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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.
The big takeaway is it's good to have a strategy. It's good to have a plan. It's good to have predictability. Welcome to the Retire on Time Q and A podcast, a podcast in support of the book How to Retire on Time. As always, text your questions to (913) 363-1234.
Mike:And remember, this is just a show, not financial advice, though it is a show where we want to get into the nitty gritty so you're not having to listen to that oversimplified advice you've heard hundreds of times. David, what what's the question we got for today?
David:Hey, Mike. What do you use to create a retirement income ladder?
Mike:Retirement income ladders are typically used with fixed products. So you've got CDs, treasuries, bonds, or MYGAs, so modified not modified adjusted gross income.
Mike:yeah. Multi year guaranteed annuities, which is basically a CD from an insurance company. Those are pretty neat. I I will say that some people in the latter part, pun intended, the the latter part of their ladder Mhmm. Is sometimes is indexed products because they have slightly more growth potential.
Mike:And if you give it five years, it should have more growth than the the fixed products themselves. It's just not guaranteed, so you have to kind of blend those two. There is a new one that's that's coming coming into surface here. It's called a Magia. Oh.
Mike:Not yeah. That sounds like
David:a The modified
Mike:or something. A Magia. Magia. A Magia is let's see if I get this right. A multi year guaranteed index annuity.
Mike:Oh. And basically, what they're saying is we're gonna give you a fixed rate or the indexed rate, whichever is higher.
David:Oh, so they'll just assess every year or something?
Mike:Yeah. So think of it as like, this is not a product. I'm just giving you an example.
Mike:Okay? You're gonna get either a guarantee of 5% or 50% of the growth of the S and P over the next five years. So for five years, it's 5%, 5%, 5%, 5%, or if the S and P grew, I don't know, let's say a 100% over I'm being facetious here. A 100% growth in five years
David:I like that.
Mike:It's never actually done that, but then you'd get half of that growth point to point. They structure things in different ways. So sometimes it's year by year, you get one or the other. Sometimes it's the five year point to point. Look at the different products, but that's kind of a nice blend.
Mike:So you've got fixed, then you've got this Magia business Mhmm. Is going on, and then you've got the index, and you can blend them together. But that's typically what I see. I like and recommend typically, this is not a recommendation to you, but the index to be later on because it helps you hedge against inflation risk. I've had too many people say, hey.
Mike:I want you for tax advice, but I I've already laddered out twenty years of income. I don't need you for that. And say, well, what are you gonna do with inflation? They say, well, that won't happen again. We already experienced it.
Mike:And I'm just going, oh, okay. Hold on. Yeah. Inflation is very sticky and can come roaring back. I mean, look at what happened in the sixties and seventies and eighties when inflation was an issue.
Mike:They fixed it, then it came roaring back, and then they fixed it, and then it came roaring back again. You know, that was a tough tough multi decade situation with inflation. Yeah. There's no guarantee that that inflation's not gonna come roaring back. There's no guarantee that the tariffs won't have this issue.
Mike:Right now, it seems fine. You could argue that the dollar's been so devalued that that's just another way of hurting the consumer or the average American. But, I mean, I just too much fixed, I think, is is a risk with inflation. It's like, why do you not just buy an income annuity, turn on income for life? It's because of inflation.
Mike:So if your ladder gets too long with fixed products, just be careful of the inflation risk. That's all I'm saying. But, yeah, I mean, we've got this what's the tool? Retireontime.com, the bucket planner.
Mike:You can say if you want, you know, one, two, five, ten years, and then what the expected rates are gonna be and ladder out all of that. Just go to retireontime.com and then and then look at the the planning tools and then go to the bucket planner. It's free for everyone to use. Like, there's you don't even have to put in your name and email address to use it.
David:Oh, that's
Mike:because I hate that crap.
David:That's yeah. You know? It's really bad.
Mike:When it's like, oh, I wanna use this, but I don't want if someone wants my email content, my newsletter, if they that's when they'll give it to me. I don't wanna force that. That's just mean.
David:Right. Right.
Mike:Right. No one likes spam.
David:So that's a good feature then. Yeah. Already, you're selling me on this calculator. You're okay. Yeah.
Mike:You don't even have to talk to me to use it. But you could but then you can say, okay, well, let's do the first five years and let's do, you know, four or 5% or whatever. Mhmm. Then he said, I think this one's gonna give me, like, five and a half percent, or I think this one's gonna be, like, 6% over the long term. So you can you can blend that and then put the rest of your portfolio in the risk bucket, and then let that grow over time.
Mike:And you can kind of see that this cool phenomena of you're spending down your lower interest accounts, and then the other accounts are growing, so your overall net worth kind of you're preserving your balance. You just divide it and conquer. That's a cool feature of the bucket strategy or laddered income. Yes. You just you just have to structure it.
Mike:This is for I I find people that are engineers, that are teachers, that are pilots. They live by systems. They love the structure. Uh-huh. Because they have they have control over a certain period of time.
Mike:They have predictability, and that gives enough flexibility for the other assets to grow, and they're not as concerned because they have this part structured out.
David:So when you're doing a a ladder, income ladder, you first before you can do that, do you need to know how much you need so you can ladder that? That helps. Yeah.
Mike:Okay. How much income and then also understand your tax situation.
David:Oh, yes.
Mike:You need to know
David:Like if you're single or married filing jointly?
Mike:Yeah. What's your effective tax rate?
Mike:Because usually you're laddering out qualified funds, which means IRA, pretax, four zero one k. So you wanna know what your effective tax rate is. Not your tax brackets. Tax brackets will change. Your effective tax rate gets you at least close enough to where you'll be ballpark.
Mike:And this is another important part too, is a lot of people will will live by the ladder from rigidity.
Mike:In that this is it, nothing can change. Well, what if you're 60 years old and in two years they changed the laws on, I don't know, health care? And now if you were to take income from your long term capital gains from your brokerage account in the year two, and not from your laddered out IRA Mhmm. That you'd qualify for very cheap health insurance. Oh.
Mike:That that's a good deal. Yeah. Right? So you wanna make sure that you understand that even though it's laddered, it doesn't just get laddered and forced into your checking account. In year two or three, you might wanna ladder it and then have the distribution go into your IRA so that in your income planning, in your tax planning, in year two or three, you're 62, 63 years old, you're taking income from your brokerage account through long term capital gains, which suppresses your overall modified adjusted gross income, allowing you to qualify for the federal poverty line closer to it, which then significantly reduces your health care costs, which saves you hundreds of dollars every month.
Mike:Yeah. So so, again, I just wanna highlight the importance of that. Just because it's Laddered doesn't mean you have to follow it. It means you have the ability to follow it, but you can just redirect it and just keep in the same tax bucket, whether it's IRA, Roth, or so on, and still be flexible enough along the way. Mhmm.
Mike:How's that? That's that's a rabbit hole. Yeah. This is Allison. We should call this Allison Wonderland.
Mike:Don't sue us, Disney.
David:Yeah. Please don't.
Mike:I don't do they own the rights for that?
David:You know, it's possible, but lots of things change in the IP world.
Mike:Yeah. I don't know. But regardless, the big takeaway is it's good to have a strategy. It's good to have a plan. It's good to have predictability.
Mike:But you want to have flexibility because things change. Inflation can hit. Tax laws can change. There can be new opportunities that you didn't have available when you first started the plan. So just be aware of that.
Mike:Be aware of the flexibility. Life is extremely dynamic. You can't control it. So just just keep that in mind as you use these calculators, as you use these planning tools, as you put your plan together. And make sure you have the plan first, then you have your strategies, and then you figure out the portfolio and the the bucket laddered planning is a part of structuring the portfolio.
Mike:It should follow your plan. It should follow and implement or it should be able to implement those strategies that you wanna implement. So that's all the time we've got for for this question. If you enjoy the question, make sure you subscribe to us either on YouTube or the podcast. Go to retireontime.com for those planning tools, resources, and more.
Mike:Join me online live as I do on these workshops where I actually break down a plan live. I build it from scratch and answer your questions along the way and much more. As always, text your questions to (913) 363-1234, and we'll see you in the next episode. Thanks for joining us.