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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. What's something you've learned over the years that changed how you invest people's money?
Mike:That's a loaded question.
David:Oh, yeah. You like those here?
Mike:But I I think it's a thoughtful question. And the reason why I like the question is because a financial professional practices his trade. Uh-huh. You know, like a doctor practices Is that his profession. Yeah.
Mike:In finance, it's very much a practice because you're always learning. So if I'm gonna answer this question, I think the most appropriate way is to admit to the the ego that I've had to overcome. To admit to leaning on manipulative sales tactics on the Kool Aid that I was drinking early on in my career and show you how I came to where I am today.
David:Okay.
Mike:I think the listeners ought to find this interesting too because you're gonna see, oh, wait. The person I'm working with right now, I kind of think is in this phase because this is kind of how they're talking to me.
David:That's interesting.
Mike:Yeah. And you might say, I'm in this phase of my life, and you haven't had the awakening. I I think of Buddhism. Okay. In our quest for enlightenment or towards Nirvana, in finance, Nirvana is acceptance that there's no such thing as a perfect investment product or strategy, that everything out there are just a bunch of tools.
Mike:And you use the tools based on what you want. Interesting. When we can get to that point, then we really have a good grasp of how to do financial planning. Because in life, you can control much of your health. Right?
Mike:If you eat well and you exercise, you're in control of a lot of different things. I mean, sure, you might get sick. Yeah. That's still possible. But this this makes sense.
Mike:Like, you have more control over your health and your diet and exercise decisions. You have control over certain career decisions. You might not keep your job, but you you have a pretty good idea of, are you falling within office politics or not? Doing your job or you not? You know, things like that.
Mike:So Yeah. But in finance, you don't control the market. You don't control tax rates. And so it takes a different mindset to approach it correctly, in my opinion. So let's start from the very beginning.
Mike:You'll get a kick out of this statement. I don't think I've ever told you this. My first experience in finance was in an educational seminar for adults about how to retire when I was 14 years old.
David:Mhmm. Now why yeah. Why were you there at 14?
Mike:Well, the long story short was, and this is a true story, but my stepmom was saying I was gonna go to this week long educational series that's put on, and it was in Utah. And I said, well, there's a girl I think is really cute that just moved there, and I wanna see her again. So, yeah, I'll go to this thing so I could hang out with this girl. Right? I'd hang out with her.
Mike:She'd be in these educational courses, and life would be good. Yeah. And I'm living in Washington state at the time. So we drive all the way down there. I have my cell phone.
Mike:This you know, when cell phones were first coming out, and I had to pay for it. But I'm I'm calling her saying, hey. Yeah. I'm on my on my way. Like, where do you wanna meet up?
Mike:I'm 14 years old, so I can't drive. And she says, oh, sorry. I'm busy this week. And I was pissed.
David:So It would be too.
Mike:Yeah. Here I was. I have nothing to do. I don't really know anyone. So I kind of have to go to this week long educational series where you can just sign up for classes, and I made the best of it.
David:Okay.
Mike:So, you know, I I took dance lessons. I took so weird to to admit this story. But I took dance lessons. I took, emotional intelligence classes. I took religion classes.
Mike:I took all sorts of things. It was actually really cool. I I really enjoyed it more so than I would have enjoyed spending time with her that week. But, you know, things you do when you're a teenager. But one of the classes I took was about personal finance.
Mike:So this was not like a sales pitch. This was an actual credible professional who was basically asked to come in and speak objectively about finance. Okay? So, you know, I know there I know there's workshops out there and things like that. It's really a sales pitch.
Mike:This was not that.
David:Okay.
Mike:So it was appropriate for me as a 14 year old to go in there because I paid to go do all sorts of classes. Uh-huh. So I'm in there, and this guy says, look. The reality is just
David:buy a
Mike:bunch of indexes. There's this thing called ETFs. You can buy mutual funds too. They keep up with the markets by the big markets. So you've got the S and P.
Mike:You've got the Nasdaq. You've got the Dow. He talked about just basic diversification. And then he explained the 4% rule, and he said that's it. And then he says, alright.
Mike:And everyone, I'll just get out some simple math. How much do you want in retirement? Alright. Now times that bio, you know, what what do you say? Like, 25%.
Mike:And that's roughly what you could expect to live off of what based on the 4% rule.
David:Okay.
Mike:At 14 years old, I thought I had solved it. Yeah. I said, why do we have financial professionals? Because that's all I need. Uh-huh.
Mike:I just gonna buy these indexes. I'll take out a little bit each year. The markets trend up. I'm set. Now how many people listening to this have had that thought?
Mike:I think everyone has had that thought at some point in their life. I had it at 14. And this is before I wanted to have a career in finance. I just took the class because I thought I should probably learn a few things here because I didn't learn it in school. Then I learned about something later on called absolute return theory.
Mike:K? This changed my world. Mhmm. Absolute return theory says, basically, we don't care what the market's doing. We wanna know what's the best place to put money now for a predetermined period of time to maximize its growth potential.
Mike:So if the market's going down, like, look at, 2,000 0 1 0 2, there were still some sectors, some industries that were making money. Absolute return theory would have sought to invest it in what was still making money. They're not attached to broad, ambiguous diversification.
David:Right. I see.
Mike:Now if you look at the, the book, what works on Wall Street, one of the largest studies on on Wall Street, Absolute return theory did rather well. It was surprising than many hedge funds and sophisticated investors use absolute return models in their portfolios. Okay. So I thought, well, hey, if I can tap into one of these, I'm smarter than the market. Notice the the hubris exercise, the ego pride is the downfall.
Mike:Uh-huh. But I thought, forget about buy and hold. I'm just gonna make more money, and then I'll have more money. And that's it. What I wasn't really understanding at the point is models, especially trend following models or analytical models like absolute return models, struggle when things like whipsaw exist.
Mike:What is whipsaw? Whipsaw is when the market is trending down quickly and then has a very speedy recovery. You can't find a trend when it's like you're taking sharp turns frequently, especially within a 1 year period of time. If the markets were like the last couple of years, when markets were kind of trending in one way or the other, they should have done rather well depending on who supports the model and and what that model is. This year, 2024, they haven't done very well.
Mike:But at the time here, I wasn't admitting that. I didn't even know that. I just thought, hey, here's something that's smarter than everyone else and we'd like to be smarter than other people. We'd like to pound our chest and think that we're an intelligent investor. So, yeah, I learned about absolute return.
Mike:My mind expanded to really the world of active management or these kinds of models, which usually have like a $3,000,000 minimum. I don't believe in that. But, you know, that that that exists. Or buy and hold, which is a very prominent investment philosophy. But then I realized that you can't just have all of your assets at risk.
Mike:Uh-huh. Even if you have equities or stocks and bonds or bond funds in a portfolio, that's a problem when you retire. So everyone told me, hey, when you're young and making money, dollar cost average into the market. And when the markets go down, don't sell. Just keep buying in because your dollar cost averaging in.
Mike:Well, no one told me even in the industry when I first started, no one told me about this thing called sequence of returns risk. So sequence of returns means that if you're taking money out when the markets are down, you're hurting your money. So basically, what helped you as you were growing your money will hurt you when you're taking your money. We don't have time to really dive into the the incredible amount of detail there, but it's a very important concept. And so what I realized was, well, shoot, we can't have all the assets in the market.
Mike:We can't just try to outgrow these market crashes and the markets. And you can see my Kiplinger article on this, that the markets do crash on average every 7 or 8 years, but now it's not actually every 7 or 8 years. There are flat market cycles. So the equity is part of your portfolio. The thing you're counting on to grow could not produce a return over a 10 year period of time.
Mike:That's a risk you need to understand. And so then I was introduced to laddering. Originally, it was bond laddering. Then it was CD and bond laddering. And then it was bond CD fixed annuity and fixed indexed annuity laddering.
Mike:Now, if you haven't heard those terms before, a fixed annuity is basically a CD from an insurance company. A fixed indexed annuity is basically a way that you can capture some of the upside in the good years, but you don't have any downside risk. It can't go backwards. So it's not gonna make you rich, but it can help preserve your assets. And this laddering technique I learned was a wonderful way to kind of combine your income needs for the 1st couple of years.
Mike:K. Which was an investment strategy for retirees. And then you've got your absolute return models or your passive models. You know, you the indexing and so on to grow long term and then you can kind of rinse and repeat this idea. So I I was becoming more advanced and it was really interesting.
Mike:Every time I learned something new, I had to give up part of my ego. Mhmm. Because before I thought it was the best thing since sliced bread and I had solved it and life was was certain. And then I realized a new risk. I didn't know to ask.
Mike:I realized a new investment or product or strategy that I hadn't understood before that was going to change how I adjusted the portfolio, the plan, the strategy and so on. And this is just the beginning of it. So as I started to say, okay. I was taught to hate x y z. What am I missing to understand when this tool would make sense or would not make sense?
Mike:So I was taught to hate REITs. Specifically, these are real estate investment trust, but specifically privately held REITs. Why? Because they're illiquid. And if the real estate properties don't do well, you don't do well.
Mike:And it's really hard to get your money out of it. What I didn't understand is there are good REITs and there are bad REITs. If you want real estate in your portfolio, you might want privately held REITs because more money is going to the investment. Publicly held REITs, they have more cash on hand because they have to maintain the liquidity needs of people that might, you know, ask for their money back.
David:I see.
Mike:So I had to learn that sometimes illiquidity, as in not liquid assets, can be a good thing under certain situations. Just like there are good CDs and bad CDs from a competitive rate, there are good privately held REITs, and there are bad privately held REITs. You just have to understand how to do the due diligence. Uh-huh. The same goes with Delaware statutory trusts.
Mike:I used to tell all real estate investment people, hey, you're doing great. Now get out of my office because I can't help you because I have nothing to sell you. Uh-huh. Hated that. But I didn't feel ethically right to say, well, sell it all, pay the taxes and blah blah blah.
Mike:Well, then I figured out what Delaware statutory trusts are. It's in the real estate sector. Right? The real estate market. But it's a way that you could 1031.
Mike:So you sell your property and you 1031 into a Delaware statutory trust. You maintain your cash flow. So it, you know, it pays out cash flow. It appreciates in value and you can keep deferring it until you die and then you pass it off to your kids with a step up in basis. Now I don't charge this is just me.
Mike:I don't charge a percentage on that. It's just you're paying basically our hourly rate to get you into it because we have to fill out all sorts of paperwork and it's a complicated process. But but, I mean, if you have a $10,000,000 real estate portfolio and you're sick of being a landlord Yeah. No one told me this was a possible I had to go out and find this was a possibility for you.
David:This is on your own. You just thought thought there has to be a better way. I'm tired of telling him this. And so you just found it.
Mike:Yeah. This is before chat gpt existed. Yeah. Right. Uh-huh.
Mike:But notice the paradigm shift I had to take every time I said, there's something I don't understand. Someone's not telling me something.
David:Mhmm.
Mike:Mhmm. Because with the securities people I work with, they want me to sell securities. With the insurance people, they want me to sell insurance. Yeah. No one's telling me about the real estate stuff.
Mike:Yeah. No one's telling me about the oil and gas partnerships. If you're a medical professional, a doctor, and a partner at a medical practice, and you have a large gain, maybe that's appropriate for you. Maybe it's not appropriate for you. That's a way you can offset a lot of capital gains with capital losses in the same year and then make your money back.
Mike:And the list goes on and on and on. Indexed income. I hate it. I wrote a whole book. I still kind of hate this.
David:Mhmm.
Mike:But I understand the people who need indexed income or just income for life. Yeah. Right. They're not concerned about getting rich. They just need to know they have stability and they can't make the transition of income from a portfolio.
Mike:They want an insurance company to simulate the paychecks that they've had throughout their working career.
David:Alright.
Mike:And if we need to live within our emotional and economic limits, sometimes the emotional limit would say you you need an annuity for lifetime income because that's what you can emotionally handle. Would I personally do it? No. But it's not about me. It's about the person's
David:Yeah.
Mike:Retirement. And then I had to understand then the complexities of that. So you have fixed income. So it's a flat rate. You have a guaranteed cost of living adjustment.
Mike:So, you know, the income grows at, like, 3%, and then it stops at some point. Or you have indexed income. Do you see how the rabbit hole just goes down and down and down and down? I mean, Alice in Wonderland's got nothing on the financial services space. Asset based long term care, indexed universal life insurance, buffered ETF, structured notes.
Mike:I could go on and on and on. But when I started my career, I thought this was the easiest job ever. I have these fancy models. Before I started the career, I thought I could just buy and hold the indexes and be fine. Now, as I've understood and sought to learn all of these different instruments, what I really came to the conclusion was they're just tools in the toolbox and what you can't do, you can't say, I have a hammer and I want to make it work.
Mike:What you need to say is this is the result I want. What tools give me the highest probability of success to accomplish that goal within my emotional and economic limits? So, yeah. When I say there's no such thing as a perfect investment product or strategy, there's a reason for that. When I say, don't come into my office and ask me about the best stock or the best product or the best investment out there.
Mike:That's the wrong way to look at this. You've got to and again, it's my very strong opinion. You've got to put together your plan first. You've got to articulate what matters most to you. You've got to have that conversation of what's gonna keep you up at night so that you don't spend your retirement stressed about finances.
Mike:And then you start to design your portfolio. Here's a basic example. If in construction, and I'm not a construction worker, but I know the difference between a nail and a screw. Mhmm. I think most people listening and know the difference there.
Mike:Yeah. A nail is used for certain situations. You put it in there and you hope you never have to take it out. You could, but you know what? You hope you don't have to.
David:Yeah.
Mike:A screw, you've screwed it in. Maybe it's more secure because it has the
David:Those threads?
Mike:The threads. Thank you. Yeah. But you could unscrew it, but you're not gonna use a hammer to put in a screw. And a screwdriver isn't gonna work well with a nail.
David:Not very well.
Mike:This might seem insignificant, but these are things that matter. The nuance, the details can make a huge difference when it comes to your finances. For everyone listening right now, here's my my plea. Forget what you think you know about the idea that you were sold and give all investments and products a day at court. Because if you can't articulate a situation to which it could be used and make sense for someone, then you might not understand its purpose.
Mike:That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility.
Mike:This is not your ordinary financial analysis.
David:Learn more about Your Wealth Analysis and what it could
Mike:do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.