Subscribe
Share
Share
Embed
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.
Here's an interesting one. I I don't know push back a little bit with Steve on this one. Annuities with an income rider tends to be a rip off. That is only true if you're using them for cash growth. So you don't buy a car to sit in your parking lot.
Mike:You buy a car to drive. Yeah. Right? Yep. You if if you use the tool as it was intended to be used, it's fine.
Mike:So if you buy an annuity, and this is very important. If you buy an annuity with an income rider, it means you bought that with the intention of actually turning on income.
David:Right.
Mike:If you are on the fence on it, you probably shouldn't buy that.
David:Or at least don't don't have that rider on there.
Mike:Well, you you have to buy it with rider on there.
David:Can't you
Mike:can't throw that on afterwards.
David:I see. Okay. Okay.
Mike:So it's better to take some take a breath. Yeah. Maybe wait a little bit. But you don't you can't have your cake and eat it too. So if if you want and this is the this is the very clear line.
Mike:Okay? There are annuities that are built for income. They are terrible for cash growth. They have riders on them that will lower the cash growth. But you didn't buy it for growth.
Mike:You bought it for income. If you want annuity for cash growth as a bond fund alternative and you're expecting it to make, let's say 6%, maybe 7% cash growth year over year, which is possible, you don't wanna write around it. You don't want any of those bells and whistles that's drag on the cash growth. But the ones that have great cash growth are terrible income products, and the ones that are great income products are terrible cash growth.
David:I see.
Mike:So you have to also understand how it works. I would never race my Subaru. Oh. It is I did not buy that to be a fast car. I bought it as a practical vehicle to drive me to the ski resorts when I wanna go skiing and to get around town here in Kansas City when it snows.
Mike:Yeah. That's it. Yeah. But I would never like my my dad has some pretty fast cars. There's no way I would take those out on the snow.
David:Right. Right. Right.
Mike:He bought some fast cars to drive fast. That was it. When it snows, he gets into his truck. Uh-huh. So we need to stop having and Steve, I don't necessarily mean that you're wrong here.
Mike:I just wanna clarify because sometimes we put blanket statements over the word annuity as a swear word, and it's just not the case. In point of fact, you've got MYGAs. They're basically a CD from an insurance company. You've got income or an indexed annuities. Do you want cash growth like a buffered ETF where you're gonna have restricted liquidity, but slightly more growth potential than buffered ETF?
Mike:Or do you want income? Then you've got RILAS. RILAS have a little bit of risk to it, but have slightly more growth potential, slightly maybe better income. I don't I haven't I haven't been convinced on that yet. And then you got variable annuities, and okay.
Mike:Variable annuities suck.
David:Mhmm.
Mike:High fees, multiple layers of fees. The only benefit is that you can put brokerage funds into it and not pay taxes. But even that's kind of a sham because if if you die before you exercise it, your kids pay the tax bill. There's no step up in basis. So I get why people hate variable annuities and that's what people learned about ten years ago and held on to that belief system and didn't look around and say, well, how things changed?
David:Mhmm.
Mike:But I appreciate that, Steven. This company lets you add the income rider during your terms. That's kinda nice. Yeah. I mean, everyone's different.
Mike:But the point being is, we wanna slow down. You wanna make sure that you understand what you're doing. And if you don't, pause. Yeah. Ask more questions.
Mike:You should never feel rushed. You should never be scared into any sort of decision. You should never be pressured into a decision. If it doesn't make sense, keep going. You don't wanna say, I don't understand it.
Mike:Let's do something different. I mean, have you tried to learn a new language? I have. What'd you what'd you try to learn?
David:Well, so more recently, it's hard. I've I've I've tried to like pick up on more Spanish and French, and it's just hard for my
Mike:brain to remember it these days. That's okay.
David:When I was younger, I felt like, you know, when I was still in college, it felt easier. Now it feels hard. And you know, you're trying to do it on the apps on your phone. Right?
Mike:Yeah. Yeah.
David:It's just nothing sticks as well as it used to.
Mike:But you learned English.
David:I did.
Mike:You are capable of learning it.
David:Yeah.
Mike:If you really if your life depended on it, if you're moving to Spain
David:Yeah.
Mike:You would learn it.
David:I think I probably would. Yeah.
Mike:K. You put enough time into it, and you use your favorite AIs, and ask those enough questions, ask enough questions with your AI at the very least, or ask the adviser, whoever you're doing the planning with. If you ask them enough questions, at some point, you'll learn it. And this is just your financial stability for the rest of your life. You want and should be allowed to ask as many questions as needed until you understand it enough.
Mike:You don't need to understand the derivatives or the option budgets of these complex, you know, dynamic indexes and all this, but you do need to understand enough to explain it.
David:Mhmm. Impossible. So. Yeah. It's possible to do that.
David:Given if you if you dedicate the time. Right? And
Mike:I mean, I don't know how I mean, I've taken apart engines before, but I don't really understand the engine.
David:Alright.
Mike:But I know this car operates this way, and this is how you drive it. I know that car would operate that way, and that's how you drive it, and those are the experiences to expect. Yeah. That's kind of a nice analogy with that. So, my goodness.
Mike:We are almost out of time. Submit any more questions you have. We'll try and cover them as as best we can here. Do you have one question I wanted to get those submitted late last week, we didn't get to?
David:Yeah. Is this from Bob?
Mike:Yeah. So I read your book, and I'm trying to understand how someone could form a reserve with the money that's in a four zero one k. My scenario, I'm under 59 a half, and was evaluating whether I could use the rule of 55 to withdraw from my last employer.
David:It's a deep cut there, Bob. Way to go. Yeah. Rule of 55?
Mike:Yeah. So rule of 55 means if you're 55 years or older, you can take income out of your four zero one k without paying the 10% IRA penalty. And then so until '55 and then '59 and a half, and then I can use my other retirements to funds without the penalty. My four zero one k's with Fidelity. K?
Mike:K? And you've got the BrokerageLink, which is a cool thing there. So here's here's the idea. With BrokerageLink, there's a lot that you can do in there. You have seen a lot of people do this.
Mike:You could ladder up bonds and CDs like you're you're suggesting here of just like the first two or three income years. If you read the DIY annuity guide, it talks about what's called the laddered reserves, and it's just the the first up to the first five years of retirement, it's completely, in my opinion, appropriate to ladder out those income years. Because the markets might go up, or they might go down like three years in a row. We don't know. But fixed growth, whether it's a MIGA or a bond, and if you hold a bond at maturity, then interest rates don't really matter.
Mike:You you got a deal that you're comfortable with and it's gonna grow at that rate. Or CD, you can do that. If you want to, you could also add buffered ETFs in there. Brokerage link honors that. Or you could do a bond fund, and just have less risk.
Mike:It still has risk, but you could blend those together. But typically what I see is when people try to build out laddered reserves until they're 60 years old, in their brokerage link, they just buy those assets and then invest the rest as if they would normally invest it. Maybe a little bit less risk and it's earmarked for when I can move the funds out. Then this is where they're going next.
David:So he's so he's opening like a he has a different account separate from his 401, and and then to fund those other accounts, those treasuries or CDs, he's pulling money out of his 401 prior to fifty nine and a half. So he's using this rule of 55. Is that is that basically what's happening here?
Mike:Yeah. Okay. Then this is where you want to diversify by strategies or have many portfolios within your portfolio. So think of like the bucket system. So this bucket is gonna pay his income from when he retires to 60 years old.
Mike:It's laddered out. It's simple. Okay. Then this bucket right here might be in this lower risk asset class, but when he separates employment and he can roll the funds over, or his old four zero one k might go to then this this new whatever it whatever's the right strategy for him.
David:Uh-huh.
Mike:And and that's important to also factor in that you might have a couple of strategies. You might blend long term growth and some reserves, and then have it in different waves. The point is you wanna know what your act one, act two, and act three is or are, whichever way you're supposed to say that. Yeah. As you transition to retirement.
Mike:If you're prepared and you know what to do each phase or each act, whether the markets go up or down, you'll probably sleep better at night.
David:Mhmm.
Mike:It's the uncertainty that keeps us up.
David:Mhmm.
Mike:Clarity isn't that bad. Even when things are going terrible, if you already know what your plan is, it's not that bad.
David:Mhmm. I like that.
Mike:We got like three minutes left. David, do have any other questions you wanna just throw in here before we we sign off?
David:Well, this might be an easy one. This is a
Mike:very
David:topical. So why are inflation and Federal Reserve policy big risks for investors right now?
Mike:Yeah. As of recording. So let me tell you a story.
David:Alright. K. Love story time.
Mike:The year is 2016.
David:Oh, yeah. I remember that year. Yeah.
Mike:We have historically low interest rates.
David:Oh, yep.
Mike:K? And people are buying income annuities. Oh. K? So you put a million dollars in, you're gonna get $4,050,000 guaranteed for life.
David:Okay. K.
Mike:Lot of government debt. Okay. Markets are growing wonderfully. Okay? As long as nothing goes wrong, there's no issue.
Mike:Except for the fact that you're getting four or 5% of your income when you could be getting more in the market. That's a whole another topic. Uh-huh. But but just think about that for a second. Okay?
Mike:Bonds or treasuries are earning 1%.
David:Back in '16?
Mike:Yeah. Yeah. Around there.
David:Okay.
Mike:They're not there's no more room for it to go down. There's no room for it to go down. We're not the Japanese bank. We don't go to negative interest rates. So so the only way is you maintain status quo and keep money cheap, and if you keep money cheap for too long, you have inflation risk, or you increase interest rates, which then all your bond funds and so on would collapse.
David:So
Mike:we're sitting in a moment where there's high interest rate risk because interest rates could go up, and if interest rates go up, your bond funds go down. And then COVID happens, and they print a lot of money. And what's really interesting is all the talking heads on TV, all this won't cause inflation, all this won't do this, and you get the farmer down the road who says, well, if we print a lot of money, that devalues our money, and and by the way, that creates inflation. Like this is economics one zero
David:one. Mhmm.
Mike:So what happens? Inflation hits, And all the people with that lifetime income lost 30% of their buying power. Like that. Because they're the income they're receiving from that Doesn't change.
David:It stays flat or steady is locked. Mhmm.
Mike:But they've got inflation increasing. That's a problem. Today, the interest rates are relatively high. All things considered. Now inflation is sticky mostly because of the the Iran situation.
Mike:If you look back before we got involved with Venezuela and Iran, inflation actually went down. Mhmm. And then the Iran situation, inflation went up. So I think inflation might go down at some point if or when this conflict resolves.
David:Mhmm.
Mike:But the the point being is, inflation's gonna go up, it's gonna go down. You just wanna be aware of the trend. And right now, if and this is my opinion, my rule of thumb is, if you have interest rates at or treasury rates at 3% or better, and the rate trend of the last twelve months is going down or staying the same, risk. It's kind of okay. Mhmm.
Mike:And when interest rates are high, it favors retirees and it hurts anyone that wants to buy a new house. Yeah. So it's great for older people, horrible for younger people. And if interest rates will go down, your bond funds would make a lot of money. And we saw that in 02/2002.
Mike:So I don't think there's a lot of interest rate risk right now. I think the inflation risk is political, but because it's political, it's able to be managed a little bit better than a runaway market or something else that may just be a different situation.
David:Mhmm.
Mike:There's there's more control whether you believe in Trump or not. They have more control over how they could try to manage it. I'm not saying they can actually manage it, but they can try to influence it.
David:Mhmm.
Mike:So I I expect interest rates to stay the same for a while, but that's my speculation. They'll either stay the same or interest rates will lower, and if interest rates lower, it would only be because inflation's gone down. Either way, retirees should win.
David:Alright.
Mike:So Not bad. Just just just be cognizant of of your of your plan, and know that inflation's gonna go up, it's gonna go down. Interest rates are gonna go up, they're gonna go down, and so on and so forth. Appreciate you all being here for the show. That's the hour.
Mike:If you want to chat with us, you can always go to retireontime.com and click the button that says talk to a planner. It's a thirty minute conversation to discuss what do you want in retirement and what do you want from us, and then we decide how it makes sense to proceed in the planning process. We do offer the first two visits free. So that's kind of nice. You can see the plan starting to be created and then make an informed decision if you wanna continue and finish the process or not.
Mike:It's okay either way. We've also got a lot of books available, retireontime.com, how to retire on time, and the DIY annuity guide, and many more books to come. But make sure you get on our newsletter. I email everyone twice a week on market context, retirement tips, and so on. Appreciate you all being here.
Mike:We'll see you next time. Have a great week.