How Much Principal Protection is Enough When You Retire?

“Hey Mike, is a three year reservoir enough for retirement?” Discover the risks associated with having a smaller reservoir and why you may want to consider putting up to 60% of your assets in investments or products that offer principal protection when you retire. 

Text your questions to 913-363-1234.

Request Your Wealth Analysis by going to www.yourwealthanalysis.com.

What is How to Retire on Time?

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.

Mike: 00:05

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.

Mike: 00:33

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.

David: 00:52

Yes. Glad to be here.

Mike: 00:54

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 [e-mail]. Let's begin.

David: 01:13

Hey, Mike. Is a 3 year reservoir enough for retirement?

Mike: 01:18

No. Yeah. I thought

David: 01:21

that was that was easy. Okay. We can have the lights on and go home now.

Mike: 01:25

And the reason is you are taking 2 very big risks, maybe more, but let's just do 2. The first one's reinvestment risk.

David: 01:35

Okay. Explain that.

Mike: 01:36

Right now, CDs, treasuries, they're pretty good. So let's say you've got a 3 reservoir and you're just slowly rolling this over year over year. Well, what's what's the rate gonna be when it matures? You need to roll it over again. Let's say the markets don't crash in 3 years that we've had 3 good years and you just roll it over.

Mike: 01:54

Okay. What was it gonna be? 1% is gonna be 2% is a 3%. You don't know. There's reinvestment risk and you need to be making money in that.

Mike: 02:02

The second part of this is, let's say you've got 3 years of a reservoir. Let's say that's like 10, 15% of your portfolio. Well, if the markets do crash, do you have enough time in that reservoir to recover? 3 years, you might do well, but now your other assets have barely recovered. And if it's a flat market cycle, then maybe it recovers just in time for you to refill it.

Mike: 02:25

Mhmm. And then it crashes again. Mhmm. There's high risk if you're just limiting yourself to a 3 reservoir. And the reason is markets don't crash quickly and recover quickly.

Mike: 02:36

Think about 2,001 and 02. That was a rough time. K. There are plenty of times where the markets were going down for 1 to 2 years, sometimes 3 years. So we need to understand that.

Mike: 02:48

The second thing is you also need time to recover. So when we talk about risk and diversification by objectives, not just the ambiguous by a little bit of everything, we need to understand that the first 5 to 7 years of your plan probably should come straight from principal guaranteed sources. So that your other assets really have plenty of time to recover and can really grow, grow, grow. After 5 to 7 years, then you can get a little bit more dynamic of saying, okay. I've got 4, 5 years left in the reservoir.

Mike: 03:21

You've drained the other parts of it, but there's enough now that's liquid enough that has enough growth potential that you should be fine there. But you've got a 30 year window, and you got to treat that differently than when you've got 20 years left in the window or 10 years left in the window.

David: 03:36

Okay.

Mike: 03:36

A 3 year reservoir may be appropriate for someone in their eighties.

David: 03:39

Okay.

Mike: 03:40

Who maybe has one more significant crash left. But if you're in your sixties, you might have 3 or 4 significant market crashes that you have to get through. And to assume that you can time the ability to slowly drain the reservoir and then refill it would also suggest that you can predict the future. Uh-huh. Don't let upside greed put you at risk of losing your assets with that downside risk.

Mike: 04:05

It's just not worth it. I've run the numbers over and over again. Let me say it this way. I'm a bit unconventional in how I get paid. K?

Mike: 04:15

I get paid less when I recommend CDs and treasuries for the 1st couple of years. As in I don't get paid anything for that. Uh-huh. I say, look, Let's ladder out your 1st couple of years with CDs and treasuries. And they say, okay.

Mike: 04:26

Is there a management fee? I said, no. We'll just set it up for you, and then it's done. There's nothing to manage. Once it matures, you spend it down.

Mike: 04:33

And they go, oh, oh, okay. A lot of people will charge. It will include that in a management fee, but I just think that's that's weird. Why would I do that when I don't get paid on it? Because it's what is right for a client.

Mike: 04:45

Mhmm. The numbers are clear as day when it comes to statistical probability. My research is pretty clear that if you want the flat numbers, take the amount of assets that you you plan to use for income for the next 30 years. So let's say all of your assets are intended to generate income or maybe you've got some legacy. Some, let's say, 70% of your assets are intended to be for income and 30% for legacy.

David: 05:10

Okay.

Mike: 05:10

Sometimes there's just money that you don't wanna touch that just purely for legacy purposes.

David: 05:15

Alright. Yep. I'm giving that away. It's it's just mine.

Mike: 05:18

Yeah. It's it's just there to grow until one day when you pass, it's given away.

David: 05:22

Okay.

Mike: 05:22

So whatever money is used specifically for your income throughout your life, assuming that you don't buy an annuity and turn on that income stream. So you want that dynamic nature. You want growth. You want some protection, some growth with the risk you're okay taking. You've blended it together.

Mike: 05:39

When you retire, typically around 60% of your assets should probably be protected.

David: 05:45

At the day of retirement? At the day

Mike: 05:46

of retirement. Around 60% is what I have found. Everyone's gonna be a little bit different because you might have a pension that starts in a couple of years. Maybe you you file for Social Security later. Maybe you file for Social Security earlier.

Mike: 05:56

But as a general rule, 60% of your assets should be protected so that you will you've laddered out enough protection for the first 5 to 7 years. And then after that, your reservoir is more dynamic. Now how does this work? That 60%, you're draining income from the accounts that have protection that are laddered out, which is at a lower growth rate. A CD is hopefully most likely gonna grow at a lower rate than what will be in the market over the long term.

Mike: 06:24

Yes. The market has more growth potential. There's risk associated with it, but you have time to write it out. So you drain down for the 1st 5 years, specifically, maybe 6 and 7, the accounts that are protected that have less growth potential. So the other accounts that have more growth potential can grow and offset what you're drawing down.

David: 06:43

Okay.

Mike: 06:44

You see how it's playing 2 strategies at once? Yeah. K. So in 5, 7, 10 years, your reservoir, your protected accounts might be 40%, might be 30%.

David: 06:57

Okay.

Mike: 06:58

But you just got through the 1st 10 years. Your growth assets hopefully have accumulated a great amount, and then you can maybe do a little rebalance. Let's say it's you got 30% of your assets that are protected and you bump it up to 40%. You just put some more CDs in there just for the short term needs or something like that. And that's in your seventies now.

Mike: 07:16

Maybe around 40% in your seventies. And maybe in your eighties, you have 20%. The older you get, the more risk you can take because you have less market crashes probably ahead of you and more of your assets are shifting from income for you to, oh, you've got leftovers. Uh-huh. So spend it or plan to give it.

Mike: 07:35

But do you see how each phase Yeah. Plays an important role of it all?

David: 07:40

And just to be clear to the reservoir, you're using that for all of your expenses, all of your travel. It's like it's like funding your whole life. Right?

Mike: 07:47

Yeah. Yeah. I mean, you've got 2 options here. 1 is you can lock up assets into a fixed income stream from an annuity guaranteed for life, backed by the insurance company. Yeah.

Mike: 07:58

But there's no flexibility. Uh-huh. Or you can build in the protection while maintaining the flexibility so you can adjust your needs along the

David: 08:06

way. Alright.

Mike: 08:07

I this is my biased. I prefer having growth and flexibility. Yeah. But I can't do that by keeping all the assets in the market. I've got to balance it between protection and laddering things out strategically based on my lifestyle legacy needs or your lifestyle legacy needs while maintaining that ability to preserve assets, grow assets, and be flexible for my lifestyle needs in the future.

Mike: 08:31

So there's there's that balance. And we all need to live within our emotional and economic limits, but we need to understand the risks that we're taking. And I just fear that because markets have really just gone up, up, up, that we have forgotten when they go down, down, down. Yes. And I'm not saying the markets are gonna crash next year.

Mike: 08:48

I'm not saying they're gonna be terrible over the next 3 years. I'm saying no one knows.

David: 08:52

Yeah. We just don't know, so why not just be ready?

Mike: 08:54

Yeah. My favorite case study is what was it? 2 years ago, a 100% of economists predicted a recession Oh, yeah. And never happened. Right.

Mike: 09:02

And I'm I'm not saying those economists are dumb. They're quite brilliant.

David: 09:05

Mhmm. Yeah.

Mike: 09:05

It just proves that we just don't know, and we need to be aware of that. 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.

Mike: 09:28

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.