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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.
So when the markets crash and you're stressed, you're probably not objectively, critically, analytically addressing the situation.
David:Right.
Mike:So you need to have the bear market protocol now before it happens. So what does that look like? Welcome to how to retire on time, a show that answers your retirement questions. We're here to move past that oversimplified advice you've heard hundreds of times. Instead, we do want to dive into the nitty gritty because well, it matters.
Mike:There's no such thing as a perfect investment product or strategy. Heck, there's no such thing as a perfect or riskless retirement. That's why these details matter. Text your questions to (913) 363-1234, and we'll feature them on the show. David, what do we got today?
David:Hey, Mike. Can you give several examples of how to keep income coming in during a market crash?
Mike:K. So we call this the bear market protocol. Protocol because it's a system, and we wanna follow systems, not sentiment. Sentiments the idea, oh, well the market's down and that stinks, but you can kind of intuitively figure out how to navigate through that. No, probably not.
Mike:Mhmm. I mean, it's yeah. Emotions tend to get the best of us, especially when it comes to money. So you want to have a system. There are many ways to skin this cat as they say.
David:Okay.
Mike:So let's let's first address what why this matters. Okay? So one of the rules that we have for a retirement plan is to never draw income from an account that has experienced significant losses. What does that mean?
David:Yeah. Why is that?
Mike:So if the markets go down 10%, let's say your account goes down 10%, it would take an 11% return to recover. Not the end of the world. Right? And the markets have a 10% correction every one point eight years or so, I mean, it's a moving rough estimate there, but that's kind of what we see. Not the end of the world, not gonna destroy your retirement, probably.
Mike:Then you've got a market crash, so that's 30%. So if your account goes down 30%, top to bottom, that's more significant. That would take a 43% return to break even. So do you see how the the gap is greater? Yes.
Mike:It's harder to break even at that point?
David:Yes. And how often do those 30% corrections happen roughly?
Mike:Seven, eight years.
David:Okay.
Mike:But it's not every seven to eight years. So like in '19 Can't
David:circle your calendar?
Mike:No. Well, there there are charts that you'll see online social media where they say they've hacked the system and, you know, they'll reference their favorite conspiracy theory or secret group of people that control the world or whatever, and this is how they manipulate people, and there's like triangles involved, and it's garbage.
David:Okay. Alright.
Mike:It's just garbage advice.
David:I'll delete those photos now then. Okay.
Mike:Yeah. I should save those. Like, maybe we'll do maybe we'll do a newsletter on it.
David:But but
Mike:like 1987, the markets crashed quickly. Black Monday. Right? That was rough. Uh-huh.
Mike:And then they recovered quickly. And then in 1990, Iraq invades Kuwait. That tanked the markets quickly. Then you had ten years of growth. Like, yeah, '99, there was a blip blip in the market, but it recovered quickly, so it wasn't really a crash.
Mike:And then 02/2001 and o two, there were three crashes or three years in a row where the markets were going down. That was a pretty tough time.
David:Mhmm.
Mike:How do you do count that? You know, it's like, it's at six months, the markets recover in a year. That was three years in a row. The markets were going down. How do you calculate that in your triangular whatever graph that circulates?
Mike:If you if you have seen it, you know what I'm talking about. If you haven't, hopefully you never get poisoned by that garbage advice. And then in then a couple of years later, we had this thing called the financial crisis two thousand eight.
David:Oh, remember that.
Mike:That was pretty rough. Yep. And most people do.
David:Yeah.
Mike:That takes several years to recover. So and and then what? From 02/2010, let's say, to 2020, ten years of growth. And you might say, oh, well, Mike, then there's ten years of growth, then there's a couple of difficult stitch. It's not it's it's more random than that.
Mike:You can't mark it on your calendar, and it's funny you asked that. I have had people that say, don't need a financial adviser. I'm all in on equities, so stocks.
David:Mhmm.
Mike:And then I go to cash in six year the sixth year and six month, and I just wait.
David:Let me how did that work out for him, I wonder?
Mike:I mean, least they're invested most of the time. So I guess it's it's better than nothing. It's better than having your money in cash the whole time.
David:Sure.
Mike:Yeah. But it's you're not gonna time the market that way. It's not that simple. For that simple, everyone will be doing it.
David:Alright.
Mike:So now you've got to ask yourself, okay, if if you don't know what time the market's gonna crash, how do you prepare for it? This is where we like to have a bear market protocol in place. Bear market is the industry jargon for a down market. And why is that? Bulls are for up markets because when a bull hits, you know, you get the horns, they strike up.
Mike:Mhmm. A bull strikes up. That's an up market. A bear, when it attacks, it strikes down with its claws. So a bear market's a down market.
Mike:I don't think anyone really cares to know that explanation, but that's where it came from.
David:Yes. It's too bad there's know, they have that bull statue outside Wall Street. Why don't they have a bear one, like, going
Mike:Well, no one wants to address the bear.
David:That's
Mike:right. Everyone wants a portfolio for the bull market. Yeah. And it's like, oh, well, the bear markets, you just have to endure. Like, we recently changed our logo to add a bear to it because you need to be you need to face your fear.
Mike:This is kind of a dumb analogy, but you know how Batman is scared of bats? Oh. So that's why he's a Batman?
David:Oh, right. Right. Right. Hey.
Mike:But but very few people, it's like, oh, well, you know, we we've got your stocks and bond funds, and that will help you get through. It's almost like you have to endure it. Well, why why you just have a protocol for when it happens? Here's how you maintain your happiness, joy, and well-being.
David:Mhmm.
Mike:Here's how you maintain your income. It's not hard. Mhmm. And the reason why I think this is important is a lot of people are scared about the market crash, as they should, and so then they they buy an annuity and take lifetime income. Now you can use annuities for other things, but that's kind of the the more popular bit.
Mike:So anyway, so I go back. 30% crash. Yeah. A bear market. Yeah.
Mike:These are rough. If the markets go down 30% or your accounts go down 30%, let's say, that's more relevant Mhmm. It would take a 43% return to break even. Now, if you pull out, let's say, 4%, so your your account is down 30, and you've you've taken out 4% as a withdrawal because you need to pay, you know, your bills. It's important.
Mike:You know, food.
David:Yes.
Mike:Regardless of what you wanna do in life, you're going to need to eat food. That's right. All humans have this necessity of food and water, and you might enjoy some shelter too while you're at it.
David:Yep. You
Mike:know, think of Walden's Pond. So you're now down 34%.
David:Yes. You've added on. You've tacked on to your losses.
Mike:Yeah. Now instead of a 43% return, it's a 50% return to breakeven. It's even more difficult. Yes. Now keep in mind, some markets can go down more than 30%.
Mike:Some could go down 50%. And you know what that means? A 100% return to breakeven. It might take you five, six, seven years just to recoup from the losses. Uh-huh.
Mike:So is it worth putting all of your assets in a bunch of equity ETFs and calling it good? Yeah. If the markets only go up, but they don't.
David:Right.
Mike:So in retirement, if your retirement's thirty years long, there's a reasonable chance that you'll experience three to four significant market crashes. So the question is, do you have three or four bear market protocols or parts of your portfolio that, not if, but when the markets crash, you know exactly what to do. Here's an example. My family's kind of weird in that we would always have like, I don't know, emergency preparation drills. You know, like at school they have the fire drills?
David:Sure,
Mike:yeah. Well, we we did these as a family where it's like, hey, if there was a fire or an earthquake or there was a gas leak, what do you do? Now, kids had no idea what was going on. Uh-huh. But if it's a gas leak, we all knew where to shut off the gas on the house, and there was the big wrench there that you could turn and shut it off.
Mike:If there was an earthquake or a water issue, we all knew where the water was. Like we knew when times were calm, what to do before an event would happen. Now, goodness, I've never had to shut off the gas or the water to a house except for like when the plumber came over, but the plumber did it anyway. I just knew where to point the plumber there.
David:Non emergency situation.
Mike:But you think clearly when you're calm. You don't think clearly when you're not calm, when you're stressed. And there's a whole, like, literature around how people think in the flooded state.
David:Yes. In flooded state, where where are you flooded?
Mike:Yeah. Like fight, flight, freeze, or faint.
David:Okay.
Mike:You don't think clearly. You've lost your critical analytical abilities. So when the markets crash and you're stressed, you're probably not objectively, critically, analytically addressing the situation.
David:Right.
Mike:So you need to have the bear market protocol now before it happens. So what does that look like? There I should write a book on this. Call we'll call it the bear market protocol handbook.
David:Okay.
Mike:Be a great compliment to how to retire on time.
David:Yeah. Yeah.
Mike:Yeah. But there are so many ways you could structure it. Let's just kind of go through a bunch of these different ways. Okay. I'm not saying this is right for you or wrong for you.
Mike:It's just, You know, do you like to cook with garlic and onions? Most people do, some people don't. Do you like asparagus? Do you like I don't know. I mean, these are ingredients.
Mike:Mhmm. Use the ingredients you want for your portfolio how you want. Everyone's got a different flavor they prefer. You know, do you like Mexican food? Do you like Thai food?
Mike:Do you like okay. I digress.
David:Okay.
Mike:So a common one that I see is someone will will keep two, three, maybe up to four if they're more conservative years in a rolling CD or treasury ladder. So they'll invest and the treasury is gonna mature in year one, year two, year three, year four. And if the markets aren't crashing, when it matures, they roll it over into a new three or four year treasury, and so just kind of it's like a caterpillar almost. Okay. It just kinda keeps rolling until they need it.
David:This is like a certain portion of their overall portfolio?
Mike:Yeah. Okay. You've gotta build the plan first. You have to know what your income needs are Uh-huh. Before you can even calculate all this.
Mike:But you can get an idea of just there's not bond funds. Bond funds can lose money, but bonds which are treasuries.
David:Okay.
Mike:So a bond by the way, it's just a debt instrument. Most people a lot of people don't realize that.
David:So you're like helping fund the debt. Someone someone needs to take debt
Mike:like a Treasury. Yeah. You're taking debt from the US government and they're gonna pay you interest on it and then you get your money back.
David:You become the creditor in a way, right?
Mike:So you can do this through through corporate bonds, you can do it through treasuries, you can do CDs. Just understand that there is reinvestment risk, so when you go to renew, you might not get the same rate. Alright. Just be careful of that, but that's one that anyone can implement on their own, very easy to do. Okay, so you got this kind of rolling situation.
David:Okay.
Mike:For other people, I've seen them use fixed indexed annuities. This is tricky, but what they'll do is they'll they'll buy a a fixed indexed annuity that has a 10% penalty free withdrawal. But they just they want enough of their they're replacing their bond funds in their portfolio and put them into fixed indexed annuities because the the index part of it, you've got more growth potential maybe than CDs or treasuries. No downside risk. There's no fees with it.
Mike:It's just you're not gonna make as much money on the good years, but you you won't lose as much on the down years, and you've got this 10% penalty for withdrawal. And so they'll put enough in there that if the markets were to crash, they could cover most of their basis each year with that 10% liquidity.
David:Oh, okay.
Mike:The problem is if you take several years to recover, that ten percent is usually based on the account value. So if you take out 10% and it's growing at 6%, you're getting less money to work with each year. You're kind of going backwards slowly, so that can kind of pinch your ability to maintain this. That makes sense? It's not perfect.
Mike:It's just a way I've seen people do this.
David:Right. It's not growing faster in that product than your withdrawing. Is that what you're saying?
Mike:Yeah. So like the first year, let's say you take out 30,000, so 10% of 300,000. So 30,000 you take out plus your social security, that's enough for your specific situation. Uh-huh. Then the next year, you can't take out 30,000.
Mike:Let's say it grew by 6%. So now maybe you take out and I'm not doing the math in my head right now, just I'm not that good at math. I use calculators. But let's say the next year you're taking out 27,000.
David:Okay.
Mike:Sure. And the next year you're taking out 25,000. Like I get the point. You're gonna be going backwards. It's that might make it more difficult.
David:To sort of maintain
Mike:It's a liquidity issue.
David:Yeah. Okay.
Mike:Okay. Another way that people have used fixed indexed annuities for this is it's called period certain. This is not talked about a lot. So there are some products, most I have found don't offer this anymore. And that's an anecdotal observation.
Mike:I I've never quantified the majority share or whatever, so what But I'm I'm finding these are more and more difficult to find. But you can put your money into a fixed index annuity that should be growing at a reasonable rate of like a bond fund. Again, it's not gonna make you rich, but you can then turn on what's called a five year period certain. So not lifetime income, you are guaranteed to get your money back in five years of structured payments kind of like a CD ladder from a bank except for it's from an insurance company. And so what happens is let's say you put some money into one of these fixed index annuities.
Mike:Maybe the first year it grows by 6%, the next year it grows by 2%, the the next year it grows by 8%, whatever.
David:Okay.
Mike:Okay? I'm not quoting any products here. I'm just giving an example. Yeah. And then in the fourth year, the markets just tank.
Mike:Just horrible. So you turn on your income. Now you're gonna get structured payments in that fourth, fifth, sixth, seventh, eighth year, every month, the same payments, it's not affected your other accounts, so your other accounts now have five years to recover, and you're gonna get these structured payments each year.
David:Mhmm.
Mike:Okay? For five years. If you die in the second year, someone else is gonna get the payments. It's period certain. Yeah.
Mike:You're guaranteed to get it or someone's getting the money. So it's not like that. Well, if I don't live long enough, the insurance company's getting rich. It's just a CD ladder that you can trigger later on. And so some people like this because they're like, well, we don't know when the markets are gonna crash, we don't wanna have it rolling into a treasury fund, we want a bit more growth potential.
Mike:And so they like the fact that they can just turn on the income, five years, their accounts have plenty of time to recover, and it just kind of sails through. That's a protocol.
David:Okay.
Mike:Yeah. Do you see how these are protocols, by the way? It's a system you just follow?
David:System's already set up and it's waiting to be enacted. You just pivot to it when needed. Is that fair to say? Mhmm. Pretty like, seamlessly pivot right to it.
Mike:Yeah. When do you need a first aid kit?
David:Oh, yeah. Well, as soon as I, like, hit my, you know, finger with my hammer or, like, I'm using my table saw and I cut my finger, that's when I need the first aid
Mike:Or when you wreck on your mountain bike.
David:I have needed one then, yes.
Mike:That's true. So you don't need it in times of good, you just need it for when times are bad and it's ignorant to think that times will never be bad. Mhmm. These are bear market protocols. Mhmm.
Mike:There are other ones that like some people will use what are called buffered ETFs. Okay. So a buffered ETF right now, you might get up to 7% growth. So you get up to 7% of the S and P, but next to, like, a lot of downside protection I say a lot of downside protection. Right now, what I'm seeing, these rate rates will change, the first 60% of losses are buffered out as in you don't experience them.
Mike:So if the markets drop 50%, your principal would be roughly protected. You just pay the expense ratio. It's like point 7% a year. If the markets go down 70%, you lost 10%.
David:So there's like a buffer between your principal and your losses.
Mike:Yeah. It takes out. Takes you. Yeah. Okay.
Mike:So what they'll do is instead of the the the treasuries or CD that just kinda roll over, they'll just put into a buffer ETF, little bit more growth potential, but it's not guaranteed growth.
David:Mhmm.
Mike:So maybe over time, you might get an extra average of a percent growth. Maybe. I mean, again, no one can predict future performance. But you just keep it in there, they keep rolling over, and then when the markets go down, you just start tapping into that because they have reasonable liquidity. Like, you could technically take it out whenever you wanted Oh.
Mike:But you wanna take it out right after they renew. And every month, there's they kind of renew. Every month. There's a new buffered ETF every month available.
David:Okay.
Mike:But they renew every year. So you might do like a couple in January, a couple in March, a couple and you can divide it up so you kind of have this rolling quarterly renewal rate or whatever.
David:And so the buffer ETF just in it's like a security and invest in securities?
Mike:Yep. It's technically it's equities. Yeah.
David:Okay. And so so someone in their forties have a buffered ETF? Is it gonna make you rich?
Mike:That's a great question. I would say that's more of a risk suitability standpoint. So emotionally, how should your portfolio be? Do equities make sense? Do you just need some some stability in there?
Mike:And if that's the case, would you look at bond funds? Would you look at buffered ETFs? You wouldn't look at annuities. You're too young for annuities. You don't I don't think there's any reason why you would buy annuities at all, unless you're maybe 55, 60 years old.
David:Okay.
Mike:That's just my opinion. Yeah. You could also look at life insurance. If it's structured correctly, life insurance could act as a similar situation to like a buffered ETF or a fixed index annuity with the life insurance component. There's just you're paying for life insurance.
Mike:You have to also want the death benefit in life insurance features.
David:Mhmm.
Mike:If you don't want to pay for that stuff, don't go there.
David:Alright.
Mike:So we've just touched on a couple of them, and we didn't even talk about, like, laddering them out or bucket strategies or anything like that. There's so many different ways you could you could develop this, but at the end of the day, you've got to have, in my opinion, when you're retired, a bear market protocol. You know exactly what you're gonna do, not if, but when the markets go down, so that you're able to sustain your income without accentuating losses.
David:That's sort of the main critical component, right?
Mike:That's it. If you can have something like that, a lot of terms around it, lot of ways people describe it, but if you can have something like that, then in my opinion, as long as it's implemented correctly, you significantly increase your overall chances of success in retirement. So not outliving your money, getting through market crashes, having a reasonable amount for your estate planning, your legacy, or whatever it might be. So these details do matter. It's not just put the assets in some random arbitrary blend based on your risk portfolio, whatever that actually means.
David:Mhmm.
Mike:And then just kinda figure it out along the way. I don't believe in figuring it out along the way. I believe in having a system before you actually need to implement it. That's all the time we've got for today's show. If you enjoyed the show, consider telling a friend, leaving a rating, and most importantly, that you are subscribed to it so that you don't miss a thing.
Mike:For more resources, including a copy of my book, on demand courses, and so much more, just go to www.retireontime.com. If you want help putting your retirement plan together, go to retireontime.com and click the button that says get started. But seriously, from all of us here at Kedrick Wealth, we wanna thank you for spending your time, your most precious asset with us today. We'll see you in the next episode.