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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 retirement questions. Say goodbye to the oversimplified advice. This show's about getting to the details so you can determine what is right for you. My name is Mike Decker. I'm a licensed financial adviser and fiduciary.
Mike:With me here is David Franson. He'll be reading your questions, and I'm gonna do my best to answer them. As always, text your questions to (913) 363-1234. David, let's begin.
David:Hey, Mike.
David:Tell me more about buffered ETFs. Yeah. So buffered ETF is kind of a complicated
Mike:investment. It's based on basically three categories. One is the investors category to where they have purchased the buffered ETF, and they're gonna get kind of the first part of the growth potential of the S and P.
Mike:Now the company is basically selling away the additional profit. So if your buffered cap, let's say, is 7%, they're selling away an option contract that if the S and P goes over 7%, that those profits go to someone else. Okay. And then they take that money, and they put it then into buying a buffered contract that if the markets go down, someone else is going to take that risk from you. So when you understand the three different groups, and you're just trying to get the gains or the growth of one specific category, you start to understand, okay, it's not a magical investment.
Mike:It's just a very complicated investment, and the simplest version is that you get the first part of the gains, but someone else will benefit from the additional gains if they happen. And another person is making money with the assumption the S and P probably won't lose money or whatever the index is, but every now and then, they'll take the hit. So they're all taking the appropriate risk for the compensation that they're receiving in one way or the other. K? So it's not super fancy, but the the simple version is for the consumer, if you look at them, and there's three companies.
Mike:You can look up Buffered ETF. You've got First Trust. There's Kalamos, and I forget the other one. But you you Google Buffered ETFs, you're gonna find probably these three companies. They're publicly traded.
Mike:You can buy them at any time, but the buffer and the guarantees are really only relevant if you hold it to the anniversary or the renewal time. So if let's say it's July to July or January to January. K? The last part of it is someone will say, well, what if the market goes up 7%? Can I just sell out of it at 7%?
Mike:It's not that simple, because who's gonna buy a position from you that has no growth potential but downside risk? Not a good deal. So they're not traded as much as you would think a stock. And so if the markets are up 7% and there's not much of a cap remaining, you're going to have to sell then your buffered ETF at a discount so that the person buying it still has upside potential. So there's a lot of moving parts.
Mike:Sounds like there's a few different parties involved. Yeah. But generally speaking, if you buy it, the idea is that if you were to sell it, whether it's in one year or two years, because it resets kind of every year Okay. That you're holding it until selling around the anniversary date just so you can enjoy that buffer. Yeah.
Mike:Because if you need to sell it halfway through, you really might not get the full protection or the full benefit that it's intended to do. That's that's the gist of the buffered ETF, and it's really a nice complement to a portfolio to hedge against flat market risk or a market crash. Is it perfect? No. It is a tool in the toolbox, and that's all it should be treated as such.
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 flexibility.
Mike: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.