You're on your way to become the elderly individual in your mid eighties on fixed income trying to figure out how to pay for life. 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's all about the nitty gritty. That said, remember, this is just a show, not financial advice.

Do your research. Now, with me in the studio is David Frandsen, and today we're gonna read your questions. As always, you text your questions to (913) 363-1234, and we'll answer them on the show. David, what do we got today?

Hey, Mike. What's the biggest mistake you see people make when they're about to retire?

I think one of the biggest mistakes people make is the assumption that what has worked will continue to work.

Mhmm.

And in today's economy, in today's situation, you know, being the 2025

Mhmm.

The equities market has had an incredible ten to fifteen year run. And the quote unquote market crashes we experienced weren't real crashes because they recovered that year. I guess 2022, you know, like kind of extended 2023. That was rough. 2020, we printed a bunch of money, restrictions were lifted, v shape, you know, a very quick rebound.

But assuming that what you've been doing for the last twenty, thirty, forty years will continue to work is somewhat ignorance in that markets go up and they go down, and what got you to retirement was probably dollar cost averaging or riding out those markets. So one of the best things you can do when you're in accumulation phase is to put money in the market when it's crashing. One of the worst things you can do in retirement is pulling money out when it's crashing. Okay. The rules kind of change a little bit.

That doesn't mean you go out and buy an annuity and say, well, I solved the problem by a lifetime contract with an insurance company that is heavily exposed to insurance not insurance, inflation risk. Mhmm. Because if inflation adds or averages, let's say, 3% year over year, then guess what? After ten years, you've lost, what, 25% of your buying power? You're on your way to become the elderly individual in your mid eighties on fixed income trying to figure out how to pay for life.

Yeah. Yeah. I mean, that doesn't sound very fun. And, yeah, fixed incomes are that limits you in in what maybe you want to do with your rest of your life.

Mhmm.

Who wants to be limited? So but tell us what you said earlier too. Why why is it good to buy in when the market crashes?

It's like buying clothes on Black Friday. You're you you already know you want the thing, you just bought it for less money. And so if you think about it, you could buy stock x y z at a $100, or let's say that stock crashes and you could buy it at $50.

Mhmm.

Now either way, you're buying it with the expectation it's gonna be worth $500 at some point in the future. But would you rather buy it at $50 or a $100 with the same expectation at the same date?

Okay. Yeah.

I mean, you might as well buy it at $50. Because if you bought it at $50, what you've done is if you had, like, let's say you had a thousand dollars you're gonna put into this Mhmm. And it was $50 a share versus a $100 a share, you're buying twice as many of those shares, and it's the same expected price later on. Mhmm. So why wouldn't you?

Yeah. And that's the key. Do you have to be kind of careful? There has to be how can you know if it if it'll reach its expectations in the future?

You can't. So this is actually an interesting point because when you think about today and why people push index funds, which do I have that book here? Okay. It's in my office. John Bogle, the guy who founded Vanguard

Has a book out called Common Sense Investing. And his argument is, instead of trying to stock pick and and figure all of this out, buy the indexes, the indexes have always recovered. And that is true. Every significant market crash that I can think of, many of the stocks that were in that crash never recovered.

And if you look at the S and P 500, the bottom 50 to a 100 of of these stocks are getting swapped out. You know, they're not all Apples and Amazons that are at the top Yeah. And will basically always be in the S and P 500. You've got these, like, little or smaller companies that will be in there for a little bit, and then maybe something happens and they're kicked out. So the index will self heal, but the stock won't.

I see.

So when you're picking stocks, you're assuming that you understand the that company really, really well

And that you have an opinion on the cash flow and the value, the intrinsic value of that actual company in a few years from now.

Right.

I mean, at Toys R Us. That

They had a good run, didn't they?

Exactly. Yeah. But look at other other tales. So Cisco, at one point, was the world's largest company. Then it crashed over, I think, 80%, and it lost its intrinsic value because we overdid it on the infrastructure of the Internet, and it didn't recover until 2024.

Ugh.

It's a long time.

So you have to ask yourself these questions. Do you want to dial into the minutiae of the stock, the value, the moat? The moat is a Warren Buffett term about the protective side of things, like Costco has its memberships. Oh. That's its moat.

Right. Netflix has its subscriptions at a low cost. That's its competitive moat. You've got, I mean, you've got all these different moats. Intuitive Surgical already has real estate in the hospitals to do the robotic surgeries, so that's its unquote moat.

Doesn't mean it's risk free. They have the risks. They can be disruptive or disrupted, I should say, past debts. But it's you've got to be more due diligent about the stocks that you own versus you buy the index, the index kind of self heals.

I see.

Indexes have always recovered, stocks have not.

Okay. Okay. So this is we're talking about the mistake people make before they're about to retire. Yes. So is is the mistake then trying to stock pick or or stay in ETFs too long?

Or

It's it's assuming that markets will just keep go growing and growing and growing. Okay. So the same thing happened in 1999. You know, the markets just kept going up, easy to retire. There are people on there saying that there's a 10% rule.

So if stocks have averaged 12% year over year on their growth, which technically they have

Mhmm.

Over a certain period of time, then in theory, you could take 10% out and never touch your principal. It would continue to grow. The problem with that is that what if they don't grow? What if they crash? Right.

And you're depending on 10% of the income, and the reality is the stock market or the S and P is really around 8%. So now you're taking more than the average growth over a thirty year period of time, which is kind of like a retirement, thirty years Mhmm. One third of your life, and then if the markets go down and you still take out that 10%, oh, man. I mean, if the markets go down, let's say let's say 30%.

A legit crash.

A legit crash. Let's say 40%.

Okay.

Because you're all in the market, and then you took out 10%. You're down 50%. Oh. That's a 100% return just to break even.

Oh. Seems like a tall order.

So what you what people need to do this is a very difficult behavioral shift. We're used to higher returns. We're used to the risk. We're used to our income streamed up from work, is you wanna start shifting your portfolio into protection mode. Now, in my opinion, the day you retire is the day you have the least amount of risk, and then over time you start draining your bear market reserves because when the markets go down, you take money from that bucket.

Those reserves.

Mhmm.

Right? Money that can't lose money, but still has growth potential.

Okay.

And then so over time, your reserves get less and less because you have less life left. That's the idea at least. But it's difficult to sit down with someone and say, hey, I know you're used to 12% or more returns on your your market. Yep. We're gonna put it in something that can't lose money, but has a six or 7% cap.

Well, why do I wanna cap my returns? Yeah. Because you don't wanna lose money anymore. You've already made your money. Now you gotta stop.

You gotta you gotta get rid of that risk, that downside risk. But but can I just ride it out? You can try, but the numbers aren't in your favor. This is what people call sequence of returns risk. Mhmm.

And so the problem is I I think many people have basically said the gist of this. What we've learned from history is that people don't learn from history.

Yeah. Is that why history repeats itself?

Yeah. Or at least it rhymes. Yeah. So it's it's the age old seven deadly sin of greed.

Mhmm.

Greed is what keeps us in the market longer than we should, And then when the markets tank, fear then takes us out of the market because we can't bear it anymore, and then you miss the recovery. Ugh. It's a lack of a system. It's a lack of understanding that in retirement, if you look at predictability, by giving up some of a part of your portfolio and its upside potential to put in to include downside protection, whether it's fixed indexed annuities or MYGAs or CDs or treasuries or cash or whatever, buffered ETFs, whatever it is, that there's some sort of protection system, whether it's actually protected or it's got lower risk, ideally, it's got actual protection. But in that situation, you're increasing your odds of success when implemented correctly because you don't want to go down.

I mean, imagine you've got 3,000,000, say, for retirement, you kept it all in the stock market and the S and P 500 because you were told that you can't beat a financial adviser or the the financial advisers can't beat the S and P 500

Mhmm.

Which is most advisers can't do it.

Mhmm.

And some advisers will beat it in some years, some won't. But it's not about being better than a financial adviser. It's about being more strategic. There's a reason why financial advisers don't put all of your money in the S and P 500, and it's not because of fees. It's to find more predictable returns on the cash value of your assets.

I mean, open up Excel

Mhmm.

And just have some fun with this. Pull the returns of from the S and P 500 from 2000 to 2010 or even 2000 to 2020, and then take out 4% from your portfolio. Now, can't take out 4% of the current value because your bills don't go up and down based on the stock market. Your bills are consistent. Yeah.

So if you've got a million dollars and you take out 4%, that 4% needs to increase by 2% every single year regardless of market conditions and see what happens.

Okay.

Now, the numbers will probably work out, but did you have the foresight of watching them from 02/2001 and o two that your assets are down over 50% because of the market and your withdrawal rate, your taking income? And then, yeah, they kind of recover, but you don't recover all the way. And then they go down, you know, in 2008 again, and you're like 70%. You've lost 70% of your retirement savings in less than ten years or whatever the number is. Yeah.

Can you stomach the idea of, oh, yeah. This was the second crash. There's not gonna be a crash for the next ten years. No one has that kind of foresight. Right.

And if you think you're, you know, Marcus Aurelius, the the best stoic ever, I would highly doubt seeing fifty, sixty, 70% of your assets gone because you went all in on the S and P because when you're in growth mode, that beats financial advisors. Okay? Some. Mhmm. Most, I get it, but you're not looking to beat financial advisors, you're looking to take income.

And that needs to be more predictable. And I can say that objectively because I'm happy to create plans and teach people how to fish. I'm the guy that wrote the article how to what was it? What was that Business Insider article? Do remember the title?

How a comprehensive retirement plan could replace your advisor and save you money and fees?

Yeah. It sounds right. Yeah.

Yeah. But it all just stales down to the system, and are you willing to follow the system? Are you willing to give up some upside potential to decrease your downside risk exposure so that not if, but when the markets crash, you kind of have a plan to not accentuate those losses? Mhmm. What was the question again?

Yeah. The question though, the what's the biggest mistake you see people make when they're about to retire on the precipice?

Yeah. It's assuming that your growth portfolio that you're used to, the familiar space you're in Mhmm. Is what's going to get you where you want to go in retirement. The rules change when the money flow reverses direction.

Mhmm.

And that Yeah. That doesn't mean you go out and buy an annuity Yeah. And turn on lifetime income. Like, everyone whenever I explain this, people people always go, alright. So, Mike, what annuity are you gonna sell us?

Uh-huh. I used to do dinner events at steak houses and colleges and other places, and I would joke and say, alright. Now that we've covered all of this sequence of returns, risks, and all these different things, honestly, who's here thinks I'm gonna sell you an annuity? Mhmm. And the hands would raise up, and I'd say, so you've all been to an event before?

They'd say, yeah. I'd say, great. And then I'd always throw up the next slide. And the next slide was all this is an actual advertisement. I saw someone do on LinkedIn that said, why would you take 4% from your portfolio when it was like it was if you have a million dollars

Mhmm.

You could take 4% out and get $40,000 a year, and it might work out. Or you could get like $70,000 a year. And they fail to disclose that there's no cost of living adjustment on that. There's no ink or increase. Yeah.

Right? It's just flat, but it looks really nice. I'm sure they got all sorts of Yeah. Of business from that very misleading advertisement. But I say, alright, let's let's beat up annuities.

Uh-huh.

And the reason why I say this is we're so used to an income stream that we often fall prey to the, well, don't retire until you've secured your retirement income to simulate basically what you're already used to. That's a a way to sell you a tool that is not good or bad. The tool just is. Yeah. Do you want to transfer longevity risk to an insurance company for a usually, it's a fixed rate for your life, but you're at tax risk because if taxes go up, your income goes down, and there's inflation risk.

So if inflation averages 3%, then you you'd, you know, you lose 25% of your buying power. Mhmm. And I hear people say, well, that's why you buy multiple annuities. Yeah. But the annuity will grow, you know, at a lesser rate than the stock market would.

Oh, but you've got, you know, the you could ladder them out and turn them on when you need more income. Kind of. But there's some nuance to that. So the gist is, don't do what you did to accumulate your assets. That's typically a singular growth strategy.

Don't buy a product thinking that you've solved it by, you know, hitting the easy button.

Mhmm.

You want to have access to multiple strategies to support a dynamic retirement plan that can adjust as your lifestyle needs change, as your health needs change, as your interests change. Yeah. But having some assets that you might give up some upside potential for downside protection. That's one of the key components I think a lot of people intuitively kind of instinctively know, but have a hard time giving it up. Yeah.

Yeah. What do you think?

Yeah. I

think Is that anything we missed?

I think we've answered the question then. That that's, like, it's, like, the one biggest mistake. We could probably identify some others, but that's the one biggest one probably. Yeah. Just assuming that what the accumulation phase, what works in the accumulation phase is gonna work in retirement income phase, which

I mean, there's other mistakes too, but those are typically not like when they retire, when they're leading up.

Mhmm.

So thinking that all of your money should go into your four zero one k is a misnomer. Sometimes people overfund their four zero one k, and they run into tax issues later on. Sometimes people don't realize that they're overfunding life insurance or that they're paying a lot of money for term life insurance when they could have repackaged it in a way to replace some bond funds, still pay for the term life insurance, but instead of it stopping at like 65, 67 years old, it could go for the rest of your life, but the policy would naturally pay for itself Mhmm. Through just proper funding of these things. There's other ways that people could get into retirement funding.

So if you already have a lot in your IRA, you might consider buying some some ETFs in your brokerage account with the sure purpose that when you're 60 to 64 years old, you're gonna take income from long term capital gains

Mhmm.

By dividing up from low cost ETFs and buffered ETFs because they both you know, the low cost low cost ETFs, they've got the growth potential. Buffered ETFs have that protection that you might need, and they only are taxed when you realize Mhmm. When you when you sell them. I mean, there's dividends that would create taxes on some of the ETFs.

But Oh, okay.

But now you could bridge the gap with very low tax environment for those first couple of years and if there's health insurance subsidies or other benefits before Medicare starts, you could take advantage of that. Mhmm. But you wouldn't know that had you not started earlier. So it's you don't know what you don't know, and the hard part is most people don't know the right questions to ask. That's why I personally think instead of people waiting to retire and then putting their plan together like six months beforehand, it's nice to at least get a one time plan and or analysis in your mid forties to mid fifties

Mhmm.

So you can make any last minute adjust adjustments to your funding and your strategies kind of looking down the line.