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 to Retire on Time, which you can grab today on Amazon, or by going to www.how to retire on time.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 cover it all.

Now that said, please remember this is just a show. Everything we 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 mister David Fransen. David, thank you for being here.

Yes. Glad to be here.

David's gonna be reading your questions, and I'm gonna do my best to answer them. You can send your questions in right now to 913-363-1234. Once again, that's 913-363-1234. Or email them to hey mike@howtorettime.com. Let's begin.

Hey, Mike. What is a good rate of return projection for a retirement plan?

Oh, this is such a loaded question. This is such a loaded question. And the reason why it's loaded Yeah. Is because humans, by our very broken and inherent nature of being flawed beings, want to have the best returns. And it's a very interesting conundrum.

Here's why. David, if you wanna get really, really strong, really, really buff, could you do that? You were all in.

Yeah. No. It's good. Yeah.

You have control over your diet and your exercise routine.

Okay.

Now let's say you wanna get really, really lean

Okay.

To run a marathon or an ultra marathon or whatever. Do you have the ability to do so? Do you have control over those things?

Yes. I do.

Assuming you wanted that. If you have to follow that.

I want it. Yeah. Definitely got to want it. I can arrange things in my personal life. I could really make it happen if I was really disciplined.

Yeah. You're you have control over that. Right?

Right.

Okay. Do you have control over the market?

Do not.

Do you have control over Apple, Google, Tesla? Can you say, you know, I'm gonna really control these companies as a small shareholder potentially of them. Right? I'm not saying your portfolio. I'm just saying Alright.

Can you see the conundrum? What's what's a good rate of return? The reason why I I I'm hesitant to even answer the question is because people want the best return for the least amount of risk. Yeah. That assumes you have control over the environment, and you don't.

We do not.

And no one knows the future. So it's like, say, no. Well, Amazon's a great company. Yeah. Until 2000.

And then it was terrible. Drop down. The Nasdaq dropped down. We've been talking about this in recent shows as well that how risk actually works. And so to answer this question, you have to be willing to be humble.

I think it was like Shaquille O'Neal. Okay. That's some incredible wisdom. As he entered into the NBA, as the story goes, he interviewed a bunch of financial professionals. And they're all talking about how, oh, I'm gonna get you x percent and we're gonna do great.

And and by the way, anyone says they're gonna get you x percent is selling you runaway. You can't promise future returns. But, hey, oh, you know, I I can get you this. We're gonna do this. It's good.

All this. And then he met this one guy who just says, yeah, we're gonna be boring. We're gonna make sure you keep your money. It's gonna be at a steady rate, and he went with that guy. Okay.

Why was that wise? Because he accepted the fact that he did not and could not control the markets. He did not know the future and that he was going to invest based on a system that he was emotionally and economically comfortable with. Notice the difference here. Yeah.

Accepting what we can and cannot control. So if we're to look back at the last 5 years, you might be thinking, well, shoot, I should be doing 12 to 14% because I'm all equities, and I bought magnificent 7. And if that's you, good for you. I I'm genuinely happy that you made those decisions because you probably got paid really well for that. Uh-huh.

K? You can beat the S and P every now and then. You can make some good decisions, and let's celebrate that. Yeah. Can you do it consistently?

The odds are against you.

Yeah. There's a lot a little bit of luck in it.

In the equities market. So if we look back from 2,000 to 2,010, it made 0. 0 return. Dividends reinvested. Nothing.

But the 6040 split, a more conservative approach, I think from 2,000 to 2,010, if you look at it from, like, a broad generic standpoint, I think it averaged around 4% of a real return, something like that, because the bonds made up for where the equities lost.

Okay.

Not the end of the world. It's just not a very good return, but that's what you should expect in a flat market cycle.

So that that's why thinking back, I did have, you know, some jobs where I had some IRA contributions and now oh, that's

why sound about right.

That's why I didn't do anything. Yeah. I never knew.

Yeah. Your equities, it's growth. It's growth. It's growth. Well, okay.

What are you being sold? An equities portfolio, and is that really in your best interest? 6040 split, not as much upside potential, but hedges against things like flat market cycles. You made some growth. Basically, you kept up with inflation.

Congratulations. Yeah. And then if you look at from 2010 to 2020, equities would have made around 15 and a half percent, I think, somewhere around there. And that's kind of the large cap side, you know, s and p 500 esque

Okay.

Kind of situation. And the 6040 split. So you've got those bond funds in there. Maybe it's averaged around 11, 11 a half percent or so. That's a little less.

Yeah. Not amazing. But notice the huge difference. Uh-huh. Okay.

Are we expecting 0 to 4% returns? Are we expecting 15 to 11%? Well, I'm a conservative investor. I'm gonna go with the 0 to 4%. If that's you, then you might be significantly living below your means and the life you could live.

I'm I'm okay with risk. So I'm gonna go for the 11 to 15%. Okay. You might get it wrong.

And

you might have to go to plan b or c. Move in with the kids. Downsize. Go back to work. You know, what have it.

So what's a good rate of return? You need to understand macroeconomics. Basically, macro being the large trends or cycles of our economy. Okay? Things like the market historically crashes.

When I say the market, equities market, historically crashes every 7 or 8 years. I think most people understand that concept. But what a lot of people don't understand is it's not actually every 7 to 8 years. That's just an average, and it can change.

Okay.

So in 2020, the market crashed. Then 2022, 23, it went down again. That's a 2 year span. In 1987, the market crashed Black Monday in October for all those that remember it. I think most people listening in would remember that.

It was a rather rough day

I bet so.

In our, in our history, but it recovered quickly. And then there was a and that by the way, Black Monday was caused mostly by technology. The abuse of technology not realizing what could happen there. Cough, cough what AI could do. But, hey, there you go.

And then 3 years later, 1990, there was a geopolitical event. Iraq invades Kuwait, and there's another market crash that happens. So it's not every 7 to 8 years. And the reason why I wanna explain this is because years ago, and this is back when I was working in Kirkland, Washington, a very wealthy individual says, I don't need an a financial advisers. We were doing plenty for his wife because they they had their finances separately.

And he says, I don't know. I don't need that. I just I invest in in the market, all equities for 7 years, and then I get out. And I just wait for the market to crash sitting in cash.

He he may have missed out on something?

Yeah. Because in 2,000 and 10, he would have probably gotten back in after the 2,008 financial crisis. He would have then grown till 2017 and then missed 3 to 4 years of returns waiting for the other shoe to drop. You can't time the market. You can't time the crash, but people do this.

There's a image that goes around social media. This ridiculous I don't know where it came from. And people think that they're just brilliant when they find it and share it. That shows like, oh, the markets crash and it it illustrates in this like Illuminati kind of esque situation that people are controlling the markets and all that. Anyone that knows the history of our markets knows it's garbage.

Mhmm. But it feels so cool to say, I figured it out. I caught the image on my LinkedIn page, and now I know the secret. Yeah. It's not true.

But you you would have to know the right questions to ask to debunk that kind of situation. Anyway, going back to the situation, let's look at what equities would have averaged around from 2,000 to 2020.

Okay.

Let's look at it from a a larger perspective here.

20 years now.

We're acknowledging that flat markets can exist. We're acknowledging that maybe not everything should be in equities. We're acknowledging that there are up markets and there are flat markets, there are down markets. And they cycle through these different periods of time. You know, there's periods of high inflation and low inflation, periods of great growth, periods of no growth, Periods of geopolitical events that are stressful and periods of peace.

There are so many factors here that create periods of time that we need to understand what's going on to understand the markets. So we look at it from bigger perspective. Equities would have averaged from 2020 or so, roughly around 7, maybe 7 and a quarter percent year over year

Okay.

Roughly. These are real returns. We're not taking the averages and, you know, add them all up and just divide it by 20 or whatever. That's that's oversimplification. We're looking at the real rate of return on your cash.

Maybe 7 7 and a quarter. K? That's a more realist expectation. And then, for a 60 40 split, it would have been around 7, roughly. K?

Past performance is not indicative of future returns. You ever hear that before?

I have heard that. Yeah. Like, I've seen it in small print next to an asterisk.

Yeah. I'd love to put that as, like, the the biggest thing that it's the title of any sort of agreement. But but the reason why I say that is you might say, well, gosh, I've got, you know, over the long term period of time, the equities are a little bit better. Maybe I'll just risk it. What equities have more ups and downs And the sequence of your return matters.

So we're looking at oversimplified average growth returns on your cash. But it's not that simple. Because when you're putting money in the market your dollar cost averaging so the downs actually are to your benefit. But when you're pulling money out, the downs are actually to your detriment. It's bad.

And here's why. First off, you had to understand volatility or the roller coaster, the ups and downs overall. And in in that situation, let's say that you've got a 100,000 in the market, and you expect a 10% average for easy math. So in the 1st year, you've got a 100,000. After that 1st year, 10% return, you've got a 110,000.

You with me so far? Yeah. And then one more year, another 10% return. You've got a 121,000. Are you with me?

Yep. Now let's do the same exercise. You've got a 100,000. But in the 1st year, you're gonna have a negative 30% crash. And the next year, we're gonna just have an incredible 50% return.

All is well. It's still a 10% return average. Uh-huh. 100,000, 30% crash. You're now down at $70,000.

But with that 50% return, that great return, you have a 105,000. So you're really averaging like 2 and a half percent not 10%. It's a deceptive way to get your hopes up. And you might say, well, Mike, you're just rigging the numbers. No.

I'm not. Let's reverse it. A 100,000 with a 50% return gives you a 150,000. You've outgrown your problems or so you think. And then you have that 30% crash.

Now you're down to a 105,000. You're still averaging 2 and a half percent return. So the rate of return doesn't really matter unless you look at the real return of the cash value. Equities are more volatile. Now here's where it gets more complicated.

When you pull income out of an account that has lost money, you accentuate the losses, making it more difficult to recover. Right. So if you lost, let's say, 30% in your accounts, which is a very realistic possibility because it happens every 7 or 8 years, It would take a 43% return to break even. 30% down, 43% up. Okay.

Just to hit 0.

Okay. Yep.

Well, now let's say you you lost 30%, but you need income. Gotta pay the bills. So you take out your 4%. You're now down 34%. That would take a 50%, five zero, return just to break even.

Yeah. That doesn't happen very often, does it?

How many years can you remember that 50% return in 1 year?

Yeah. It seems like an outlier to me.

Yeah. If you look at, like, large cap growth or large kind of diversified ETFs, a very common investment strategy, it might take you 3, 4, 5 years to recover.

Okay.

That assumes you don't take any income. Oh. So what are you gonna do? So, again, going all equities in retirement when you're taking income out may be an oversimplified way to think that you can make it through retirement, that you can outgrow your problems. And maybe you do.

Maybe we have 10, 15 years of incredible growth. No problems. No crashes. All is well. It just goes against all historical averages.

And it it would be unprecedented is what you're saying.

And this is where humility comes into play. I'm not saying go out and buy an annuity and turn on an income stream for life. I'm not trying to scare you into that. I personally, I would not buy a lifetime income stream. As of right now, that's not my way of doing things.

Would I use an annuity like a fixed index? And is it bond alternative with other things? Sure. Diversify a portfolio of principal protected products and investments. But I'm not trying to scare people into that lifetime income.

I'm trying to help you understand that maybe that 8, 9, 10, 12, 14% return you think you're gonna keep getting, maybe not as as realistic as you would assume. Is this fair?

I think so. Yeah. Everybody's getting their day in court.

And here's what makes it worse, by the way. Go home and build a Monte Carlo. This is fun.

Yeah. Not the car. You're talking about something else.

The statistical metric. You see, you open up Excel, build a Monte Carlo. Here's what you're gonna do. You're gonna go in the Monte Carlo, and you're gonna say, okay. I've got a $1,000,000, and I'm gonna take out 40,000 each year with, let's say, 2% inflation.

Not 3%. Let's say 2% inflation. K? We're gonna be nice. And you put in if you're if you're savvy enough, you're gonna put in the standard deviation of the S and P 500 or the equities you expect.

So let's say it's a 9% year over year return is the average you expect over a 30 year period of time. And then let's say that you're going to I don't have, the range, the deviation, the, you know, the the ups and downs. Let's say we're we'll put it at 15%. I'm just throwing out some numbers here to get you started with it. Alright.

And by the way, you can listen to this via podcast. Go home and do this. Yeah. Just search for how to retire on time anywhere on YouTube. And here's what you're gonna do.

You're then gonna see your probability of success, do a 1,000 iterations, and see your probability of success be in the high nineties probably. But if you're really astute, you're gonna see that those iterations, you're probably not gonna see typical market patterns. So, yeah, it looks good on paper. It's fun to manipulate a calculator that makes you feel really good about yourself, really smart. But then what you gotta do is you gotta say, okay, let's let's find some more realistic returns.

And then you manually type in, if you build it right, a 30% crash in year 7, let's say, in year 14 and in year 21 And rerun it. And watch your probability of success go down to, like, the 60 percentile. If you live 30%, your equities portfolio based on the Monte Carlo, the very tool that's intended to sell you this this concept has a 64% or so chance of success. No one probably ever told you that. Even the people that I've I've met in speaking at conferences and being either a keynote speaker or as a panel.

When I talk about this, the financial professionals I explained this to are just baffled. Because no one ever told them. You'd think you'd run these numbers and do your own due diligence, but no, it doesn't really happen as much. They're just here's how you sell it, and there you go.

Yeah. Whatever's in there, like sales material, handbook or training, maybe.

It's not that they're bad people. Yeah. It's good to have equities in your portfolio. It's good you have investments. It's good to diversify.

But to have all your eggs in the equities basket in retirement, I think is a bit risky, especially when you put this. And by the way, if you put your, those market crashes, let's say it happens in the 1st year. So in year 1, 8 and 20, let's say, somewhere around there, you have, like, 30, 40% probability of success of your money lasting 30 years.

Okay.

This should be upsetting, by the way.

Uh-huh.

And that doesn't account, by the way, flat market cycle. That only accounts market crashes happening every 7 or 8 years or so. So the question I've got when you say, hey, what's a good rate of return? Make it low, maybe 5, 6%. And if you get ahead, great.

If you've got extra money, spend a little bit extra money. But if we had a flat market cycle and you have too high of a return that you're depending on, then you start to get desperate. And when you get desperate, you start making bad decisions. And when you start making bad decisions, you destroy your retirement and you've got to move in with kids, get a job, or figure something else out. It's not worth it.

The day you retire is the day you have the least amount of risk possible. When I say possible, based on your plan and the portfolio needed to support that plan. The real question is, can you time a flat market cycle? Can you consistently pick the winners? Because if you believe so, the odds are against you.

If you can do it, then I've got news for you. Go to Wall Street. You'll make a ton of money. It's just no one's ever really consistently done it to the level that you might need. And people might say, well, Warren Buffett's a brilliant investor.

He is a brilliant investor. He's also not retired. He's not necessarily drawing income from a $1,000,000 portfolio trying to make it work for 30 years. So let's not take things out of context to confirm a bias that we want to believe is there. Humility is such an important component.

We need to fight greed. I mean, you you wanna grow your assets. You want future flexibility, but don't make it a necessity. Don't say if I can't get these higher returns, I'm done. Give yourself some grace.

Fight the 7 deadly sins as they say. Yeah. Especially greed and fear. Fear is not a 7 deadly sin, but greed and fear in the market in that sense. Yeah.

Hopefully, you can overcome the bias and these cognitive distortions and be humble enough to put together a proper plan that can help support yourself, your wealth for 30 plus years with a retirement plan that's designed to last longer than you. 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. 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. 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.