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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.
The idea that all of your money needs to be growing at the best rate possible, that's greed. Welcome to the Retire On Time podcast. I'm Mike Decker here with David Franson. This is a q and a. Our purpose here is to really take your questions.
Mike:You can text them to (913) 363-1234, and we'll answer them on the show. Just remember, this is not financial advice. Let's get into the nitty gritty. David, what do we got today?
David:Hey, Mike. Can you provide a practical explanation on how to implement the bear market protocol?
Mike:Yeah. So for those who don't know, the bear market protocol was recently published in a Kipling article that I had written. The idea is that you don't need to be scared of the next bear market. Bear market is a jargon for a down market. And for those that care, it's because bears strike downward, bulls will strike upward.
Mike:That's where that comes from. I don't know who picked those two animals, but whatever. Yeah. A bear market, bad news bears. That's the easy way to remember it.
Mike:So people typically, at least the reaction I get is, well, I'm concerned about the DEX market crash. All I you know, you buy and hold, and you just have to ride it out. And it's just consistently, you know, I'm okay with risk. I know how to ride it out. Well, there's one guarantee I can give you, and that's that you're gonna need income in retirement.
Mike:You need to pay the bills. Yep. Now if you have a pension, then maybe you can afford to take more risk so you can ride it out. But if you're generating income from your assets, you might not be able to quote, unquote, ride it out unless you can just not pay your bills. So it's a genuine it's a genuine concern for retirees because of that that fundamental need for retirement planning.
Mike:So the bear market protocol basically suggests that you don't need to be scared of the next bear market, that you can prepare now so that it's kind of an opportunity for you. Now when I say opportunity, I'm not suggesting that you're gonna short the market. That's basically jargon again for the the uninitiated of Yeah. Trying to make money when markets go down. I do not encourage that.
David:It seems so counterintuitive. The market's going down, but there's a way to make money.
Mike:Well, you sell what you don't have. Oh. That's what shorting is. So I let's say, the S and P five hundred. I'm gonna sell you shares of the S and P five hundred, so SPY or VOO, but I am on the hook.
Mike:I have to buy it back in later. Oh. So I'm basically borrowing and selling you something I don't have, then I've gotta buy it back to then complete the transaction. The problem is if I sell you something I don't have and the value of that keeps going up, there's an infinite amount of upside. So I can lose infinite amounts of money.
Mike:Mhmm. You have to have nerves of steel to short the market. I do not recommend it. Yeah. Really, for even financial advisers who are uninitiated in that space.
Mike:It's it's stressful. Even the top fund managers go, yeah. I don't have the guts to short the market, so we'll just go to cash for now.
David:Okay.
Mike:It's those who are inexperienced often think, well, you know, I'm I'm confident. Mhmm. The wise, the experience go. Mhmm. So anyway, that that Okay.
Mike:Quick aside. But yeah, that's that's not what I'm suggesting here. It's not timing the market. It's not shorting the market. It's preparing for if or when the markets crash, what is your protocol?
Mike:Now, a protocol is a system. If this happens, then you do a, b, or c. So there's no emotion. You're trying to remove emotions from the equation and just implement something.
David:It sounds very sort of like militaristic almost. Like, there's a binder and it's like, let's go to protocol zed or whatever, and you you find it and
Mike:you Yeah. Not z zed. Yeah. Thanks for being fancy.
David:I I just I must be watching too much, like, British shows.
Mike:Yeah. Bluey with your kids.
Mike:Yeah. So Precisely. So there I write about three strategies specifically. And let's let's just articulate them first, and then let's bring some realistic context because you don't wanna go all in on any of the strategies. You can't time the market.
Mike:This is just a way to hedge your bets against the market or be prepared for a market crash and take advantage of that said market crash.
Mike:So the first one is just income. K? If the markets go down, if your accounts go down 30%, it would take a 43% return to breakeven Mhmm. Just to get back to zero. So having all of your assets going down is a problem.
Mike:This is called sequence of returns risk. If the markets go down 30% and you take out 4%, it's because you need income. Right? You're now down 34%. That would require a 50% return to breakeven.
Mike:Now it's harder to recover. So how do you take income in a bear market? That's the first question in retirement. So a lot of people will buy lifetime income streams or they'll ladder out treasuries for twenty years or whatever it is to get around this this, you know, sequence of returns risk, which is a very real risk. In my mind, instead of having, like, let's say, 60% of your assets in bond funds that have lower risk but lower growth potential, have a part of those assets, maybe one to up to five years of income in something that has growth potential, whether it's at a fixed rate or indexed rate, so it participates in the upside of the net index.
Mike:The markets go up, you go up with it. If the markets go down, you don't go down with it or you go down less with it.
Mike:That's a buffered ETF. It's not principal protected, but it's close. But you're allocating some of this bond fund portion of your portfolio, if you're very traditional in that sense, and putting it in something that can't lose money, so that if the markets go down, that's what you take your income from Mhmm. While you give enough time for the markets to recover. Mhmm.
Mike:If you do that, you solve sequence of returns risk. Yeah. That's it. But you have to have the protected asset before the markets go down. And some of the easy ones, you've got CDs, treasuries, not treasury funds, treasuries.
Mike:So you buy and have the treasury until it matures. That's key.
David:And that that's so how does how does a real treasury differentiate from a treasury fund?
Mike:Yeah. Treasury fund is going to buy and hold and then sell the treasuries, so they're constantly kind of circulating through them. So if treasuries if rates change or things shift in the market, they can lose money.
Mike:If you buy an actual bond, which a treasury is a bond, it's a debt instrument that you're getting a coupon rate for, and it's gonna grow until it matures, That's just that is. As long as that debt does not default, you get the rate, it matures, it all settles. Okay. So it's more predictable. Yes.
Mike:So that's that's why the difference is going to matter.
Mike:You can do MYGAs, which is basically a CD from an insurance company. So it's a fixed rate product that's gonna grow for two, five years, whatever it is, and then it's liquid. So you can ladder out MYGAs, you can ladder out CDs, you can ladder out treasuries or bonds. Some people will do a fixed indexed annuity that has a clause where they allow a five year period certain. So let's say you buy it right now Mhmm.
Mike:Okay, and then it's gonna grow for two or three years, and then the markets crash because you don't know when the markets are gonna crash.
David:Nobody knows.
Mike:No one knows.
Mike:But when it does, you can say, great. This is my protocol. I'm going to turn this income stream on. It's going to pay X amount for five years. That covers my needs for five years, and now everything else has plenty of time to recover.
Mike:See how that works?
David:That is nice. And so is five years generally enough time? Is it too much time? Is it not enough time?
Mike:The the the old school, traditional, what market crashes typically, it's gonna take three to five years to recover. Okay. But you need income anyway, so if the markets recover in three years, it's okay that you still had five years. You needed the income anyway, but it gives you a slightly longer runway.
David:Okay.
Mike:So for those that want more structure, take a little bit less risk, that might work. If you wanna be more risky and you believe that the Fed's gonna manipulate things and it's gonna recover in a year or two, That's that's a recent thing. The COVID crash, you know Mhmm. The 2022, 2023, that was pretty quick. That was a slow burn crash.
Mike:That was painful for a lot of people, but that the point being is you're gonna pick your poison. Uh-huh. If you put something in a safer or less risky investment, you're gonna have less growth potential, but you're gonna have, less risk as well. So it's a it's a balancing act. Everyone's gonna be different.
Mike:Okay? Now, that said, the the tricky part is how much is right for you, and I don't have a generic blanket statement conversation answer for that.
David:So how much to put in the bear market protocols right
Mike:now? And in the reserves for income. You just have to do what is right for you knowing the risks. And the reason why I hesitate to give more clarity on a possible structure is right now a lot of money is leaving America. Like, only times I can think of where they were similar were in the nineteen sixties and the nineteen twenties.
Mike:Those both led up to a very difficult flat market cycle. Uh-huh. So right when the markets recover, they crash again. So you might want to have kind of two five year periods of time or ten years in total of just income that you could have from a protected source. That's not investment advice.
Mike:That's just a rule of thumb, do what's right for you.
Mike:That's not gonna take all of your portfolio, though. That's just a part of your portfolio. Now, the second strategy that I write about in the Kipling article is about taxes. Okay?
Mike:So what's the difference between sequence of returns risk with your income? So if you take income from an account that's lost money, you accentuate the loss. And sequence of returns risk with taxes. Because if you do an IRA to Roth conversion when markets are down, you pay the taxes out of the conversion. The only difference is it's income to you or the government.
Mike:Either way, it accentuates the losses. Uh-huh. But if you have some assets in a protected account, okay? Okay. Let's say just a CD that rolls over every six months.
Mike:It's not making you rich Yeah. But it's there for when you need it.
David:Yeah. Yeah. It's maintaining with a little bit of extra.
Mike:That's it. Right? Then when the markets go down and you're concerned about your tax implications, your IRA assets, required minimum distributions in the future, future tax rates, whatever it is, think about it for a second. You have all this money. Let's say it's valued at a $100 per share, whatever it's invested in.
Mike:That's just what it's valued at.
David:Okay? And
Mike:now it's valued at $50 a share. You're gonna wanna convert as much as you can within a certain bracket $50 per share as much as you can because it's basically everything is 50% off. So you can get twice as much money through from one end to the other and pay the same tax bill. Oh. Because the tax bill is based on the dollar amount, not the shares.
Mike:So if the dollars go down by half because the shares went from fifth from a 100 to $50 a share Mhmm. Don't sell. You your your strategy hopefully is built so that you can recover, whether it's active recovery, whether it's passive recovery, whatever your investment strategy is, hopefully, it's those, like, ten year timeline. So you don't panic about it. You just say, hey.
Mike:It's down. Now you do conversions. You don't pay the taxes from those conversions. You pay the taxes out of a principal protected investment or product. That gets that that accelerates your IRA to Roth conversions without paying more in taxes.
David:Because normally, you would you'd you'd make the conversion, and then you'd also pay the taxes from that same account. Yeah. So there's more money leaving the account.
Mike:Yeah. So you you convert, let's say, $100,000
Mike:And you have to pay out, let's say, an effective tax rate of 20,000. Right? So now it's $80,000. That $100,000 was a dip. The 80,000 is now less money that has to recover.
Mike:Uh-huh. So forget about the 4% rule. You know, the markets are down Uh-huh. You know, twenty, thirty, 40, 50%, and then 20% goes to taxes. Alright.
Mike:Paying out of the conversion destroys your accounts. But if you have the money in a protected source, CDs, treasuries, a bond that hasn't gone bankrupt or belly up, a MYGA, maybe your FIA that you did the five year income stream bit, but maybe you fund it overfunded a little bit so that some of the money each year is paying for the taxes to the conversion. So you can't have all of your money in bear market reserves. You need some of it to lose value so that you can take advantage of it. You have to divide and conquer.
Mike:Yeah. So it's almost like you're looking to lose money. It's kinda like that speculation that and it's speculation. It's a fun conspiracy theory
Mike:That in the NBA playoffs or Major League Baseball in the playoffs, they'll throw a game just to get a few extra advertising dollars. Oh. I don't know if that's true or not. You hear about stuff like that.
Mike:Well, you want some of your money to lose value so you can move it over. It's just a larger scale version of tax or tax efficiencies.
Mike:Because and it works because it has to recover, you expect it to recover, and your investment timeline is ten years, or whatever it is. Seven years, ten years, fourteen years. So you've got plenty of time to recover. You don't need all of your money at any given moment.
David:So are you just waiting at some point during the year, like, hey, I know I wanna do a Roth conversion this year, but the markets have just been up, so I don't wanna do it now. I'm gonna wait until they dip a bit?
Mike:Yep. Everyone's different. Some people's income will already satisfy their RMDs. Okay. So let's say they have 40% of their assets are in an IRA, 20% are in Roth, the rest is in a brokerage account, and they need x amount of income, they can take majority of their income from their IRA assets.
Mike:Their RMD's naturally being satisfied. They don't really need to be panicked about RMDs. Mhmm. It's already built in there. Now, all of your money is in an IRA
Mike:Then you might be concerned about required minimum distributions. And the concern is if your RMD is higher than the income that you want, you're paying more taxes at an uncertain future rate
Mike:Than what you know right now.
Mike:If taxes go up, it would be good to do IRA to Roth conversions. Taxes go down, it would be better to wait.
Mike:No one knows. Yeah. But if your accounts go down, you can get more positions over at a discounted rate. Yeah. But it doesn't work unless you've before the crash funded some principal protected accounts, whatever that might be.
David:To pay the taxes.
Mike:Yep. Yeah. Just to pay the taxes.
David:Got something to think about. So you gotta be ready. Be like a boy scout.
Mike:Be prepared. Yeah. Be be prepared. Three fingers up. Yep.
Mike:Right. One, Cub Scout. Is that two fingers for Cub Scouts?
David:Cub Scouts. I think they may even do it separate or do they do it like this? I can't remember. Sign. Yeah.
David:There's all sorts of signs we can make. We don't wanna make any obscene or lewd ones
Mike:Yeah. On accident. Yeah. Peace forward. Don't don't put your
David:Don't do that. Yeah. To all our people in Europe watching.
Mike:Yeah. Alright. So let's do the last one.
Mike:K? The the so we've we've got income, preparation. Markets go down, don't want to accentuate the losses. You've got taxes. Okay.
Mike:And the last one is accelerating or accentuating your growth.
Mike:K? So I believe right now, at the time of this recording, Warren Buffett has a lot of money in treasuries or sitting in basically cash or cash equivalents. Why? Yeah. Let me tell you a little story.
Mike:October 1987, Black Monday, they call it. Markets go down over 20% in a day. Just mayhem. If you're invested in the market, you are hating life because you just lost a lot of money very, very fast. Absolute despair.
Mike:But for those that had money in cash, black money was really like Black Friday. Uh-huh. Because you could buy into the market in that day, at the end of the day, at a 20% discount. Yeah. See, some of your money is going to go down.
Mike:Like, if you're invested, you're going to have your your accounts go up, and they're gonna go down. That's what a market crash is going to do. So the idea that you can put all of your assets into bear market reserves, protected assets, products, or investments, whatever they are, that you don't wanna go all in on this. Mhmm. You wanna pick your strategy, and it might be the tax strategy.
Mike:It might be the income strategy because you're retired. Or it might be that you're trying to grow your assets. You just you need more money, and so you might have some money in cash, not trying to time the market. Maybe it's in a CD growing at a fixed rate instead of bond funds. Maybe it's in a buffered ETF because you're trying to hedge your bets instead of bond funds, or whatever.
Mike:These are bond fund replacements.
Mike:But if the markets go down and you have some money that hasn't lost money, as in it hasn't gone down in value, you could sell it because it's protected in some way, shape, or form, or there's some buffer mechanisms that lower the the loss, and then you buy it at the discount. Uh-huh. If you buy a stock that's lost money, it it's not a guarantee that it will go up. The markets aren't even gonna guarantee that they're gonna go up, but a stock is risky. In market crashes, many stocks never recover.
Mike:But you know what typically has always recovered? I should typically, that's my hedging. I can't guarantee performance.
Mike:But the S and P five hundred has always recovered. The Dow Jones has always recovered. The Nasdaq has always recovered. The Russell two thousand. They've the index is because there's enough companies in them.
Mike:Yeah. And because you're buying a fund, and in the fund, they're exchanging and and moving in and out what qualifies for the fund. If you buy the fund, you buy it back in at a discount.
Mike:should be able to grow your assets faster. Because it's not about buying and holding and going for the ride. It's about understanding that maybe we're overvalued right now. Maybe we're not. Maybe we are.
Mike:If we are overvalued, then the price after the crash will probably be lower than the price today. Mhmm. In other words, it's like it's November 15, and you you need a coat. Yeah. But you know you could buy the coat that you want 30% off if you just wait two weeks.
Mike:Yeah. So you wait. That's the idea. We wanna turn Black Monday, where you're losing a ton of money, to having some cash in your savings account or a protected but still growing at a fixed rate or some sort of index rate, but there's a protective mechanism in there so that when the markets crash, it's Black Friday, and you're buying into the market.
David:Yeah. That sounds like a good strategy.
Mike:It's not about all in on one strategy. Yeah. It's about understanding how much do you wanna put in protected assets and then define what are those what's the purpose of those funds? Mhmm. Are you looking to buy in at a discount?
Mike:You know, the Black Friday deal. Are you looking to accelerate your tax minimization strategies and and do more IRA to Roth conversions? Do you need the income? Are you retired? Are you getting close to retirement?
Mike:You've gotta pick one. You could do all three, but you can't put all your portfolio in all three.
David:Yeah. Because then you're missing out on growth. Is that right?
Mike:You you can't that's that's when you get into timing the market, and you don't wanna get caught up in timing the market. So you have to kind of pick, okay, what's strategy one and two? Maybe a little bit of three, but probably not. And then what part of your portfolio are you okay growing at a slower rate? Mhmm.
Mike:Because it's not gonna outgrow the market.
Mike:It's just you're trying to either buy back in or take advantage of the hopefully temporary dip. Yeah. When I say hopefully, I'm I'm just I'm basically trying not to promise that the markets always recover
Mike:Even though they always have. Yeah. Right. But I can't promise returns.
David:No. We don't do that on this show. Not on my watch. Yeah. So is is it appropriate then to have, like, I don't know, let's just say, like, a $100,000 in this protected account?
Mike:No. Well, is that all your portfolio?
David:Oh, yeah. Okay. So let's just say that's only I don't know. Let's just say that's, like, a third of my portfolio.
Mike:Here's here's a rule of thumb.
Mike:So the rule of the rule of 100 says that your age is how much you should have in bonds or bond funds.
Mike:So if you're 60 years old, 60% of your assets would be in bonds or bond funds or an equivalent. So I don't necessarily agree with the portfolio, but maybe you take that, and and this is not investment advice. This is just, you know, I don't want you to start with a blank sheet of paper. Let's let's start somewhere. Let's say instead of 60% of your assets in bond funds, maybe 20% of your assets are in buffered ETFs.
Mike:Mhmm. And maybe you need 30% of your assets in some sort of laddered mechanism for income for the first couple of years because you're gonna have that in Social Security during your retirement. Mhmm. But maybe you don't wanna retire for two years, so you don't really so you can ladder it out that way. Now we're at 50%, so maybe then the the last part, 10%, if you really want bond funds, that's the bond fund component.
Mike:But all of that still kind of qualifies in this lower risk category. You just took that amount and you said 20% for this, for that purpose, 30% for this, for that purpose, 10% for this, for that purpose.
Mike:It's you don't wanna have the idea that all of your money needs to be growing at the best rate possible. That's greed. You wanna have one portfolio that's made up of many portfolios, and each of those many portfolios have very specific missions or objectives. Assign purpose to them. Assign a specific strategy for them.
Mike:And then watch the overall portfolio grow. That's the idea at least.
Mike:So thank you for watching. If you enjoyed the show, make sure to tell a friend, leave a rating, and subscribe to us wherever you get your podcast or on YouTube. That's the best experience. That said, remember, retireontime.com is really where all of our resources are. Go there.
Mike:Check it out. Enjoy the planners, the calculators, buy my book, and so on. Last but not least, thank you for spending your time, your most precious asset with us today. We'll see you in the next show.