifferent on what they say, but I wanna know.

And they'll say, well, we want about half of it guaranteed. We don't want any of it guaranteed. We want mostly growth, and we'll just take it dynamically, or or in their words. Mhmm. We want all of it guaranteed.

And then here's the critical question. Why is that?

Uh-huh. Okay.

If they can't answer why is that or how come, they don't know what they're saying, which isn't a bad thing. Yeah. It means it's an opportunity to give them homework to then go home and really look in the mirror and say, what's gonna keep us up at night and what's not gonna keep us up at night? If your accounts and I do this. If your accounts go down 50%, are you concerned?

Now, we'll have some assets that are protected over here and things like that. We can do this, but are you gonna lose sleep overnight? Some people and this this is the honest reaction. Some people, they they would they could not live with themselves in that situation. Other people, yeah.

I've been down it. I know it'll recover. No problem at

all. Some

people, they want to believe that they're one when they're actually the other. And that's the tricky part. Yeah. So that's what I'm looking for.

Why is that? Why do you want half of it guaranteed? How why is it that you want none of it guaranteed? Well, because I I want enough in the reservoir, and I know, like, I'm comfortable with CDs, I'm comfortable with treasuries, and I I I read your book. I'm I'm fine with these strategies.

I just wanna have more for growth and more flexibility, more for play. And so if we can get, like, a five year reservoir figured out, I can sleep with that. Okay. I'm good with that. It's the questioning.

And it's not an interrogation, it's the questioning. It's just trying to find out what is right for the person.

And

here's a more important part. If they're married, it's making sure both spouses answer.

I don't know. He handles it is not a good answer.

You're not gonna let that fly. Mm-mm. You're gonna make them answer.

Because she's gonna end up with the plan, not him. Women live longer than men Yeah. Typically. If she doesn't know what's going on, then we need to pump the brakes and have more conversations about how the plan is working. You cannot delegate to someone else all of your financial responsibility because at some point, you'll probably be the one that's financially responsible.

So that's that's why I say there's a lot of ways to solve it. What is right for you? It's about that risk analysis. It's understanding, is this let 60% of your assets take care of all of the income that you need? Or is it let's do five year reservoirs?

Is it let's ladder out for five years and then have a secondary reservoir that you can turn on whenever you want? Is it There are so many ways it could be done.

But what's the system, and will you be able to sleep well at night if the worst should happen and still remember the system? That's the key here.

So did we answer the question?

I think so. The answer is that there's a lot of different ways to solve, not maybe not just sixtyforty, not just lifetime income from an annuity. If you wanna do if one of those two works for you, then great, but there are also other options. Yeah. And and be can you answer the question, well, why?

Why do you want the lifetime annuity?

And it's okay that you don't know. Yeah. I I can't you don't need to to work with a financial adviser and be smart. You just need to be honest and feel like you're in a space that you can be honest and authentic. And I don't mean like that safe space, you know, I want my feelings to get hurt Uh-huh.

Crap. Like, no. This is money. Yeah. Money doesn't have feelings.

Yeah. But you're going to feel something based on what your money does. Mhmm. So let's make sure we tell your money what you really want it to do. Mhmm.

Thanks for watching this show. If you enjoyed it, make sure to subscribe wherever you get your podcast and or on YouTube. Best place is YouTube for the best quality content. As always, text your questions, (913) 363-1234 so we can feature them on the show. And go to retireontime.com to get access to the book, the workbook, the checklists, the planning calculators, and all the different tools we have available, and join a workshop where I'm actually putting together plans in real time live while I answer your questions.

All of that and more found on retireontime.com. We'll see you in the next show.