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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 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 which means when it comes to financial topics, we can pretty much discuss it all. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational as in not specific financial advice. If you want personalized financial advice, then request Your Wealth Analysis today from my team by going to www.yourwealthanalysis.com. With me in the studio today is my colleague, mister David Fransen. David, thank you for being here.
David:Yes. Thank you for having me.
Mike:David's gonna be reading your questions, and I'm gonna do my best to answer them. You can submit your questions at any time by texting them to 913-363-1234, or you can email them to hey mike@howtoreontime.com. Let's begin.
David:Hey, Mike. What do you think of private equity as a source for retirement income?
Mike:It's just a tool in the toolbox. One of many. So when people come out and ask me for private equity, I ask them why.
David:Typically really cool.
Mike:It sounds really cool. And they typically say stuff like, well, isn't that what the ultra wealthy are doing? Yeah. No? Not necessarily.
Mike:So first off, there has to be a purpose behind private equity specifically. These are privately held companies, which I think 80% of companies out there are private. They are sold on private equity. Smaller portion are on the public markets. And there's a reason for that.
Mike:They don't wanna deal with the hassle that's required as a publicly traded position.
David:Like SCC filings?
Mike:I mean, it's still an SCC regulated bit, but it's just different.
David:Okay.
Mike:So the joke I've got is on a publicly traded market, your position's marked very accurately to the millisecond. K? Private equity, maybe they kinda delay that their position is not doing so well. There there's a little bit of nuance in that. With private equity, and this these are my opinions.
Mike:In private equity, there's a liquidity issue. You can't just go out and sell it like you can in the public market. What if you need the cash? What if you need to sell? You may be able to liquidate it.
Mike:You may be able to place a trade, but it's harder to get access to the funds. So just like if you want to take more risk, there's more growth potential with private equity. You may be taking more risk and have some liquidity potential issues, but there's more growth potential with it. So what's the purpose of your money? That's the first question we get asked.
Mike:What's the purpose of your money? What do you want your money to do for you? And if a portion of your assets are for long term growth, let's say 10, 20, 30 years, you have sufficient assets elsewhere that can provide the lifestyle that you want. Maybe you invest in the private equity in the sense that you're really looking more for legacy planning. So you wanna have this asset grow and then you want your your heirs to get it.
Mike:They receive the step up in basis upon death and then they can sell it at that point. That makes sense to me. But if you're saying, well, I wanna grow the asset, but I might need it next year. That's that that doesn't make much sense to me. Mhmm.
Mike:You see where I'm going with this? Yeah. Now the other side of the private alternative investments is private credit or private debt. This is the more income focused side of the the alternative market. When I say alternative market specifically on, like, the bond alternative market.
Mike:K. And I'm not talking about real estate, which is also in the alternative market. With private credit, there's been a huge shift in how the debt market has functions.
David:So let
Mike:me kind of explain this to you. Okay. Okay? So pre 2,008, it wasn't as difficult to get a loan from the bank. K?
Mike:Post 2,008, it's much more difficult to get a loan from the bank. So if you're a business and you're trying to get some capital to do whatever you need to do with your business, and you're large enough and you're reputable enough, you might seek to raise funds by going through a private credit route, instead of a bank route. Because you have to be an accredited investor or a quote quote, more informed investor to go down this route. And they would give some money and the terms are a little bit different. It's just a little bit easier for companies to borrow money.
Mike:Is there anything wrong with that? No. Is private credit riskier? Not necessarily. It depends on what specifically you're getting.
Mike:But if you want something that pays more, you're gonna be taking more risk. So you gotta be cognizant of that. You can't cheat the system. You can't say, well, I found something that's paying 8 to 10%, and there's very little risk. Now that's probably a lot more risk than the ones that are paying 4 to 5% or 3% or whatever is out there.
Mike:So you gotta understand even with private credit, it's not better or worse. It's just more restrictive. You're supposed to be more informed, which means there's somewhat more risk just by going into this, in my opinion. And then you could explore those options. And the reason why I bring this up is I remember some time ago, I was talking with someone that was considering going on this private credit route for their income.
Mike:And I said, okay. If it were 2,000, would you go and you knew what was gonna come, would you go down this route? They said, no. If it was 2,000 and 7 and you knew it was gonna come, would you go down this route? No.
Mike:Then why are you building a plan around something that could happen? Like, these these catastrophes could happen again. Why are you building that? Why don't think that's gonna happen again? Okay.
Mike:So you think that what has historically happened, the market crashes, the fed dropping rates, or the pressure that's on a lot of these institutions, a lot of companies, you think that's not gonna happen again? Well, it'll it'll be different this time. Can you see how the emotions are distorting a reality that are causing them to go into something that may not be suitable for them, but they want it to work because they want to be considered a sophisticated investor?
David:Yeah.
Mike:These cognitive distortions which look up by the way, look up the term cognitive distortion. That's a psychological expression. I think there's like 12 of them to where people's subcortical emotions. So the stuff that you don't really realize it's happening are distorting a reality to emotionally look at a result that you want regardless if it's actually real or not. These cognitive distortions cause us to make poor financial decisions.
Mike:Is investing difficult? No. Is controlling your emotions when it comes to investing difficult? Yes. And I think that's the biggest hang up.
Mike:Private equity and private credit is just a tool. It's a lot more fun to use a sledgehammer than a hammer, but it's a lot more destructive if you don't know how to use a sledgehammer or when to use a sledgehammer.
David:Right.
Mike:There's different types of saws out there. Some of them are more risky than others. Right? Go down the list of construction tools. They vary in their purpose.
Mike:The same goes with the investments. Don't build a portfolio to try and look smart with your friends. You want a portfolio to be boring? You want a portfolio to be diversified by strategies and by purpose based on their timelines and your lifestyle and legacy goals. And if the tool you wanna use fits within those parameters, then great.
Mike:You have not put the cart before the horse. All is in order. But too many times when people ask about private equity and private credit, they don't actually have their sequence of priorities in proper order. There are things out of order. When things are out of order, when it comes to your priorities, a lot of bad things can happen.
Mike:May maybe not next year. Maybe not in 3 years. But you gotta define what do you really want to accomplish here? And then go from there. 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 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. This is not your ordinary financial analysis.
Mike: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.