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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 grab a free copy by going to www.howtoretireontime.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. When it comes to finance, we can pretty much cover it all.
Mike:Now that said, please remember this is just a show, as in not financial advice. So if you want financial advice, you can always request analysis from our team today by going to www.yourwealthanalysis.com. With me in the studio today is Mr. David Franson. David, thank you for being here.
David:Yeah. Happy to be here as always.
Mike:Yeah. David's gonna read your questions, and I am going to do my best to answer them. You can always submit your questions by texting them to (913) 363-1234. Again, that number, (913) 363-1234, or you can email them to heyMike@howtoretireontime.com. Let's begin.
David:Hey, Mike. What's the smartest way to draw down your accounts?
Mike:This is a great question because there's layers to it. So the first layer is how are you gonna draw your accounts down based on taxes? So you've got your pretax accounts, your IRAs, your four zero one k's, all of that.
Mike:When you take the funds out, you're gonna pay income tax. Then you've got your after tax accounts, think of like your brokerage account, you've already paid taxes on it, subject to capital gains. Okay, so that's kind of its own thing. And then you've got your Roth accounts, they grow tax free, they pay income tax free. Yeah.
Mike:What you're really trying to do is understand at first, how do you take income out of your accounts, while minimizing your pre tax burdens.
David:Okay.
Mike:So you can do IRA to Roth conversions, or you could just take income from your pre tax accounts. Now a lot of people have said things like, well, hey, I'm gonna take income out of my brokerage account, because it's 15% from my long term capital gains, and it's fine, and all is well, and then I'll do the IRA to Roth conversions, and just move more money over there. Well, that may be appropriate, but it may not be, because what's your timing? How much time do you have to do that? Because you're not gonna be subject to RMDs from your brokerage account.
Mike:You're not subject to RMDs with your Roth account, but if you have a lot of IRA assets, that might be the focus. You might want to draw down the account by income, and you might wanna be doing IRA to Roth conversions, so that when your required minimum distributions start, that your RMD is roughly half of the income that you want and need in retirement. Okay. That way you've got flexibility. You're not being forced into a tax situation you don't wanna be in.
Mike:So it's really about working backwards from the RMD to today.
David:Okay.
Mike:So that's the first layer of it. All right. The second layer of it is when it comes to withdrawal strategies, what did your accounts do? So if all of your accounts made money over the past twelve months, you could take income from anywhere. Sure.
Mike:It's fine. But if you have accounts that have lost money, you don't wanna touch those accounts. Because when you draw income from an account that's lost money, you accentuate the losses. So just a quick example.
David:Yeah. Tell us how that works.
Mike:If you lose 10% in an account, it takes an 11% return to break even, not the end of the world. Yeah. If you lose 30% in an account, it now takes a 43% return to break even, which could take two, three years. Now, if you take a 30% hit and you take out 4% as income, you now need a 50% return to break even, that might take four or five years to recover. Assuming you'd still don't touch the account.
Mike:Yeah. So this is called sequence of returns risk. It's one of the 60 risks that retirees often don't know exist. And the idea behind it is simple. If you have some assets in protected accounts, then again, the question, how do you do a withdrawal strategy?
Mike:You need to have a, what we call a We call it the reservoir. So just like a city has a reservoir of water in case there's a drought, you wanna have a reservoir of protected accounts, so that when the markets go down, you can draw income for these protected accounts, allowing your other accounts to recover. So define protected account. What do those look like? Accounts that we typically look at.
Mike:You've got money markets, right? Cash equivalents, high yield savings, that category. Alright. CDs, treasuries, or bonds, fix or fix the next annuities, cash value life insurance, if you want to pay for the death benefit too. Okay.
Mike:Buffered ETFs or structured notes.
David:So those are accounts where the principal is sort of protected from the market risk.
Mike:Yep. Can't go backwards, but it's either gonna grow at a fixed rate or an indexed rate. Index rate means if it grows, you get upside potential. It's not guaranteed. It's the market has to grow for you to get upside potential, but it can't go backwards.
Mike:So if the markets tank, you just stay at zero, it resets, rolls over, and goes again.
David:Okay.
Mike:But they all offer different benefits and detriments. They all offer different growth potentials, different markets, they'll operate in different ways. So getting a little bit of all of them can be very beneficial, because we don't know the future of the market. No one knows the future of the market. It's really fun to speculate.
Mike:I've got my buddies that love sports speculation, who's gonna win the game. Oh yeah. I've got buddies who used to love to speculate what's gonna happen with the Kardashians, you've been in the Kardashians. Kardashians. We all love drama TV, right?
Mike:Yep. My drama TV is the market. I think it's fun. Yeah. But am I gonna invest based on speculation?
Mike:No. We're gonna follow systems, not sentiment. Yeah. And this is one of the systems is understand the markets will tank, and that if you have some protected accounts to draw from when the markets do tank Yeah. You should be just fine.
Mike:Think of it as this way. Two portfolios. You got one portfolio that's intended for long term growth. It's the grow baby girl portfolio, the bull market portfolio.
David:Okay.
Mike:And by the way, bull market, do know why they call it bull? Well, yes. A lot of people don't. Oh, yeah.
David:This is yeah. Bull has horns. They they sweep their head up
Mike:on a u. Yeah. When they attack, they attack up. Okay. So that's the bull market.
Mike:Yes. The easy way to remember it is the u and the bull is up. Okay. And then bear markets, bad news bears. Bears when they attack, they strike down.
Mike:That's where that came from. Uh-huh. However many years ago, I don't really know. But Yeah. But you need to have a portfolio that captures the upside growth.
Mike:That's focused on the long term growth, but then you need to have your bear market portfolio, your bear market allocation, your bear market protection. So when the bear market happens, it's gonna happen, but that's the your withdrawal strategy during those years to get you through those times.
David:So good good bull market. Hey. Take income from anywhere. It doesn't matter.
Mike:Yep. Yeah. If markets only went up, retirement would be really easy. Yeah. The fact that it doesn't always go up, the markets can go flat for ten plus years.
Mike:The markets crash every seven or eight years. The fact that the markets are complicated, they're not guaranteed, and so that's why you need to have this protection Mhmm. For when things don't work out.
David:Yes. And that's one one that we need to really talk about. I don't know if we have time, but flat markets. How often do those happen?
Mike:Yeah. Every twenty years or so. So February to 02/2010, the equities market or the stock market basically made zero returns as a whole. A 1965, '10 year flat market, 1929, a flat market, nineteen o six, another flat market. It's just we grow, grow, grow, and then we digest for a long term period of time.
Mike:We may be in a flat market right now. You don't really know until you're just over halfway through, and that's when it's like, oh shoot.
David:Yeah. Right.
Mike:So the bear market portfolio, notice how it's indexed or fixed on the growth, it hedges against flat markets. I've heard research from JPMorgan, from I think Merrill Lynch, from Goldman Sachs that are suggesting we could be in a flat market right now. Can you imagine trying to retire and making nothing on your accounts for ten years? It destroys your retirement.
David:Yeah.
Mike:So you've gotta hedge against these things. You've gotta prepare for these things. You gotta prepare the good, the bad, the ugly, and just a market crash is not enough. You got to prepare for the flat markets as well. That's all the time we've got for the show today.
Mike:If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire 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
David: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.