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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, 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.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
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 you can go to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, 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 a show so everything you hear should be considered informational as in not financial advice.
Mike:If you want financial advice, then request your wealth analysis for my team today by going to www.yourwealthanalysis.com. With me in the studio today, it's mister David Fransen. David, thanks for being here today.
David:Yes. Hello. Thank you for having me.
Mike:Yeah. David's gonna be reading your questions, and I'm gonna do my best to answer them. Now you can send your questions in right now or anytime this week. Just save this number, 913-363-1234. Again, that number is 913-363-1234, or you can email them to hey mike@howtoreontime.com.
Mike:Let's begin.
David:Hey, Mike. How do you feel about Buffered ETFs? Would they work as part of the reservoir strategy?
Mike:Oh, clever question sneaking in there as ice I just snuck Buffered ETFs in that last segment. Yeah. They count. So only on the buffered ETFs that have all 100% downside protection. They can't go backwards.
Mike:Be very, very careful. There are some that will sneak in saying it can't lose money. And then in small text, except for these situations that will probably never happen. Well, they might. So if you're looking into an option for the reservoir strategy, technically, buffered ETFs that have no downside risk could qualify.
Mike:Now and and just for those listing, why is this important? If the markets go down, you never wanna draw income from an account that's lost money. K. That accentuates the loss. So for example, if the markets go down and you've lost 30% of your portfolio, which will probably happen, at least whatever's in the market, that will probably happen within the next 7 years if history repeats itself.
Mike:It would take a 43% return to break even. K. So that's not fun. Now if you lost 30% in your portfolio and then let's say you needed income, so you took out 4%. You are now down 34% in your portfolio.
Mike:Are you with me so far? Yep. That would require a 50% return just to break even. Let's say you went really heavy into the Magnificent 7 or a select few of stocks, or you just have too
David:much in equities, or you have too much in high growth equities, which means
Mike:you also have more risk. And you're down 50% now in your portfolio. You need a 100% return just to break even. So having a part of your portfolio that cannot lose money, I think is a very important part of an overall strategy or overall plan or overall portfolio design. Many times, I actually have recommended people to replace their bond funds with principal protected investments or products that have reasonable upside protection.
Mike:And this might count in that category. The problem though is with that 100% downside protection, you will be limited on the upside growth. Mhmm. And actually this happened this week. I get calls all the time from different investment institutions or firms saying, hey, sell our product.
Mike:Yeah. I'll hear everyone out. I don't care.
David:Sure.
Mike:You know, what what if it's a good thing? I wouldn't know if it's a good thing. So I'll listen to it. But this guy calls me up very friendly and says, hey. We've got a buffer DTF, 100% downside protection because you're a fiduciary and you ought to have this in your portfolio.
Mike:It's very slimy. But I will still listen to them even if it's a bit slimy in their sales pitch. Very manipulative. Hate that crap. So he says, you know, hey, you gotta protect your portfolio.
Mike:We've got a buffer DTF that can do it for you. And I said, what's the cap? He says, but there's no downside risk. What's the cap? 7.4%.
Mike:Okay. I'm good. Thank you. Uh-huh. Why is that now?
Mike:That'd be pretty good. Right? Because the same simulation could be found in fixed index annuities with a higher cap if you want the S and P, or you can do alternative indexes with your fixed index annuity with no fee, and you've got more upside potential. Not all of them do this. Many annuities, many fixed indexed annuities.
Mike:Have I said that enough? Many of them have very uncompetitive returns. And this would look better than those.
David:Okay.
Mike:K. But you can't take one and assume it's a proper representation of all. This is why we go shopping. Yeah. For everything.
Mike:Everything in life you go shopping for and you're looking for a good deal based on what you're trying to accomplish. This is kind of a funny analogy, but I think IKEA is a great deal. I love IKEA furniture. My wife hates IKEA furniture. She says it's low quality.
Mike:I say it's high quality. She says, I don't like how it looks. I said, it's cheap and practical. Yeah. And so we ended up buying West Elm.
Mike:But you get my point. It's what what are you looking for? What do you wanna accomplish? This might be a great option for you if you're okay capping your upside growth at 7.4% for a 1 year duration. So if markets go up 10, 20, 30%, you're given 7.4%, but you can't go backwards.
Mike:But I have found more competitive returns in the fixed index annuity market. And if all I care about is growing my clients cash, this is not competitive. Now there are other buffered ETFs out there you need to understand that have maybe a 2 year duration. And people will say, well, I'll just sell it. You know, if I've made my 7.4%, I'll just sell it to someone else.
Mike:Who's gonna buy a security from you like a buffered ETF from you? Let's just say you could do this. Who's gonna buy something from you that can't make money, but could lose 7.4%. So they've got no upside potential, but only downside like you have to kind of think these things through, right? So if you wanted the cash or you needed the money, you might sell it at a discount or at a loss or what have you.
Mike:So these are things that matter understanding the benefits and detriments of any investment product or strategy matters. Understanding how to compare them matters. Some people will compare buffered ETFs, fixed index annuities, structured notes to just buying the market. Okay. Well, do you want protection or you want maximum growth because those are 2 very different objectives.
Mike:You don't need to put all of your portfolio in 1 group or the other. The trick is understanding how much goes into either one and what are the risks associated with it? What's the liquidity associated with it and so on. But with with all these products buffered ETF structured notes, anything fixed indexed annuities, any index universal life, all these indexed products that have protection but upside potential, you need to understand how they operate. You need to understand and look at the caps, which is where you get up to a certain amount of growth, A spread where they collect the first part of it, and then you get everything after that.
Mike:Or participation rates, which is where, let's say, it's 5050 participation of something. You get half and the other company allegedly gets half or however that works out. So, yeah, the details matter. The environment matters. And there is no perfect category in perpetuity because sometimes buffered ETFs may be more competitive than fixed indexed annuities or indexed universal life or structured notes or whatever it is.
Mike:And other times, it might be something else. So shop around with someone that can, one, get you access to these things. And 2, is gonna be neutral and a legitimate fiduciary. And explore the options and and have a fun time with you there. Be careful.
Mike:If you are working with a financial professional, which many of these products, investment products, require you to buy through a financial professional, make sure they're licensed across the board and can offer you all of them. If they can't, get out and find someone that can. You don't wanna try and do comprehensive shopping with someone that can only sell you 1 or 2 things. 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 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.
Mike:Go to www.yourwealthanalysis.com today to learn more and get started.