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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.
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 How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.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 adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much talk about it all. Now that said, please remember this is just to show.
Mike: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 today. Pleasure to be here.
Mike:David's gonna be reading your questions, and I'm gonna do my best to answer them. You can always send your questions in by either texting them to (913) 363-1234. That's (913) 363-1234, or you can email them to you, hey, Mike, at how to retire on time dot com. Let's begin.
David:Hey, Mike. I heard the bonds are expected to do better than stocks over the next few years. How is that possible?
Mike:Yeah. So, traditionally, bonds or bond funds, I think, is what people usually refer to
David:Okay.
Mike:Is supposed to be the thing that kind of creates stability. It's the more conservative part of a portfolio. So when you think about your most cliche traditional basic portfolio, you've got 60% in stocks, in equities, because that's where the growth should happen. In normal situations over the long term, the equities market is where you would grow your money. When you look at, like, large cap stocks, that's a fancy way of saying big companies Mhmm.
Mike:In The United States, for example, historically, you're gonna get around a 13% or so year over year return.
David:Okay.
Mike:But that's that's an average, and averages are deceptive. If you want a fun book to read over a weekend, aside from how to retire on time, Grab how to lie with statistics because that's basically what fuels the financial services space. It's all about making things look good. The reality is, yeah, stocks sound great. There's a lot of TikTokers out there, influencers, self proclaimed philosophers, people that think they've got everything figured out that are saying, just buy the S and P and you're gonna be fine.
Mike:When you buy the S and P, you're buying equities. You're basically buying this thing that might average 10 to 13% year over year over a long term period of time. So if you if you wanna buy something and not do anything with it for thirty years, you might end up with something like that. But notice the fact that you didn't touch it for thirty years. When you retire, things get more complicated.
Mike:And now you've gotta factor in things like flat market cycles. And usually when I say a flat market cycle, people perk up and say, well, what's that?
David:Yeah. Never heard of it.
Mike:Flat market cycle is when your equities or your stocks, you know, the thing that's supposed to be your your growth Right. I mean, your portfolio, go flat for ten years. As in the amount of money you put in there in year one is roughly the same dollar amount ten years or later.
David:That sounds like a problem.
Mike:Yeah. And so when you consider that, you might think, oh, well, Mike's just talking about the two thousand financial crisis, the great modern recession. He's cherry picking data. No. I'm not.
Mike:Just dive into the details of your charts. So February to 02/2010 or depending on if you reinvested the dividends or you use them as income, you would not have made much money in the large cap market. Mhmm. In 1965 to 1966, depending on where you start from there on for ten plus years, you would've made no money in the market. Again, the equities market specifically, and notice how I'm highlighting the equities market.
David:Mhmm.
Mike:There are multiple markets out there. Flat markets are being referenced here as the equities or the stock market. And there's a lot of nuance even in that, but people based everything on the S and P. So there you go. Nineteen twenty nine, the market was flat for over ten years.
Mike:Nineteen o six, the market was flat for over ten years. And the reason why this is important is because when you retire, you need to grow your money
David:Yeah.
Mike:If that's your plan. There are over 10 ways you can take income in retirement. One of the more common ones is the 4% rule. The 4% rule says that if stocks or equities, you know, this thing we're expecting to grow grows around 8% or more year over year, which historically it has, and your bond funds average 4% year over year assuming you'd have that in your portfolio. You could take out 4% and be fine.
Mike:And a lot of it's based on the growth.
David:Equities, so that we want them to grow. That's what they're there for.
Mike:And you're you're basically taking your income as growth.
David:Oh, yeah.
Mike:So everyone that expects their money to grow, if it doesn't grow for ten years, that's a problem because you have now accentuated losses and dipped into your principal over the first ten years of your retirement. Goldman Sachs has come out and said that the markets could be flat for the next ten years, the equities market specifically. I believe I saw Merrill Lynch had someone that's projecting it should be maybe around 3% maybe or so, but that's not enough to really keep up with inflation. I've seen some hesitation or some pause from analysts from JPMorgan as well. I mean, it's this is becoming a common thing.
Mike:And if you wanna you know, as the the kids are saying, I've got the receipts. I wrote for Kiplinger two years ago about the risk of this market. And it was like, oh, you know, we fixed it or no, you know, tech's growing and then notes. Well, now it's become a very real problem.
David:Mhmm.
Mike:And as the receipts, you can look at the time stamp of the article that I wrote it two years ago. It was also in the June 2021 Kiplinger magazine, the printed copy about this stuff. These things matter. And the reason why they matter is, again, these flat market cycles can suffocate someone in retirement. So if they have an oversimplified portfolio or they're following the TikToker who says, oh, you don't need to hire a a financial advisor and pay the 1% fee because you can just buy the S and P, and you're gonna outgrow it.
Mike:And guess what? Just because you dollar cost averaged in, you can dollar cost like, these are dangerous things that people are being told. They're oversimplified, and it's because investors have a short term memory. We have forgotten what it's like from February to 02/2010 to basically make no money for ten years. And we're in a situation to where that could happen again, and no one knows the future of the market.
Mike:So So when you see things like, yeah, bond funds or bonds could outpace equities, it's because the equities are considered overvalued. Now I've got a story about that. So if I don't tell it, let me know.
David:It's Okay.
Mike:It's the time I had lunch with a bunch of hedge fund managers in New York.
David:Oh, yeah. Yeah.
Mike:And I've got another one I had in Vegas too, so make sure I tell those stories.
David:But Okay.
Mike:There are several different markets or asset classes, and they're all uncorrelated. Okay. So the equities market, the stock market is not correlated with the bond market. The bond market is the debt market. So a bond is issuing basically, hey.
Mike:I want your money. I'm gonna borrow it from the public, and I'll pay it back at this coupon rate. That's what the bond market is. The bond market is significantly bigger than stock market. Mhmm.
Mike:Right. I didn't know that. The stock market is actually shrinking on the options. So I like, 1997, there was 8,800 publicly traded companies on the stock market.
David:Okay.
Mike:Today, it's around four thousand. And the reason why it's around 4,000 is because a lot of them are going private, and that creates all sorts of nuance in how we're assessing the equities market. So it's also becoming more complicated, and there are certain bubbles that could be expanding. So this is actually a more complicated situation than people realize, and the oversimplified approach of, well, I can just buy SPY or VOO in in the market in anyway. So pause that for a second.
Mike:Let's go back to the bond market.
David:Alright.
Mike:Bond market, they're at coupon rates. When When you issue a bond, it's at a certain rate. So if you're buying and trading bonds and interest rates are roughly stable, then you should get, you know, around four or 5% or so on your bond funds.
David:Okay.
Mike:I think that would be a reasonable expectation. Yeah. Now am I saying that, oh, no. The markets the the equities market's gonna crash, so let's just go all in on bond funds. No.
Mike:Absolutely not. There's a reason why we diversify assets. It's because we need to be okay with the idea that we may not beat the market every year with all of your money. But if the markets were to go down or stay flat, you're still able to outpace inflation. You're still able to make adjustments to your lifestyle.
Mike:You're still able to minimize your taxes. Do you see how it's not about it's like have you ever run a marathon or a half marathon?
David:I have run a half marathon. Yeah.
Mike:Okay. Imagine sprinting out of the gate for your half marathon. You're gonna be hurting after the first half mile or mile depending on how you how well you prepared.
David:Yeah. Probably.
Mike:Now I know the professionals, they basically sprint a marathon. Yeah. But for the rest of us Us mere mortals. You've gotta pace yourself.
David:Yeah.
Mike:So the research that I have found and conducted internally and I wouldn't say, you know, I'm I'm not a PhD grand scholar that works at Yale. Right? I'm it's just me and my studies internally. What I have noticed is to increase your probability of success in retirement, it's not creating more risk and hoping it works out. It's about lowering some of your upside potential to significantly decrease your downside risk.
David:Mhmm.
Mike:You see the difference there?
David:It's Okay.
Mike:We're looking for predictability and consistency and not roll the dice and hope things work out. Yeah. And the reason why I say this is the markets may go flat. Bonds and bond funds, that market, which is uncorrelated with the stock market, may actually beat the equities market over the next ten years. No one actually knows.
Mike:You know, the joke of economists two years ago is that a % of them said we would enter into a recession that never happened.
David:Right.
Mike:So we don't want to try to time the market. What we wanna do is address it with strategies on how to approach it if the market were to go up or if the markets were to go down. If the markets were to have a ten year bull market, which means an upmarket, or if it's a flat market, did you shop appropriately? Did you find the right investments in products to hedge against a flat market cycle? These things matter.
Mike:Now let me tell you the story.
David:Is this the Vegas story or the Wall Street 1?
Mike:All kinda blend them together Okay. Because they they have very similar things. So on Wall Street, I would just was invited to basically be on the New York Stock Exchange, the part where the public can't go. So you have to be on the list. You have to be invited.
Mike:And I was on there and had a great time and kinda hit off with a couple of people. We then we had lunch in New York afterwards, and these are, like, brilliant money managers. Right? Cream of the crop. It's like in finance.
Mike:If I said their names, it's like you're you're you're Taylor Swifts, you're Beyonce's kind of people in finance.
David:Okay.
Mike:And so I'm having lunch with them, and you know what they're doing? They're reminiscing about how in the mid nineties that there's no way the market could keep up with this. You know, everything was overvalued. And the joke was if you put .com in your company's name, you'd make a ton of money, even if you had no product or actual valuation. Like, it was just crazy time.
Mike:And some of them were making fun of the others saying, well, you went to cash at in '96, and you missed out on '97, '90 '8, '90 '9 returns, which were phenomenal. And they say, yeah. I may have been early, but I wasn't wrong. And they they still missed out on those returns and actually were worse off, but, you know, it's a hubris exercise. It's ego's on the line here.
David:Okay.
Mike:It was a very interesting banter of basically some of the top minds on Wall Street saying, yeah. You can't time the market. So if the top minds on Wall Street who are hiring rocket scientists to create models to help predict what's gonna happen, why in the world does the average person think that they can time it?
David:Yeah.
Mike:And I I mean that sincerely because when I get on an airplane or I'm just casually in line or come up with a conversation, if I'm open to having a conversation with someone, I'll say I write for Kiplinger or I I authored a book about finance or that I'm a financial adviser. Usually, in those situations, they might ask me questions. The joke is if I don't wanna talk to someone, I'll say I'm an insurance agent, and they don't they just sell. Alright. Conversation ends.
Mike:But when I'm happy to chat with someone, they always come back with the same two things. Well, why would I just buy SPY? Like, why do people even hire you? Like, they're not being mean. They're just saying, like, why wouldn't I just do this?
Mike:Yeah. Low cost, low fees, capture the upside. It's because of everything I've just explained. It's an oversimplified approach, and everything has risk. There's no such thing as a perfect investment, product, or strategy, and the risks are important to understand.
Mike:Because if you got that wrong, if you just went in SPY or VOO Mhmm. And we did do a flat market cycle, that one thing that oversimplified, I'm better than money managers. I can do all this myself. The ignorance is what's going to hurt you if the markets were to go flat. And if they're not flat, then wonderful.
Mike:You can pat yourself on the back. But are you willing to take that kind of risk? Now the Vegas story is a little bit different. The Vegas story, they were pontificating on the right withdrawal rate. And I thought this was so interesting.
David:Okay.
Mike:They were trying to predict future average returns of the market so they could figure out the perfect withdrawal rate knowing that if the markets go down, they're gonna accentuate losses. They didn't even pause to say, well, what if we just had some of our assets in principal protected accounts so that we could just draw income from there and have the other accounts recover? This is for all those who haven't read my book yet. This is what the reservoir strategy is all about. Yeah.
Mike:Just like a city has a reservoir of water in case of drought, I personally believe that everyone should have a portion of your assets in principle protected accounts, whether it's CDs, treasuries, structured notes, buffered ETFs, as long as there's a % protection, or fixed or fixed index annuities or cash value life insurance. There's a number of ways to slice this. Mhmm. But when the markets go down, you draw income from your reservoir so you don't accentuate your losses. You don't need to be a scholar and predict the exact projection of the portfolio.
Mike:You just need to have a reservoir of protection just in case.
David:Yeah. Because we don't know when the next big event's gonna happen. Yeah. So you're protected no matter what.
Mike:Yeah. You just you've got two options that are available. Yeah. And so this whole thing of the markets could go flat. The bonds could outpace equities.
Mike:Maybe equities outpace bonds. Maybe we do enter a flat market cycle. Maybe it's a growth cycle. The fact is no one knows, and we can debate things we can't control until the cows come home, or we can just build a proper plan and put ourselves into a position where we can still be successful regardless of the outcome.
David:Yeah. You can still sort of just live your life the way you want to no matter what's happening out there, almost no matter what.
Mike:Do you play chess?
David:I've attempted to a couple times, but, no, and I wouldn't call myself a chess player.
Mike:Okay. So I was listening to an interview for Magnus, the grand master guy
David:Okay.
Mike:Who's, like, the smartest guy in chess, allegedly, that's ever lived. He's just brilliant. Right? And he was talking about how people are trying to copy computer chess strategies
David:Okay.
Mike:As a human.
David:Alright.
Mike:And he was talking about when you play chess, you've gotta have multiple layers, multiple strategies. When you put that first pawn out, you've gotta have multiple reactions. That's how you play chess. That's like the financial markets. You gotta have multiple ways to react and maintain the protection while still being able to attack or grow from the market.
Mike:Mhmm. People are trying to do computer strategies, which are things that humans struggle to comprehend because you're calculating probability 20 to 30 moves in advance. Okay. We don't do that. No.
Mike:So when people say, well, I'm gonna do chat GPT and just manage with AI in the markets, that's a dynamic large language model with a dynamic market that is based on human emotions. The market price is a voting machine. It's human emotions.
David:Mhmm.
Mike:And so I think AI, as its currently stands, can compromise people in this. So, again, I'm trying to highlight that markets are projected to be very tough for the next ten years Depending on AI, as a human that doesn't fully understand some of the risks and strategies may actually hurt you more than help you. Oversimplifying your approach of just buying a couple of ETFs and holding them and hoping it works out also may hurt you. You need to have a more specific, strategic, multilayered approach for the multiple outcomes that could ensue. Could I say that more directly?
Mike:I don't think so. My favorite texts that I get from friends are, hey. Have you seen this TikToker? What do you think? It's like they just enjoy trolling me on this stuff.
Mike:And then they always know they're gonna get me with some rant where I can just cite a couple of statistics on why they're wrong, why it's oversimplified. But that's where a lot of the advice is coming from today. It's oversimplified. It seems to be right. But to quote Mark Twain, it's not what you don't know that will hurt you.
Mike:It's what you know that isn't so. The blessing of the Internet and the blessing of social media is also the curse. Yeah. 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.
Mike:Just search for how to retire on time. Discover if your portfolio is built
David: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.