People complain, oh, well, financial advisers, they never beat the S and P 500. Yeah. Because you can't stomach the S and P five hundred's volatility. Welcome to the Retire Q and A podcast. My name is Mike Decker here with David Franson.

We're answering your retirement questions. Text them to (913) 363-1234. And remember, this is just a show, it's not financial advice. Alright, David. What do we got today?

Hey, Mike. Does it make sense to diversify your retirement income streams? If yes, can you give some examples?

First off, let's let's ask the question, what is diversification?

It's not putting all your eggs in one basket. Okay?

Alright.

So the reason why people buy a bunch of stocks in different sectors is not necessarily to try and get rich. It's to just say, hey, if I'm in, like, let's say 10 sectors and four of them go down, overall, my average should advance.

A reason why people will put bond funds in their overall portfolio was because if the markets go down, the bond funds should not go down as much. Maybe they'll even increase offsetting it. It's to stabilize the volatility or the ups and downs. Like, I don't I don't get this. People complain, oh, well, financial advisers, they never beat the S and P five hundred.

Yeah. Because you can't stomach the S and P five hundred's volatility.

for those that can, good for you. I I have no problem with that. I've seen many portfolios of 30 and 40 year olds. All they're in is just stocks and their dollar cost averaging in. And I said, what'd you do in 2020?

They said we put as much money more money in the market as we could. Mhmm. So we need to have context behind the purpose of this. Now, here's a quick story. Someone once said, well, I'm diversified.

I said, how so? They said, well, I've got CDs at at Bank of America. I've got CDs at Chase. I've got CDs at my credit union. So that is diversification by company, not by investment.

They diversified their custodians very well.

Yeah. I mean, you know, FDIC insured in a couple of different places. It's not a bad deal. So diversification is not just buying a bunch of stocks or a bunch of different ETFs. And by the way, if you have a bunch of ETFs, look what's in the ETFs.

You could have diversified and just bought the same thing a bunch of different ways.

Right. Yes. Yes. Yes.

So the point is to have multiple strategies. Okay? So this translates into a number of other areas in retirement planning, and income planning is one of them. K? So let me give an example.

Alright.

A not diversified income stream would be to just have all of your assets in a stock bond fund portfolio, and you take out 4%. That works because the portfolio, in some sense, you hope is diversified, but the income strategy is singularly dependent on that portfolio and its ability to perform.

Okay? Now let's just open it up a little bit. What if you had a large portion of your portfolio, let's say in, I don't know, stock bond fund sixty forty. Okay? So that's a part of your portfolio, you're taking 4% out of it.

But you had another large portion of your portfolio, and it was in real estate, whether it was in a privately traded REIT, whether you bought preferred stock of a real estate portfolio. And, you know, maybe today, it's it's averaging, I don't know, 9% dividends because it's a private situation. You have more control over it. The position might not grow with inflation, but you have a reasonable amount of cash flow because the real estate market is not coordinated with the bond market, the bond market's independent of the stock market. And so now you have different income streams and different structures in different investment markets to help regulate the ups and downs.

It stabilizes. And JPMorgan did an interesting bit of research on this. They found that if you incorporate 30% of your assets in their study in a portfolio with stocks and bonds, you know, that you blend it all together, that you would see, historically speaking, it showed an increase of of returns and a decrease of volatility because you went outside of the cliche stock bond fund market.

K? So that's kind of a nice deal. Yeah. Now, this is the important part of this. Anything you do has its own inherent benefits and detriments, the risks associated with it.

So if markets are on a tear, they're probably gonna outperform, let's say, the real estate market. If the markets crash, maybe the real estate market holds steady, maybe it doesn't. And the real estate market portfolio, those income that's based on that contract, the renters still have to pay. And so you might get that 9%, but if push comes to shove, maybe they have to change it, or maybe something happens. I mean, you can't guarantee necessarily that you can control the economic situations of the various markets.

Right. Are with me so far?

So you're trying to diversify, but there's no guarantee anywhere in any of those things.

And then let's go to just investment philosophy one zero one.

Okay? So if you're a growth investor, that's gonna work really, really well sometimes. If you're a dividend investor, that's gonna work really, really well sometimes.

Okay. I see where you're going.

If you're a real estate investor, it Might only work sometimes? Yeah. Okay. And you can finish my sentences. So but the the point here is I believe it is important to be able to shift your income strategies based on what is working and what is not working.

Because that'll change, like, on a dime.

Yeah. You wanna be able to adjust based on the markets. Dividend investing was a really, really attractive thing years and years ago. Okay. Now it's not as attractive.

Companies want to manipulate their stock, their buybacks, their their books, or whatever it is legally. They they do it legally.

You know, these are all rules that work. Right? Not saying anyone's criminal here, but but if they can appreciate their stock value, they can then use it to their advantage instead of being a tried and true boring company that pays us all the dividend. That doesn't always work today. It's not as attractive when you have a growth market.

When the pandemic happened in dividend investor, the dividend investors struggled because I think it was, like, 600 dividend companies I was aware of stopped paying their dividend for a an unforeseen amount of time. So the point being is all in a one strategy leaves you kind of exposed. Being able to say, I wanna be a dividend investor for this time because we're kind of at near a market top, and maybe we're just gonna sit here for a little bit. Hey. I think the markets are undervalued right now.

We just hit a crash. Let's now shift into a growth portfolio to where we're taking our income off of the growth of the the the stocks or the positions, whatever they are, stocks, bonds, whatever.

I say stock, bond, fund portfolio specifically. Maybe there's the market is overbought, and you're in the real estate portfolio. And that's just my example for today. Alright. K?

So now comes the instead of just saying all in on one, but it being able to shift to the other, what if you had multiple going at the same time? So here's three examples that we use often here at Kedric Wealth. Alright. One of them is I call it the baseline reserves. So the theory for those who haven't heard this is, we believe you we call it the Kedric reserves.

We we believe that some of your assets should be in protected accounts. So if the markets go down, dividends dry up, whatever it is, you have a source that you can tap into that can't go backwards, so you don't accentuate losses. Just like a city has a reservoir of water in case of a drought Mhmm. You wanna have some protection that can help you sail through the market turbulence of whatever your strategy is.

Yeah. And so what what are those what can't go backwards? Where can you put your money that it doesn't go backwards?

Yeah. So you've got CDs, treasuries, or bonds as long as they're investment grade, and you're buying the actual bond, not the bond fund. Okay. Okay? You've got MYGAs.

Those are multiyear guaranteed annuities. Basically, it's a CD from an insurance company. You've got fixed indexed annuities, so you've got growth potential, but you you're not supposed to lose money on those. There are some newer ones that can, so be careful with that. Buffered ETFs.

Not necessarily principal protected. They have, like, right now, at the time of this recording, like, 50% buffer is the max buffer.

Okay.

So if the markets go down 40%, you're fine. Markets go down 60%, you might lose 10%.

Okay.

So they're not principal protected, but they have a reasonable amount of protection.

you've you've got all of these different categories or different setups. Some people will even go as far as to say structured notes, but that's a that's a rat's nest of of variability there. And and and what's this note versus that note, how are they structured? So just be very careful with things of that nature.

Okay.

Private credit is a a different one you could look at. It's just a different version of, like, a a bond.

Alright.

Okay? Technically, it's a bond, but private credit because it's for a specific type of person and a specific type of structure. But the point being is there's a number of different investments or products out there that can do these things for you.

Okay? So

one of the first ones is a common one. Okay? What if you just want structure, you want predictability?

K? What if your income strategy for the first five to ten years is laddered out? K? We call it the Kedrick ladder reserves. Yeah.

You just ladder out your reserves. First year, maybe it's high yield savings. You're just pulling money out of a money market or high yield savings account. Year number two, it's a one year CD. When it matures, you spend it.

Year three, then you're looking at maybe a MYGA or a treasury that's, you know, gonna mature in that time frame and so on. And usually for the first five years, those are kind of fixed accounts.

Okay.

So So they're gonna grow at a fixed rate. Then after that, it's it's split. Some people like fixed for ten years. I've seen people go fixed for twenty years. You have inflation risk with that, but it's it's predictable.

Other people will do indexed. So after the first five years, then you have indexed products, so buffered ETFs and fixed indexed annuities because they have more growth potential, and then they just you letter out the maturity. This one matures in five years, six years, seven years, and so on. Okay. Or a buffered ETF, you just let it ride for the five, six, seven years.

So that's one. We call it the the laddered reserves. Yeah. And then you put the rest of your assets in growth, and the growth assets are there for the one offs, the the occasional, you know, need a new roof or new car. Sure.

You know, to the hospital. So it's kind of the extra buffer flexibility kind of side of the portfolio. That's that's a structured way that you could blend income now and then grow income for later.

So the the part of your portfolio that you don't need now, that's that's where it can be subject to a little more risk and, hey, I don't need that money yet. It can grow. It can do whatever it wants.

Yeah. Just gotta be careful, though, because the fixed products Yeah. Don't do well when the dollar's being deflated or when inflation gets out of control.

Uh-huh. We got some stuff like that.

It happens. Yeah. It happened. It could happen again. So and that leads me to the other one, which this is probably the most common that I see in the retirement space.

You know, I've I've coached financial advisers all over the country. Yeah. And what they'll do is they'll say, well, look, if you have a million dollars and you want 4%, $40,000, let's take 60% of your assets, put it into a lifetime income annuity, maybe you'll get $4,042,000 out of that for life, flat. It's not gonna increase over time, but it's it's your baseline reserves. It's your, hey, this is guaranteed as good as the insurance company's credited, guaranteed as long as you live.

So you've kind of checked off the starting part of your portfolio, and then the rest you invest to then handle inflation, you know, the one off expenses and so on. And you wouldn't go all at risk with that. It's just you'd you'd manage it appropriately and and but you have you have that kind of to to pad the inflationary risks. So that's not a bad strategy. I mean, people when people there was a study done in Florida.

So do you want the four zero one k or do you want the pension? I think it was, like, 98% of employees said, no. Let's keep the pension. People like structured payout. Yeah.

Social Security, pension, and annuities. It's all the same definition of annuitization, which is a structured payout for a contractual period of time. And for these, it's lifetime as the as long as you're alive. Yeah. You're getting paid out.

People love to hate on annuities because you give up control, but people love pensions. It's very conflicting because many people are a product of someone else's marketing. Uh-huh. Would I do a lifetime income stream? No.

No. You personally for yourself?

I personally would not, but the reason is I'm also comfortable with my money. I don't invest client money this way. I'm comfortable with my money going down 60%. I get excited when the markets are crashing because I know I can buy in. I've been trained to do that.

I've been trained to understand these situations, so it's not an emotional reaction, it's excitement.

Right.

Right? Just like a doctor is trained for heart surgery, or a soldier is trained to go into combat and not freak out, I'm trained to look forward to those situations. Most people are not. Yeah. Therein lies many people, it is appropriate to have that baseline reserve just so they have that consistency they can depend on.

Yeah. For others, having a laddered reserve where they're that's still having more of their money in the market for long term growth because they want more future flexibility. Right. But do you see how they're different psychographics or types of people, avatars, if you will, of how they should invest? This isn't about, oh, what's the best way?

It's which way is right for you? And then the third one I'll share just on structuring income and kinda blending things together. Okay. If you like the 4% rule, you like most of your assets in the market, great. Do it.

If you can really stomach it.

Right.

A lot of people say they can until, you know, it happens, and they go, oh, this this is tough.

It's one thing on paper to, like, maybe believe in the theory behind it, but then once you actually see your balance drop, can you really stomach it?

Well, it's like this is a terrible example, but I've met a lot of people that say, I could get in a fight. I could know, a bar fight. Totally handle that. Yeah. Yeah.

Then it happens. No. They can't. No. Not a chance.

We can envision ourselves winning, but when reality sets in, it's a very different situation.

It looks easy in the movies when, you know, Tom Cruise is punching someone. Right?

Yeah. Keanu Reeves. Yeah. Right. So so that's why this third one I have found to be very appropriate, and it's really the one I highlight in the book How to Retire on Time.

And that is it's called the dynamic reserves. In the book, I call it the reservoir. But the idea is simple. You buy a fixed indexed annuity

That has a five year period certain clause. Most of them don't have this. Or you buy five years of income and put it into buffered ETFs. You can pick whichever one you want. The annuities can have a little bit more growth potential, but more complicated on the contract side of things, more protection, more structure, but you need to understand which one you're gonna get into.

But but the idea is you're growing your assets, and you're taking money off the profits, and you're living a great life. It's incredibly flex flexible. It's incredibly dynamic. Right? Good situation.

But when the markets crash, the dynamic reserves you turn on for about five years. Why five years? Because markets will crash one or two years typically, and it might take three, four, five years for it to recover. So five years is a reasonable period of time. And you just want a five year pocket that when the markets go down, you can sail through and sustain your quality of life for the next five years without accentuating losses so that your other risk accounts have time to recover.

Don't think that you can time the market. Don't think that you can outsmart the market. This is retirement. You don't get two, three strikes, and then you're out. One strike, and you could be out going back to work.

It could be devastating. So how much would go into that dynamic reserve? I don't know. You've gotta put your plan together first. You need to understand the strategies you wanna implement next.

Strategies specifically are, like, the tax minimization strategies you want, the income, the dynamic income. You know, do you want to take some income from a brokerage account for a little bit, then you then you wanna take some IRA assets, and then you you need to organize your plan and your strategies you wanna implement so that the investments in products you buy don't impede the strategies or get in the way of the plan. Sure. There's a very important sequence to these things. But, typically, what you'll do is you put your plan together and say, okay.

Now look at the top five largest years for distribution. Total them up, maybe back a little bit off because you expect some growth potential, and that's kind of your dynamic reserves.

Okay.

And typically, I'll see people put two pockets together. So it's like the first market crash, this money's for the first market crash, this money's for the second market crash. Oh. Okay. That's kind of how it works.

Yeah. But what you're doing is you're just in that situation, you're blending between how to take income when markets are up and how to take income when markets are down.

That's kind of the key takeaway here, at least not that I'm getting.

Have different options. Yeah. Have different products, have different investments, be exposed to different markets. Don't just buy a little bit of everything in the stock market.

Think bigger than that. And think strategically, not just blind diversification. What are you gonna do when the markets go up and there's good growth? What are you gonna do when the markets stay up, but there's not much good growth? What are you do when the markets go down a little bit?

What are you gonna do when the markets go down a lot? Mhmm. What are you gonna do when inflation gets out of control? What are you gonna do when maybe there's not much inflation, but, you know, it's hard to find a good deal? What are you gonna do when the dollar gets devalued?

Which, you know, I'm crossing over in different situations here, but you want to be proactive about how you handle those situations, not say, well, I I bought this product or I bought I I bought into this idea of a strategy, and that's good enough. Nothing's gonna work well for thirty years. Right. You wanna blend things and have the ability to change. Okay.

That's all the time we've got for today's show. If you enjoyed the show, make sure you tell a friend, leave a rating, subscribe to us wherever you get your podcast or on YouTube. Also, to retireontime.com to buy the book, the workbook, join a workshop where I in live. I I actually put together a retirement plan and so much more. That's retireontime.com.

We'll see you in the next show.