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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 retirement questions. This is a live show, and we're gonna be taking your questions. As always, submit them either on the chat if you're joining us live on Zoom or anytime during the week by going to retireontime.com/ask. We've got kind of a fun show today. We're talking about the subtle things that people don't think about that erode or prevent a retirement plan from making a big difference.
Mike:So that and so much more. Get your life questions in right now, either in the chat or so on. If you're tuning into one of our broadcasts on the radio, just remember you can always go to retireontime.com, join our newsletter, and get access. We only send this invite to those on our newsletters to join us live. We've got the feeds going up here.
Mike:All right, David, so before I talk about the things that slowly erode a plan, I wanna ask you a question. I did not prep you for this before the show on purpose.
David:Nope. This is coming at me cold.
Mike:Usually, give you a softball heads up. If you had to name the top three most deadly creatures in the world, what would they be?
David:Probably some kind of spider, some kind of snake. What would the third deadliest creature be? I guess maybe some kind of big cat.
Mike:K. Snakes are number three. Okay. On the most deadly. Alright.
Mike:Okay. Snakes are number three. Number two, humans. Oh. We forget to include ourselves in a category.
Mike:So humans contribute to the second highest amount of deaths in the world. Okay.
David:I guess that makes sense.
Mike:You know, a little bit of a trick question. I'll admit it. Yeah. But at the end of the day, like, we hurt ourselves more than most all creatures, all but one. Alright.
Mike:The number one most deadly creature in the world is Yeah. I'm ready. Mosquitoes. Oh, yes. Of course.
Mike:Mosquitoes lead to more deaths than any other creature in the world. Yeah. That little annoying thing that gets your blood and you slap it, but when you get dengue and you get all these other viruses.
David:Yeah, malaria.
Mike:Malaria. I've never had malaria, but that's Zika virus, right? That's, yeah, pretty rough. Yeah. Reason why well, first off, let me tell you how I found this out.
Mike:I my son said, hey, what are the most deadly animals in the world?
David:Alright.
Mike:So we pull up AI, and I'm thinking, we're gonna have a conversation about sharks and tigers and bears, Uh-huh. Oh And like, none of the results were expected. I think tapeworms were on there as well. Like, the small creatures are the ones that get you. And if you look at it from a quantity standpoint, how many people are getting mauled by a hippo?
Mike:I mean, really?
David:Yeah. That's pretty rare, isn't it?
Mike:We're not all, like, actually fighting hippos. Yeah. So we forget the little things that can make big differences in our life. That was kind of the point of the question.
David:Alright.
Mike:So when it comes to a retirement plan or your portfolio, what is the thing, and this is a leading question, what's the thing we all want?
David:Unlimited growth. Performance.
Mike:Yeah. Yeah. Unlimited to the moon. Mhmm. And that's a very important thing.
Mike:It is. We all want growth. Undisputed, no problem, and the last fifteen years, guess what we have received?
David:Pretty good growth?
Mike:Grow, baby, grow. Yeah. That's what our markets did. But growth, there's two factors here. Risk does not equal growth or reward.
Mike:Risk means growth potential. So sometimes, like humans are the second deadliest animal or creature in the world, sometimes our greed can actually reverse the growth that we seek. And I cite among many other people on this, I've written about this extensively in Kiplinger, even in their magazines as well, that flat market cycles are the most dangerous ten years of market performance that you could possibly have, and the and the problem with it is there's enough time in between a flat market, and then you got twenty years of up market, and then a flat market, there's enough time in there that we forget that they happen.
David:Right.
Mike:It's like the, oh, that used to happen. It doesn't happen anymore. Or that happened to them, but it won't happen to me. Mhmm. Emotional behavior really can pull a factor in here.
Mike:Now, I'm not saying that everyone should just do a twenty year CD letter or bond letter. Right? That's got inflation risk.
David:Yeah.
Mike:And you either have market risk or you have inflation risk. You can't have one without the other. You can't not have at least one of them. The But point I'm trying to make is what are the other factors that people are missing constantly when it comes to retirement planning? So I've got a list right here.
Mike:This is based on the research of Vanguard, Morningstar, and InvestNet on basically looking for the alpha in retirement. The little things, the mosquitoes that suck your plan dry and you don't even know. Okay. You ready to dive into this? It's Yeah.
Mike:Very do interesting when I was doing this research for the show. So the first one is tax efficiencies. I can't tell you how much of my life is focused on tax planning. Now when I first started in this industry 10 over over a decade ago, oh, we don't give tax advice. Just get them in here.
Mike:Here's our model. Our model's great, and we'll give you your income, and go see your CPA about taxes. Yeah. Well, your CPA ain't talking about how to be proactive with your tax minimization. He's saying, here's what happened.
Mike:I can tell you what happened, but I'm not looking forward. You know, you got one professional looking into the rearview mirror and the other looking ahead in the front view mirror, or no, the rearview mirror of the windshield. Yeah. That's a crappy situation because you're in the middle and you are compromised because they're not communicating. Let me give you an example.
Mike:All right, David. Congratulations. You have $1,400,000. You're 62 years old though, so getting a few years.
David:Okay.
Mike:I don't know
David:which is worse there.
Mike:Yeah. A million dollars in IRA, 400,000 in your brokerage account. Now, a lot of people at this point in their life are going say, well, I'm 62 years old. I've got till 70 years old, whatever it ends up being for you, 73, maybe they put it back to 70, 75, whatever. You're going have RMDs.
Mike:And so you're going, yeah, I got this IRA balance. I want to start working that down. And so what you do is you take some income, maybe you push out Social Security a little bit because you know about Social Security optimization, so you push that out a little bit. You're doing IRA to Roth conversions. You're not concerned about Irma because you're at 62 years old.
Mike:All is well, right? And you let your brokerage account just grow. Here's the tax inefficiency because you're not connecting the dots here. You probably don't have a huge issue with RMDs, given the income that you'd want and the account size balance, assuming that you're focused on maximum income. So that's not really that big of a deal.
Mike:You're solving a secondary or a tertiary issue, not the primary issue. Yeah. What you really have is a huge opportunity by taking the 400,000 of long term capital gains, your brokerage account, and in 62, 63, and 64 years old, only taking income from long term capital gains. That equates to 26 to 36 extra thousand dollars of less money that you're paying to Affordable Care Act insurance and or in taxes.
David:Because the capital gains are taxed at a lesser rate.
Mike:Yeah. So if you're married finally jointly, you've got the first 100,000 of gains that you can realize and pay zero taxes. And by the way, that's not a situation where if you go $1 over, it's all taxed at 15%. People get this all wrong.
David:Okay.
Mike:As long as there's no ordinary income pushing up your capital gains bracket, you only focus on capital gains for the first couple of years, that's a pretty cool situation. Yeah. And you can do all sorts of things if you're 61 years old, you're gonna retire next year to rebalance it so you have incredible tax efficiency for a couple of years, knowing that when you turn 65, you'll start doing your IRA to Roth conversions, you'll keep your tax at a certain level, and that you've blended your income with RMD efficiency. But we think, oh, what's the thing everyone talks about online, on the blogs, on the podcasts? What are they all talking about?
Mike:IRA Roth conversions. I better do that first. That's an inefficiency because the sequence is out of order. You're missing different opportunities. And what the research found was tax efficiency, those who properly understand how to weave long term capital gains into income and then maybe stepping and doing IRA distributions at income on a different year, or understanding how tax loss harvesting actually works, not just going in there and, you know, selling a few stocks of loss and moving on, but, like, how it actually works.
Mike:Those who understand this have seen anywhere from 0.3% to 0.75% of additional growth of their portfolio throughout retirement. That's significant. Not only are we increasing performance, not promissory by, let's say, the market. We cannot control the market, but we're controlling something that we have control over, and that's where we take our income from, and that leads to an extra, you know, let's say half a percent. Do know what an extra half a percent does?
David:I mean, it doesn't sound like a lot, but
Mike:That's like an extra million dollars in your legacy. Yeah. Half a percent.
David:Wow. That snowballed.
Mike:That's just one, yeah. That's just one of them. And that's just a couple of tax efficiency strategies that a lot of people don't realize. Because taxes are complicated. So there's the first one on the list.
Mike:How'd that sound? Put in the chat for those who are joining us live, if you want me to dive into more tax planning here. I'm gonna answer the questions as long as they're submitted first come, first served. But this is why I didn't just write the book How to Retire on Time, by the way. I wrote the book to teach you a principle on how to manage a portfolio throughout retirement.
Mike:Yeah. I created the guide. Let me just pull this up real quick. The Retire On Time Workbook, which you can get on retireontime.com, so if you guys haven't done it, go there. You can buy it, and we'll actually mail it to you, a physical copy here.
Mike:But I've got several pages on just tax risk, things you don't know. And then there's an entire section in the book that walks you through your ten forty, your tax return, to help you find those efficiencies. And you know what's really cool today? We've got AI that can explain a lot of this stuff and bridge certain knowledge gaps between the book, asking the right questions, pointing out, oh, see I've got on line two a, you know, tax efficient income, but that's actually upsetting this and this and this on portfolio. Or I see on my tax return line three b, there's a huge number there, not in three a, but three b.
Mike:Oh, no. Like, I'm I'm paying ordinary income on dividends when I could just shift that over and pay long term. All of these things are in the workbook.
David:Okay.
Mike:That's why people hire us to do a one time plan. It's not just to find a better portfolio. It's to find a better tax efficient portfolio, a strategy, a written plan, which by the way, a written plan is what gives people more comfort than anything else in retirement. Yeah. It's not having a smart adviser.
Mike:It's a written plan with maybe a smart adviser. Yeah. Anyway, we want to keep going? Let's keep going. All right, so the next one, Social Security Optimization.
David:All right, I see it.
Mike:No one knows your date of death, but Social Security Optimization, a lot of it is how do you get the most out of your Social Security? That's a true thing. So if you have longevity issues, you're probably not going to live past 75 years old. There is an inherent means or there's a strategy saying, yeah, maybe you should file early. Be careful at 62 and 63 years old.
Mike:You're taking it at an accelerated reduction of your benefits, so be careful of that. But if you find the right time between 64 and 70 years old based on your life expectancy, and you acknowledge the surviving spouse risk, and you acknowledge the tax efficiency risk, you could add potentially an extra 0.2 to 0.5% increase on portfolio growth. Something I don't think people fully understand is, yes, you might die before you file for Social Security. That's a true statement. No one plans to get hit by a bus.
Mike:To, I don't know, what's what's another you get the point. No one no one wants to die, but you don't plan like you're going to die tomorrow. You plan like you're going to die when the when it seems like it's right, and if things change, well, we don't have control over that. The point being is Social Security optimization, it's not just trying to get the most out of Social Security, Because if you take it too early and you end up with longevity, that's a burden on your plan. Now you might have less pressure on your portfolio, but you've got less tax efficiency.
Mike:And I'll say it this way. If 60% of your income in retirement is from Social Security, you're way more tax efficient than if 40% of your income comes from Social Security, because Social Security is not totally taxed.
David:Yeah. In in every case, it's never fully
Mike:It's never fully taxed.
David:Okay.
Mike:And it's not 0% or 50% or 85%. This is called the tax torpedo. So you can be in a certain category or a blend of the different categories, but if you do if you create more taxable income Mhmm. What you're doing is you're getting taxed on that income based on your tax brackets, but it also causes your Social Security to increase its tax rate as well. Oh.
Mike:You're getting hit twice. So if you could have a larger amount of your retirement income coming from Social Security and longevity is in your family, and you did the IRA Roth conversions correctly, and you structured the income around your standard deduction from your assets, you're blending it all together, you can get so much more out of your portfolio by minimizing your taxes, by blending Social Security as true optimization, and not the optimization where it's like, okay, well, here's when you die. Here's when you could file for Social Security. Great. Now let me sell you an annuity.
Mike:Because that's really what happens in the industry, by the way. Most Social Security optimization reports that I've seen online are basically, hey, here's a free report, and look, we do it too. We created our own app to do this for you. If buy the workbook, you get access to it. But they'll say, hey, here's your Social Security benefit.
Mike:Great. Looks like you need an extra 10 to 20 to $50,000. Let me sell you lifetime income because you know you don't want to retire and lose your paycheck until you've guaranteed your paycheck. Well, no. That's like one of 10 different ways you could solve income in retirement, first off, but that is often used because we like Social Security as an income stream, so it does transition well to lifetime income.
Mike:But I digress. What I'm saying is Social Security optimization is not just a timing issue, it's a tax issue, which goes back to the other point. And so if we if we did that really, really well and maximized tax efficiency and maximized Social Security Optimization, that could lead to an extra 1.25% in your portfolio. They call it the retirement alpha. That's significant.
Mike:And you might be thinking to yourself, how in the world do I figure this out? Mhmm. That's a good question. And there's a lot of AI prompts that can help you start asking questions, but unless you have the softwares, unless you know the right questions to ask, unless you know what to look for, it's very difficult.
David:Right.
Mike:I'll I'll just I mean, I'm not trying to be a gatekeeper, I'm just saying it is difficult. I've spent the last ten years of my life focused on how to figure out these efficiencies. It's not one plus one is two. This is like four dimensional chess. This is quantum mathematics, calculus, whatever.
David:And we expect everybody in America to be able to do this and figure this out for themselves.
Mike:It's so unfair. It's so I mean, if everyone still had pensions, it'd be easy. It'd be way easier. But that's just not how it is. Somewhere along the lines, we thought as a society it would be a good idea to get people to save into a four zero one k or something similar, grow their nest egg, and then put all the responsibility on them to just figure it out.
Mike:I mean, I'll reverse it just for a second. I've spent my entire life in investments, finance, taxes, and so on. The last thing I want to do is become a healthcare specialist. Let's say, a very complex profession Yeah. When I'm 60 years old.
Mike:I don't I will pay a doctor for that. Yeah. It's just ridiculous. And also the fact that this industry is riddled with salespeople selling a product makes it even more difficult. You can can move to Florida and get fed for a year by how many
David:Oh,
Mike:yeah. Annuity dinner seminars that you will get invited to, especially if you go to like The Villages. You can get fed, literally fed for a year. There's books on how to do this that teach you how to do this. Horrible for your heart health.
Mike:Uh-huh. But it's just, hey, file here, now let's move on to selling you a product. No. Plan first, strategy second. And notice tax efficiency is a strategy.
Mike:We didn't even talk about product. Social security optimization, strategy, that's second. We haven't even talked about a product. So important we get this sequence in order. The next one I'm going to talk about is behavioral coaching.
Mike:So this is very interesting, but just having an adviser that prevents you from panic selling, that alone and just maintaining discipline when markets go down, could contribute around half a percent to 2% of overall performance. That one thing alone.
David:Just not selling? Not panic selling?
Mike:Just not panic selling. Not locking in those losses, saying, oh, I'm going to try and time the market, and I'm going to just get out for a little bit, I'll get back in soon, and then you never do. Mhmm. I mean, I had a guy call me last year, very nice guy, says, hey, I'm just the markets are overvalued. I'm in cash right now.
Mike:I'm trying to figure out how to get back in. Said, okay, how long have you been in cash? Since the pandemic. Oh, yeah. That's not a system.
Mike:That's sentiment. Uh-huh. And he was crippled by the fact that the markets were overvalued, and they are overvalued. That is a true statement. But just that behavioral coaching, having someone, it's kind of like in war.
Mike:How's that for a segue? It's kind of like in war, you don't have necessarily the general or whoever's making the decisions on the front lines. Right. You want them back protected and in the common state possible so they can make informed decisions. Yeah.
Mike:Because when you're on the front lines, when it's your money, it's tough.
David:Right.
Mike:There's that old Mike Tyson quote. Everyone has a plan until they're punched in the face. When you see your $1,500,000 go down 50%, now it's 750,000, and you can't keep taking those withdrawals because you're not taking four or 5%, you're taking seven to 10%, you panic. First off, that's not a good strategy. That's not a good situation to be in.
Mike:But you're probably going to make some really dumb decisions too, because we're all human. You're not stupid. It's that you're panicked. Yeah. That's just how we are.
Mike:So that's another factor of having either a written plan, which by the way, I'm the guy that wrote that, literally wrote the article, how a written plan or a comprehensive plan could replace your advisor and save you money and fees. You don't necessarily need an advisor, you need the discipline to follow a written protocol.
David:Yeah. Kind of like a recipe.
Mike:Yeah. I love recipes. Yeah. Good old cooking. So, all right, should we keep going with this?
David:Yep. We got a couple more here.
Mike:Withdrawal sequencing, we talked a little bit about this with tax efficiency, but understanding where to pull, not just from a tax standpoint, but if markets are up, where to pull, and if markets are down, where to pull. Most people have a portfolio for when the markets go up, not a portfolio when the markets go down.
David:Oh, yeah. So explain that. So if the markets are up, like, what is my what is my game plan?
Mike:Yeah. So let me me share with you some advice. It's not really advice, it's social media influence. Okay. I probably get this clip emailed to me or texted to me or sent to me once a month from someone that stumbles across it.
Mike:And it's, I'll just say it's a guy that likes to walk around a lot and says, if I were to retire tomorrow, here's exactly what I'd do. And he claims to be a former financial adviser, which he was an English teacher that was like an adviser for a couple of months during a time when the markets only went up. But here's what he would do. He would put basically most all his money in the S and P five hundred because allegedly that beats most financial advisers. That's true.
Mike:The S and P beats most financial advisers during the up years, but not in the down years, not in the volatile years. There's a reason why professionals use instruments to stabilize a portfolio, whether it's bond funds, buffered ETFs, or something else. But I digress. And he says, and I would just dollar cost average out of my portfolio every single month and be fine. Okay.
Mike:Let's just ignore the math of sequence of returns risk that if the markets go down, let's say 30%, you need a 43% return, which could take two or three years. And if you take 4% out while the markets are down 30%, you're now down 34%. Your portfolio doesn't need a 43% return to break even, it needs a 50% return to break even. And if the markets actually crash, which historically they do every seven or eight years, and I have a whole long list if you look at my Kipling article about the market patterns that investors need to know, there are many 50% crashes, which means you need a 100% return just to break even, assuming you don't take income. It is proven that putting all of your assets in the S and P is not a good idea in retirement.
Mike:Great when you're 20, 30, or 40. Yeah. 40, you start to transition to something a little bit more strategic, dare I say. Mhmm. But understanding how to withdraw from your retirement is critical, and there's really two camps here.
Mike:There's one camp where they are disciplined like they are Stoic. Marcus Aurelius, Offspring. Okay. Okay? Little Stoic reference for you.
David:Yeah, love that.
Mike:For all the Stoics out there. It's almost like they don't feel, they just do. Now a stoic is in touch with their emotions, like they like nature and all, but they're not making emotional decisions. It's exactly what they're going to do. They just it is.
Mike:Okay? And then there's other people who are saying, well, I'm learning how to do day trading. And I'll say, okay, how have you done? Terrible, but I'm getting there. No.
Mike:Okay. This ain't the little leagues. This is just your life savings that has to last. You need a system that you can follow perfectly. You just do it.
Mike:Or you get a behavioral coach, aka advisor, to help you with this. But withdrawal sequencing, that can add an additional point two to point 5% on your overall portfolio. That's that's pretty good. Then we've got systematic rebalancing, and that's really just, again, sticking to your system, the portfolio discipline of understanding is the market up, is it down, and then how are you rebalancing, so it's a system approach. That can lead to an extra 0.1 to 0.35% overall in a portfolio.
Mike:And then the last one we didn't talk about is investments and or products access. Okay. You can't get, as a retail investor, a structured note. You can't get any insurance product on your own. You can't get access mostly to private equity, private credit, or a lot of those funds.
Mike:You can't get if you're a real estate investor trying to sell your real estate property and move it over to something that's more tax efficient and defer your capital gains tax, defer your depreciation recapture tax, you can't get a DST. Seven twenty one UPREIT, forget about it. But I've just mentioned we're called Regulation D investments. For accredited investors, you have to go through a professional. So if you want to try and handle retirement on your own with only retail investments, you could be missing out on point one five to point 45% of potential growth.
Mike:That you could have had better returns by using stuff that you just you couldn't get on your own.
David:And and why is that? Why is there sort of a gatekeeper? Why do you have to go through a professional for some things?
Mike:In my opinion, the reason why they have a gatekeeper for a lot of these investments and products is to help people not make dumb decisions. I'm not a doctor, but Tylenol is a great pain relief. Oxycontin coating
David:Oh, yeah.
Mike:Whatever the oxy thing is.
David:Those sort of narcotic pain relievers?
Mike:Yeah. I think they work better. I've never actually had any of the oxys. I've never had a surgery, so I've never needed them, right? Yeah.
Mike:Yeah. But I'm pretty sure, like, they're a little stronger. Uh-huh. But there's also increased risk for addiction. I don't know anyone that's addicted to Tylenol.
Mike:Right.
David:Just Yeah. I have never met that person either.
Mike:Yeah. But Oxy is highly addictive. So when you get more when you've got more on the line, so less liquidity, or more complex on how the investment works, they're going to restrict access to try and help you not make dumb decisions. That's really it. And I think that's well founded.
Mike:It's not to get financial advisors rich on back end commission deals or blah blah blah. It's it's to make sure that at least a professional who's willing to sit down and have a suitability conversation, a real one, not some little janky little questionnaire thing you fill out, here's your portfolio. Yeah. Like, actually get to know you as a person. That can be huge.
Mike:Huge. So if I'm to summarize all of this real quick, and I see we got questions popping in here, so thank you for that. If you decide that you want slightly more efficiency in your retirement plan, By working with an adviser, according to the research by Vanguard Morningstar Investnet, that alpha could lead to an extra 1.45% to 0.55% of more out of your money. I'm not even talking about performance. I'm talking about just being smarter with your strategies, and maybe access to a few more products that you could not get on your own.
David:Mhmm.
Mike:And this is this is one thing that really I'm really passionate about. I think it's ridiculous, frankly, today, where you can manage your assets on your phone if you wanted to, that we have a culture of charging people 1% to 2% of how much they've saved as like a participation award to where the client is the annuity to the advisor. Yeah. I mean, I won't say the company's name, but they may have had a multimillion dollar marketing campaign basically saying, I hate annuities and you should too, so enter our stock market portfolio with a strategy that says, unless the markets are expected to go down by 20% or worse, you should be all in equities, which has some merit. I'm not going to discredit that, and we're going to charge you a percentage of your assets to have access to all of this.
Mike:Well, how much does it cost to do the job? Yeah. I think that's a more fair question to ask.
David:And actually, you're answering a question that just came in, so if I could just let you keep answering it,
Mike:but this Yeah, please interrupt me. I get on tangents.
David:This attendee says, I am confused. If you are only fee based, financial planning instead of acting as an investment advisor are charging one and a half percent fees for AUM, how do you stay in business? Yeah. How do you keep paying me, David?
Mike:Yeah. So here's here's the simple math. How do I pay David? How do I run the business so you get your paycheck, right?
David:Yes. That's that's my take on this.
Mike:Yeah. So it's many conclusions we make aren't based on the evidence given. So it's very common for people to say, well, I charge 1% because our team is going to be doing way better. Like, we're going charge more, but we're going to do way better than anyone else. Okay.
Mike:Maybe. It's incredibly expensive for a financial advisory practice to run custom portfolios for every single client. If you want a custom portfolio where you are sitting down with your adviser, and you're picking out handpicking out every single stock, and you really want to be involved, we're not a fit. We're not doing that. We build systems.
Mike:So when I say how much does cost to do the job, we have modeled portfolios that you are either in or you're out. Now, it's not all your money in or all your money out, it's we have fixed costs on how much it costs to run this portfolio that's for retirees, or this portfolio that's, for example, our retirement clients and their grandkids, and they were trying to grow their Roth. We have different portfolios, but there is a fixed operational cost to run. So regardless of how many or how little clients there are, back in the day, it'd be incredibly expensive to run because we'd have to call and move all of those shares. Today, we literally click a button, and all the portfolios are rebalanced based on the model.
Mike:Yeah. And people won't admit to this. The profits of this business on that model continue to go up and up and up, and I'm saying, well, how much does it cost to do the job? Now, the flip side of it is if you don't have any money, you're I mean, in some sense, some people won't even take you, but like, you might you might not have enough money to qualify for one of our models because it's a fixed cost. Now let me just I mean, this is the pricing for today.
Mike:Okay? This is just today. Actually, I'll even announce one that's coming out next week. All right.
David:All right.
Mike:How about this? So for your just investment management, for all the people that are out there that don't really talk to their advisor, they're just managing their assets, the portfolio, they might do a phone call, that's kind of it, just to check-in. We charge $200 a month for that. That's it. We're not doing your annual reviews.
Mike:We're not having ongoing conversations. We're managing your money with a very specific objective for those funds. Dollars 200 a month. That's it. To have access to our very sophisticated model that, yeah, I mean, participates in the market, because the reality is the market makes you money, not the adviser.
Mike:Yeah. That's just how it works. Now, if you're in retirement or near retirement, now I'm just doing the retirement versions. This is the new one. If you have a million dollars, 1,500,000, or less, the reality is your tax planning is easily solved with a one time plan.
Mike:The reality is your Social Security optimization, once we solve that, we're pretty much good to go. Like, you do not have a complicated situation. And so once we build that plan, it's just following the system at that point. So we will we will have $400 a month, and that's it, to maintain what we call the retirement essentials. It's it's being technically we'll release it next week, but I'm just going to talk about it today.
Mike:Because what are you doing? You're paying for our time to sustain all of the needed efforts, the implementation, the maintenance, on an hourly rate, not based on how much you've saved for retirement. So if you've got a lot of money saved, we're cheap. If you've got 100,000 saved, we're really expensive.
David:Right.
Mike:We set our prices to sustain our business model, and it's up to you to either have saved more or less. Do you see how that reverses it? I mean, are you paying a CPA based on how expensive your tax return is, or are you paying them for their time?
David:Oh, right.
Mike:Technology's made this industry so efficient. Why are we still charging people based on how much they've saved? Why not charge for the job? And then for our private clients, the ones that have a lot more tax planning, the ones that have a lot more of a dynamic situation. Mean, there's a lot more.
Mike:It's $600 a month. That's it. That is the most straightforward, transparent, and guess what? That allows us to be impartial to where your money goes. Should we put money into a CD at this bank?
Mike:Normally, an adviser wouldn't be able to get paid on that because the money left the accounts, they can't charge you that one to 2% on there. If that's the best place to put your money, let's do that.
David:Yeah.
Mike:Hey, you want spend more money this year? Go ahead. You can afford to do that. It doesn't affect our paycheck. Yeah.
Mike:It was the most liberating thing I've ever done professionally, was go to a flat fee, like a membership model. Mhmm. So where I was going with this though is, if you want the behavioral coach, and if you want to have someone that you can talk to, there's different levels and different, you know, things that we offer, certain things we don't, it just depends on the level here. You can go to retireontime.com or kendrick.com and experience all this. Kedrick is kedrec.com.
Mike:You can look at these different tiers. You can explore which one's right for you, and we have the new question. Jake, if you put in the chat for us real quick, just for me, score.kedrick.app. You can all fill out this new questionnaire we just filled out. And what it does is it asks you a bunch of questions, and it will say, you know, based on how you answer this, you might be better off with a one time plan, about $2,000 let's say, and you're good to go.
Mike:We can do the tax efficiency, Social Security strategies, get you access to the investments or products that you wouldn't have had on your own, create your withdrawal sequence, what do when the markets go up or down when tax laws change, and then tell you, here's your systematic rebalance. If you can follow a recipe, just follow this plan, and you're good to go. You don't need to pay ongoing fees. But for the people that have maybe more needs on behavioral coaching, or their life might be more dynamic, they might want the ongoing relationship. We're good either way as a company.
David:What's the URL again?
Mike:Yeah. It's score,score,.kedrick,kedrec,.app.
David:Oh, yes. Okay.
Mike:Not com,.app. I'll make a better URL later, but when you fill it out, it's going to ask how much you have. It's going to figure out roughly how much do you have in pretax, after tax, like Roth, and then brokerage account. It's going to ask you questions like when you plan to file for Social Security. It'll ask you questions like have you ever sold at a loss?
Mike:Do you consider taxes when you sell? Just a couple of really basic questions in there. And then it gives you a retirement score. Based on that score, it's going to put you into one of the different categories that may be right for you. It's all based on everything we just talked about today, tax efficiency, social security optimization, investment product access, behavioral coaching, withdrawal sequencing, and systematic rebalancing.
Mike:The reality is, if we're fiduciaries, we're supposed to be this transparent. We're supposed to accept you where you are and who you are and support you based on where you are. I just created a business model that allowed us to do it without constantly favoring, hey, how much money can we get into our model so we can charge you 1% on all of it? I mean, it's it's like clockwork. Someone says, well, I'll give you 300,000.
Mike:I'll give you half 1,000,000, but I've got 5,000,000. Okay. And when they say, what? You're not trying to get all my money? No.
Mike:If you want to manage those assets over there, go for it. Here's the expectation. Are you good with that? Yep. No problem.
Mike:We're in we become indifferent. Yeah. And if we're able to be neutral, that fundamentally has changed our conversations as a firm. It's so fun. Now, are we suited for the 20,000,000 to $50,000,000 client?
Mike:No. That's I mean, could we service them? Sure. Is that our bread and butter? No.
Mike:20,000,000 or less. We help a lot of people that have 300 to 800,000 with one time plans. We teach them how to fish and give them a plan that has an extremely high probability of success. Really cool stuff that we can do. And then for the $7,800,000 to 5,000,000, that's really our sweet spot when it comes to ongoing relationships because we're less than the typical 1% advisor, but we're typically offering more services because we treated this like a CPA model, not the how do you what do you call it?
Mike:Not the participation award model. Now please understand, back in the seventies and eighties, when you had a lot of money, it was very difficult to move those assets, to call someone on the floor, to place the trades, like it was a lot.
David:Right.
Mike:But with the advancements of the computer, our job operationally has become very simple. The research is still a lot, but it's a fixed cost for us. So anyway I get that. Hopefully that was that was well received. Alright, let's go to our next question.
David:Okay. And so walk us through the idea that if you're 50% down, why do you need a 100% to recover? What am I missing? Why is the percent greater to recover?
Mike:Yeah. So let's say you've got a million dollars, k, and there's a 50% loss. You're at 500,000.
David:Okay.
Mike:Okay? What's 50% of 500,000? 250. So if you have a 50% return, your 500,000 increases by 250,000, you're at 750,000. So what's a 100%?
Mike:Or in other words, so when you talk about returns, it's whatever the number is, plus one, if you're doing the math. So 100% return really is that number times two. You're if, in other words, if you're a million dollars and you go down 50%, you're at 500,000. From that point, you need to 2X your portfolio. So 500,000 times two to get back to a million, that's 100% return.
Mike:People do not get this. And the problem with it is we invented quantitative easing. That's a fancy way of saying we print money to get out of a crash quickly. That's one reason why we have a lot of debt. Now there's a number of other reasons why we have a lot of debt, but I don't think people fully appreciate that.
Mike:COVID would have been a terrible, probably 50% crash or worse. I mean, we shut down our economy. Yeah. But then things started to open. We figured out a way to get through it.
Mike:We printed a ton of money, and so we were able to recover quicker. But what if that's not possible? You know one of the funniest things that happened this year, if I can get political, and I will, because I can and I don't care, is when Trump tweets, job reports have been better than you know how Trump talks.
David:Yeah.
Mike:The job report's better than ever. No one expected this. You know, what's the Shane Gillis joke? I walked in the room and saw, oh, that was the best report ever. He's he's bragging about his jobs report that just comes out, and the markets are tanking.
Mike:Yeah. He can't control the market. He can try to influence it. But when you see a massive surge of people getting hired, especially in tech, what does that signal? Oh, we priced AI wrong.
Mike:What has caused almost all of the growth in the market over the past couple of years? AI. Mhmm. So if if Trump or any politician right now grows the job market in the wrong way, or companies really is politicians don't actually make jobs. It's business owners that make jobs, and politicians then take credit.
Mike:Yeah. But and politicians create an environment that's healthy or conducive for I don't want to be too mean about it, but if we have the wrong job growth, that's a problem. If we priced AI wrong, this could be a very slow burn, just like $2,000.01 and o two was three years. Slow decay. Mhmm.
Mike:For three years, top to bottom 50%. And the Nasdaq was down like 80%. And then you need a 100% return to break even. That took a couple of years. We have forgotten what it's typically like.
Mike:COVID, that's in the event you can solve that. But when you have financial, like fundamental decay in an economy, that's hard to fix.
David:Right.
Mike:And I don't think people fully appreciate the gravity of where we are right now in the market and how overpriced it is. When I look at Warren Buffett and Berkshire Hathaway, who is negative year to date, last I checked, they're managing their assets very, very well. The new guy? Smart as can be.
David:Mhmm.
Mike:He just is patient enough to say, yeah, the markets are overvalued, we're going to wait until it crashes, and then we're going to buy the dip. Mhmm. But investors are impatient. Yeah. We want greed.
Mike:We want money now. So all of this good, and this is what I talk about, for all of you listening, if you want to read my book, you can get it for free, retireontime.com. Download the book. It's book, audiobook, or you can and you can get my planning calculator for free as well. Chapter three talks about this in great detail.
Mike:Chapter four talks about the solution. Some of your assets just need to be in what we call the real reserves, assets that have growth potential but cannot lose money. It is probably more important now than ever before, especially for anyone that's within five years of retirement. We had a couple 100 people download my DIY annuity guide book this week. How to Retire on Time is a book that argues against lifetime income.
Mike:I've been a huge critic of annuity for many, many years, but I'm teaching a class on when it's appropriate and when it's not. Half people are they're going to attend it, and if you haven't signed up, sign up. You can email us. But half the people are going to attend are going to confirm that it's not right for them, and what a great win that is. And the other half are going to say, oh, I didn't understand how it worked.
Mike:Let's do it. Yeah. Let's do it. So anyway, that was a of a tangent here, but retireontime.com is how you get on our newsletter, how you download our books, which I give away for free, because I want you to start asking the right questions. Okay?
Mike:Can I pick a question?
David:Oh, yes, you can.
Mike:Coming right here. And by the way, talk about retireontime.com. If you're live here, you can always submit your questions in the chat. We do this the show live on Zoom anywhere in the country. If you're listening to the broadcast, you can also submit your question anytime.
Mike:Retire ontime.com/ask. Put it in there, and you can catch the recording on YouTube later. Alright. So the next one here is which is better, an FIA or an FAA? So FIA is fixed index annuity.
Mike:It's a cash value insurance product, and FAA is a fixed annuity alternative.
David:Oh.
Mike:So on the surface level, that looks pretty two annuities, right? Mhmm. Nope. This is deceptive marketing. Because you think, oh, these are safer or less risky insurance products, and insurance company has to guarantee, and so I think that should be Yeah.
Mike:Nope. Notice the subtlety of sharing abbreviations, which can confuse investors into making dumb decisions, and then you've also got the annuity alternatives. They put annuity in the word, so your mind goes to what it is, and oh, maybe it's an annuity in the alternative investment space. Oh, this is fancy stuff.
David:Maybe some private credit, something?
Mike:Yeah. So I actually had this recently.
David:Oh, okay.
Mike:An individual says, well, hey, she she was asking about, you know, index annuities and so on. She's trying to de risk her portfolio because she's all in the market. That's a normal conversation.
David:Mhmm.
Mike:And so I explained how they work. I said, look, these are great as like a bond fund replacement, but they're not going to beat the market. You're used to really good returns. That's not what this is going to be able to do. I know a lot of people overpromise them.
Mike:They they hype them up. No. It's over five years, it should beat bond funds. It should beat CDs, but it's not a guarantee. You just got slightly more growth potential.
Mike:Yeah. She goes, well, this FAA is going to give me, and these are her words, by the way. The FAA is going to pay out 8% of whatever you put in there every quarter, so 32% dividend basically every year.
David:And this is the FAA that she's quoting?
Mike:Yeah. Fixed annuity alternative. Okay. Okay. Just for context, I don't know anyone that's ever had consistent returns or payouts of 32% other than two people.
David:And who are they? Do we know? Can you say?
Mike:Yeah. Yeah. The Medallion Fund. Alright. The cream of the crop, one of the best hedge funds ever that's closed, you can't get to it.
Mike:It was like a group of friends, they would report things, they would report the returns, probably just to brag. Yeah. But like, no one actually knows how they did it. And they could only do it because they had limited assets. If they tried to be a multi billion dollar firm or a hedge fund or, you know, these large ones you about, it would not be possible.
Mike:Just like Warren Buffett's always said, if I had less money, I could make more growth. They limited the size to be able to have pretty good consistent returns. Now, did they do 32 or more? I don't know exactly. I just know that they are the best by a large margin.
Mike:And then you got Bernie Madoff. Oh. Allegedly had some pretty good returns too.
David:Yeah.
Mike:That didn't work out. Now, I'm not saying this FAA, this fixed annuity alternative is Bernie Madoff or a Ponzi scheme. I'm not suggesting that at all, because I did read the prospectus, I did go through the details. It is a legitimate investment. It's not an insurance product though, so how they can get away with this, call it an annuity alternative.
Mike:It's like all these securities people, the investment people hate when people call an index annuity a bond alternative. Well, literally what it is. So now they're, I guess, tit for tat.
David:Yeah, sure.
Mike:But but I read it, and you know what it was full of? High risk private credit and distressed loans.
David:Oh. Yes.
Mike:Junk bonds looked like a riskless asset compared to this thing. And when I broke it down to this person, they said, oh, you know, if I had the bleep button, oh, beep. Had no idea, because it was presented completely differently than how I read the prospectus. And I said, look, put this into your AI and ask it some questions. Yeah.
Mike:This ain't sustainable. When the markets crash, when something happens, like, is not a long term play, and you could lose everything. It's not principal protected either.
David:Right.
Mike:There's no guarantees on this. It's just going to pay out until it doesn't. It's like kind of like buying an Argentinian bond back when they were like 40% coupon rate, knowing that they would go bankrupt every now and then and just stop paying. How's that for retirement alternative? Yeah.
Mike:I'm not saying that indexed annuities are good, bad, or indifferent. What I'm saying is it is indecent for someone to say, you've saved a million dollars. Now you're an accredited investor, and you can have access to all these fancier investments like what the wealthy do. No. It's not what the wealthy do.
Mike:It's the marketing pitch that's intended to help people sell a product, a high commission product, that gets them to a risky asset or risky situation, and they have no idea what they're doing. Yeah. These are real conversations that I'm constantly having because people are looking for a way to get more potential reward for the lower the risk might be. It just, for whatever reason, you can't cheat finance. You are compensated for the risk that you take.
Mike:That is it. You can't separate it. The reality is you've got MYGAs, if we're going down the spectrum here. Okay. MYGAs, multi year guaranteed annuity.
Mike:It's guaranteed to grow at a fixed rate for a certain period of time. After that, it's whatever the insurance company's going to offer until you redeem it. Or a CD, which is a fixed rate until it rolls over into another CD or you redeem it, and it's whatever the bank's going to give you. They're kind of the same thing. Okay?
Mike:Then you've got fixed annuities. Fixed annuities are a fixed rate for a year, but they can vary year to year, and you need to understand the difference between the two. Then you've got indexed annuities, which are the insurance side, or you've got buffered ETFs, or you've got structured notes. The idea is you've got upside potential, but a downside, less downside risk. Some of them are 100% principal protected.
Mike:Some of them have a buffer or some sort of threshold, so they might take out the first 50% of your losses. But notice how we're going to the spectrum of fixed, lowest growth potential, highest inflation risk, but it's very dependable. And then you've got a middle category. And the middle category is you've got growth potential, but it's not guaranteed growth potential, so you want to have that for a little bit longer period of time. And then you've got your variable rates.
Mike:I'm not talking variable annuities. The stock market is a variable rate, as in it's going to go up and it can go down.
David:Right.
Mike:It can go both ways. And so that's where you got your stocks, your ETFs, your so on, and That's got the most growth potential. But notice you've got a spectrum. You can't get out of risk versus potential reward. So, alright.
Mike:We've got just a couple of minutes left. What's the last question here?
David:Okay, last question. Shall we talk about how are you using buffered ETFs in your plans?
Mike:So buffered ETFs are a new thing that a lot of people, in my opinion, haven't adopted fully yet because it's new or they don't know it exists. A buffered ETF was possible because in, I think, 2019, the SEC changed the rules or updated the rules on what would qualify for within an ETF, and they're allowing now option contracts to be the underlying asset or mechanism of an ETF. That's a pretty cool thing. It's pretty significant.
David:Yeah.
Mike:And so then after a couple of years of people saying, hey, this new thing was possible. How do we do it now? It's been slowly, I guess, becoming more and more pronounced in the investment world space. I'll use the original one that was familiar with. And that's you might have up to 7% growth.
Mike:So if the S and P goes up, you get, like, up to 7% on the upside. But the downside buffer, like a max buffer, that will change every year based on how expensive the option contracts are. So in one year, might be like a 40% downside buffer. So if the market's going on 40%, you don't lose anything. But if they go down 50%, you lose 10%.
Mike:Do you see how it's once you cross the buffer, you're on
David:your own? Mhmm.
Mike:But if option contracts are cheap or volatility is low, that means we're not scared about the market crashing, you can get a 100% buffer. But those buffers change every year. And then you can get something like a more traditional buffer, where the first 10 is buffered out on the downside. So if the markets go down 10%, you don't really lose anything. But if the markets go down 15%, you lose 5%.
Mike:Smaller buffer, but you get like 14% of the upside. So more upside potential, less downside risk, and there's a whole array of them. That's pretty cool. But the value of the buffered ETF is based on the value of the option contract based on the time, like today, and then when it would become due, which would be on its anniversary. So it in my mind was the securities world response to the fixed indexed annuity.
Mike:Not bad. Yeah. It's a pretty cool thing. Great for short term and for liquidity needs, but long term, you're going get probably a better yield on an indexed annuity than a buffered ETF as long as you shop them correctly. And that's a whole thing, by the way.
Mike:People don't shop them correctly. They get greedy looking for the best rate today, and then they get stuck with a crappy rate in two or three years. It's called renewal rate risk, so be aware of that. Now they've created different types of buffers, like a quarterly buffered ETF, so it resets every quarter, not every year, or dynamic buffers to where you take like a max buffer or different thresholds, so more upside, less downside, or less upside, more downside protection. And then they blend 12 into one fund, so you get the aggregate or the average of it all, and it just stabilizes a portfolio.
Mike:In my opinion, it's got more growth potential than a bond fund, but it does the same purpose of a bond fund, which is stabilizing the portfolio itself. So I prefer buffered ETFs in investment models and portfolios that are in the market to help lower the risk or stabilize it. But when it comes to, like, reserves, like if the markets are down, it's not a guarantee like an indexed annuity or you buying a specific buffer ETF that is matured. So you want to separate the two types.
David:Okay.
Mike:That makes sense. There's a lot of new products out there. It's hard to adopt something you don't understand. I mean, had to do a significant amount of research to understand how these actually work.
David:Because when you first started in the business where buffered ETFs, maybe they were a thing, but were they as prevalent and available? Were there as varied as
Mike:They didn't exist. Oh. When I first started. Yeah. Yeah.
Mike:You could only do it if you had millions of dollars and a relationship with an investment bank to replicate what a buffer ETF was. Oh, interesting. Now it's available to the masses. Alright. And that's not one of those, they're taking advantage of you, it's the SEC changed the ruling that made it possible to package this up and make it more available to the large group of people.
Mike:Okay. Which is kind of nice.
David:Yeah, it is. When things work out good for everyone, it is nice.
Mike:Yeah. Thank you, SEC. Yes. We appreciate our regulators.
David:Yeah. Sometimes they do a decent job.
Mike:And I think we'll end with that. So for all those tuning in, again, is How to Retire On Time Live. I'm Michael Decker with David Franson here. Grab the book, How to Retire On Time. You can get it at retireontime.com.
Mike:If you want to continue your retirement preparation in the comfort of your home, you can always buy our retirement planning kit. That's where you get the workbook, the AI prompts, the planning checklist, the book itself, and many other tech resources, so Social Security optimization, tax planning, and so on. I had someone tell me the other day, they saved $7,000 this year because of the kit and understanding how tax planning actually worked. That's a pretty cool situation. So anyway, it's not guaranteed.
Mike:Everyone's performance, you know, blah blah blah disclosure, everyone's going be different here, but continue the exploration, many resources at your pace, whatever is right for you. We'll see you same time, same place next week, or join our newsletter and join us live, and we'll see your questions here. Sorry we didn't get to all of them. We'll respond to your questions later and go from there, but it's a lot of fun. Dave, thanks for
David:Yeah.
Mike:Thanks for hanging out with me today.
David:Always a pleasure.