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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 retirement questions. We're here to move past that oversimplified advice and get into the nitty gritty. As always, text your questions to (913) 363-1234. Again, (913) 363-1234. And remember, this show is just a show.
Mike:It's not financial advice, so make sure you do your research. David, what do we got today?
David:Hey, Mike. I don't want any risk and currently have all my money in a money market. If I gave it to an adviser, could they grow it better without any risk?
Mike:This is a very perplexing question, and here's why.
David:Okay.
Mike:What is risk? Let me ask you, David. What is risk? Yeah. I guess It's not existential.
David:When you're talking about risk, there's some sort of danger. Right? Yeah. Like, oh, if I'm riding a bike, I have risk of falling over and hitting my head, so I put on a helmet.
Mike:In finance, it'd be loss of money. Yes. There's a pain or something negative that can happen, a negative consequence.
David:Okay. Yeah. That sounds well defined.
Mike:So if you're afraid of risk and you put your money in the market, you're scared of market risk. And then you're either not scared of or ignorant of inflation risk.
David:Yeah.
Mike:So you have to understand there is no such thing as a perfect investment product or strategy. There is no such thing as a riskless retirement. You need to accept that in life, there's all gonna be risk. There's going to be something that you have to address. There's gonna be demons ahead of you that you'll need to face in order to create a healthy plan.
Mike:So let's take our example here. He's got what all of his assets, like a money market or some
David:Everything's in money market.
Mike:Okay. So this question brings me back to an example. So someone I know, years and years, like, over a decade ago, said, hey. I want low risk. I don't want any risk.
Mike:Tells the adviser, don't want any risk. What do you have for me? And this adviser, based on if you look at the details, his job is to put you in some sort of fund. So what does he do? He does the best that he can.
Mike:He's gotta get paid, but he does the best that he can, and he puts this person into very low risk bond funds. But when interest rates go up, bond funds lose money.
David:And how is that? Just, like, really quick sidebar. Yeah.
Mike:So if interest rates go up, right, new debt issuance, so, like, new bonds are paying a higher coupon rate than your old bonds.
David:Oh, right.
Mike:Right. So think of it this way. This is my chicken analogy. If you bought a chicken for a thousand bucks and give you three eggs a week, you know exactly what you're expecting. Let's say foxes can't get to it safe, it's secure, whatever.
Mike:And then next week, they're selling chickens for a thousand dollars. They're gonna give you five eggs every single week. Which chicken do you want more? Well, if it's the same price for the chicken, but one gives you two eggs more every single week, you're going to naturally want a higher yield. So when interest rates go up, basically, it's new chickens laying more eggs.
Mike:So all the people that bought a chicken that's laying three eggs, they're gonna have to sell it at a discount to compensate for the lost eggs that they would have gotten if they just bought a new chicken.
David:So that's the risk in investing in bond funds?
Mike:In bond funds. Okay. Yeah. They're actively trading bonds. So because of that, if interest rates go up, they're selling old chickens, trying to buy new chickens, and that creates a loss.
Mike:So this person wanted no risk. They went into a low risk. It went down. They panicked. They didn't like it.
Mike:They didn't understand it. They didn't have experience in the market. It was not explained well to them, and so then they went back and just stuck everything in the high yield savings account. And that's all they've done ever since.
David:Yeah. And what's the risk in that?
Mike:Inflation risk. If your funds are not in a qualified account, such a retirement account, like IRA or Roth, your growth is taxes, income tax. That's line two b of the tax code or not tax code, but your ten forty. Sure. Two b is taxable interest.
Mike:So every like, let's say you got a 4% interest every year. What's your effective tax rate? That's kind of what you're paying on that interest rate. But the crux of this question, there's two problems that need to be addressed. Let's do the first one, the expectation of an adviser.
Mike:Okay? When you have an adviser and you ask them, hey. Can you get more money from a high yield savings account? The adviser who is sales focused, their job is to acquire more assets, will probably say, absolutely. We could probably do that, but you can't guarantee results.
Mike:I'm not saying any advisor would say, we can guarantee results, because no one really does that. And if they do that, let someone know Yeah. That's illegal to promise returns. Uh-huh. Even to suggest or infer that, yeah, we're going to get around here.
Mike:You can say, historically, this is what we have done, but we can't promise you future performance. We don't know what the future market has. Our job is to be an adviser and manage it to the best of our abilities, to give you the best return based on your risk suitability. That's like saying, hey, I want medication with only benefits and no side effects. Well, that doesn't exist.
Mike:Right? So there's always side effects. There's always risks associated with it. So if you ask an adviser saying, hey, I've got it in a high yield savings account or a low risk bond fund. I want more money, but I want no risk.
Mike:The adviser is absolutely compromised, and the reason is twofold. One is if the adviser puts it in the market, there's risk, and the person has said, I don't want any risk. That's compromised. The whole situation's now is gone off the rails because you can't put it in the stock market, in ETFs, in bond funds, or any of these things, and still do what the client asked. The adviser is compromised.
Mike:And the person might say, well, can you give me a more realistic like, just paint the picture. In ten years, what would it be like? That's an oversimplification of their emotional state, because it's not in ten years people aren't actually emotionally resolved. They're emotional. People are emotional.
Mike:So in the first year, the markets tanked. Well, we had the conversation in ten years, it should be up. That could be a true statement. It probably is a true statement. But along the journey, they might get pissed.
Mike:Maybe it wasn't totally suitable for them. So the advisers absolutely compromise, because if you do try to grow it, there's risk. Now you might say, well, Mike, there's other things you could grow without risk. Yes. If you want a CD, maybe you could put it into a CD, or let's say you could do a treasury, any bond instrument depending on the credit rating of it, so like a corporate bond if you want.
Mike:You could do a fixed annuity. A lot of people don't realize that a fixed annuity is a CD from an insurance company as long as you're 60 years old or older.
David:Okay.
Mike:Like, it's just a CD from an insurance company. You don't need to turn on income. Right? There's no fees. It's just put it in here for a certain amount of years, and it grows at that fixed rate.
Mike:That's it. Okay. Really boring. Yeah. Doesn't pay much of the commission, so I don't think they're talked about a lot either.
Mike:But if you put your money into a fixed investment or product as such, why would you pay an adviser fees?
David:Oh, I heard.
Mike:Therein lies the complicated bit. Yeah. If you put something into a indexed product, so a buffered ETF, so it has buffered protection. So whether it's some of the downsides protected or most or all or certain thresholds protected, you've got limited upside. There needs to be a realistic expectation that some years you'll make some money, some years you might not.
Mike:It just depends on the market. But what are you paying the adviser for at that point? Mhmm. Because you just let it sit there. Yeah.
Mike:So the idea of asking an adviser to make you more money with no risk, all the things that you could offer that have no risk, do not rationalize any sort of ongoing fee. It would be a one time service. Here's some recommendations. Here's what you could do. Now there's really nothing I can do at this point.
David:Because it's it's fixed. The adviser isn't managing anything. Or she is not moving money
Mike:you actively trade it, you're creating risk.
David:So they wouldn't it wouldn't be suitable for someone who is risk averse.
Mike:Now if you pose this question to an insurance agent, or maybe they're duly licensed, so they have securities license and an insurance license, It's got annuity sales all over it, which may or may not be right for this person. I don't wanna suggest anything, but by definition, an annuity is transferring longevity risk to an insurance company, and maybe this person's going, hey. I just want stable income. Great. Maybe the annuity is right for you as long as you're okay taking inflation risk and tax risk.
Mike:Because if taxes go up, your income goes down. Right? It's all about net income. Mhmm. But if they're already keeping their money in a high yield savings account, that's it.
Mike:Maybe they're already okay with those risks, or maybe they didn't even realize it. Now is that extensive of a conversation going to happen? Probably not. That's the sad truth. But you need to be aware of that.
Mike:In addition to that, you might be like, well, a fixed index annuity, you've got more upside potential. No downside risk, and you can pull out 10% whenever you want. That is true. Make sure there's liquidity risk. You got to address liquidity risk.
Mike:So what if you need more than 10%? What are the other needs? So when someone asks a question like that, it sets up the adviser to either give you a product pitch without doing a full suitability review. I know we're supposed to. I just understand that it's not.
Mike:We wanna live in a utopic society, but the reality is I don't think there's proper vetting of these products before they're placed, because the people come into my office, and they complain about, I didn't know x y z, or I didn't realize this was a risk. I didn't realize it could go this way. So because of my anecdotal experience of having to clean up other people's messes, I'm not so optimistic about it. Then why would you pay adviser fees for the ongoing service? That's on the adviser side.
Mike:Now if this person ends up in an annuity and the proper conversations there, maybe that's appropriate for them. Maybe they split some funds. Maybe they do a hybrid. Don't know. There's many ways that could be done, but ongoing management fees in that situation, I don't see it making sense.
David:So did we answer the question then? Nope. We haven't. Okay.
Mike:Now let's get to the real stuff here. Yeah. This is where it's important, and I hope everyone listening, whether it's on YouTube, podcast, this is the part where we're ten minutes or so into the show. This is where you bookmark it, and you listen to this over and over again. This is your unofficial therapy for the day.
Mike:Ugh. K? Not a therapist. But almost without exception, when someone asks me this question, I say, what happened historically that caused you to fear the market so much?
David:Oh, good question.
Mike:And almost unanimously, it says, when I started investing, the markets kept going down, and I have avoided it ever since.
David:Oh, right. They have that sort of past trauma of they just have those memories of, oh, I just watch my balance go down or stay flat. Unresolved trauma. Yes.
Mike:And if you do not resolve your trauma, whether it's related to investments, whether it's related to relationships, whether it's related to self doubt, maybe someone bullied you in your childhood, and these are demons. These are traumatic experiences that weigh on you for the rest of your life unless they're addressed. Here's my framework. It's rather simple. Your history, your past experiences, and how you've perceived them shape your habits.
Mike:Your habits are behavioral systems that basically predict what you're going to do in any given moment. So if someone aggressively speaks to you, your habit will be either to shut down or to try and speak louder. That is a habit. It's a behavioral reaction to the situation. Those who are happy, those who have amassed extra wealth, those who have healthy relationships, they have healthy habits that have created a very happy habitat, just a general lifestyle.
Mike:Those who have had a history, trauma that was unresolved, created habits that has caused them to infinitely live a lower quality of life, comparative to if had they resolved them. There are some horrible things that happen. I am not minimizing trauma. I'm not minimizing that some people have had some very messed up experiences in their life, and I can't explain why it happens. All I can say is things happen, and it is our individual responsibility to address them.
Mike:Why am I saying this? Because everyone that comes to my office has a bias. And every time that bias is traced back to a historical moment or series of moments that has either distorted their perception of something where they've then compounded this idea, and then they're walking to my office not defining things as they are, but as they want them to be, and it's leading them to a riskier retirement than they realize. Your history, your past, dictates your habits, your ability to make decisions, your behavior, or your systems that then dictate your outcome. And too often, people are not addressing their trauma.
Mike:They're not addressing their past that's distorting their reality. It's easier to say, I don't care. I just want this, as opposed to healing and becoming a better version of yourself. And so when you understand what a healthy portfolio looks like, what healthy conversations around your finances looks like, when you have that baseline, a lot of people become uncomfortable because you're being asked to heal. You're being asked to be a better version of yourself, and that means giving up some of your, let's say, biased addictions.
Mike:The addiction to perceive things in a certain way. You ever met someone that's like, the world's always out to get me?
David:True. Yeah.
Mike:You ever met someone that's just the world's my always everything always works out? Yeah. Those are polar opposites. Yeah. And that juxtaposition, they're both so imbalanced that whether they realize it or not, it's hurting them.
David:And so have you seen in your career someone who maybe they take your advice, they get the healthy portfolio, they have some discomfort at first, but have they sort of worked with you and get to the other side? How did their life get better?
Mike:They have now permission to live. Some of my wealthiest clients, and even some family members that have done well for themselves, are so frugal. They're so uncomfortable spending money that they'll take the red solo cup, and they'll wash it. Yep. And we've got people at the office now laughing about this because they know even the family members that do this.
Mike:Uh-huh. K? But it's funny because there are many clients that we have that are so frugal. They don't wanna waste anything. Now they have multiple millions of dollars.
Mike:They can't spend all their money, but they're so uncomfortable even going on a vacation because it might be a bad steward of their money. It's an unhealthy relationship with money. And so a lot of the times, we have to work through then how do you budget, not to prevent you from overspending, but to force you to spend and create meaning to your money. You don't need to spend it on yourself, but you need to spend it in some way. Maybe that's creating an endowment that in perpetuity is spending money for technical schools, college educations, professional trainings, whatever it is.
Mike:Maybe it's saying, hey, here's $50,000 you're supposed to spend every year, and you're being forced to spend it. What do you wanna do? It's like, well, I don't really know. And then we explore those options, And maybe it's like, hey, there's a couple of families that are really in need, or maybe it's we're gonna do a family vacation and create a memory that they'll remember forever. Yeah.
Mike:When people think budgets, sometimes a budget is restriction. The other times, it's forcing you to do something. Think about it this way. Many of us struggle eating healthy. I'll I'll admit, I have my bouts where I'm a bit gluttonous, and as we go into the holiday season right now
David:Oh, yeah.
Mike:I'm gonna help me. Goodness. When you're trying to be healthy, there's really two options. One is you wanna lean down, so you wanna shed the fat. And another one might be, and this includes the retirees, gaining muscle mass.
Mike:So I think it's like mid thirties is when you start actually losing your muscle mass unless you deliberately try to trigger your muscle mass. So you might be in your fifties or sixties saying, gosh, I'm more frail than I want to. I need to build muscle mass. Mhmm. You cannot have the same diet and accomplish both those goals.
Mike:You either have a calorie deficit to shed the weight, or you have a calorie surplus to gain muscle mass.
David:And so we're transposing that onto, like, in a budget situation?
Mike:But notice yeah. There's a difference on the intake of calories. There's a difference on how you're spending money. But notice it's all based on principles. It's all based on precepts, frameworks.
Mike:Yeah. What does it look like to have a healthy relationship with money? What does the conversation need to be? And then you need to add to that, can you define things as they are? If I show you a hammer, you can most people can define what a hammer is.
Mike:Mhmm. A hammer is a device to put nails into walls or to pull nails out. Right. A hammer was not invented to hit your thumb. And I'm I'm doing this a little bit in a joking manner Sure.
Mike:To just illustrate a point. Maybe you have a horrible time hitting nails, and you keep hitting your thumbs. That's not what was intended. Define things as they are, and then you can have a healthier conversation of what do you actually want. At the end of it, we typically ask for a certain result for the conditions that we need to accept to get that result.
Mike:We all want growth, protection, and liquidity. No investment offers at all. So how much should be in growth and protection? How much giving up liquidity? How much should be protection and liquids?
Mike:You know, like your emergency fund. And how much is growth and liquid, but has risk? It's not protected. And then are you okay with those mini portfolios, knowing that some of it has certain detriments? Knowing that some of it has certain timelines.
Mike:But then you start doing exercises, and we have clients actually come in not for therapy, because we're not therapists, but for coaching, where they walk through and they reiterate and rearticulate their plan, and we start doing exercises to say, well, what if this were to happen? Because they're scared to death of the next market crash. And I say, okay. If the markets were to here's your list of accounts. Now where are gonna pull your income?
Mike:We can liquidity. The protocol
David:Yeah. To follow. The playbook.
Mike:Yeah. And as they start to learn it, as they start to envision it, what they're doing is they're changing their behavior, their habits, so that when something happens, they're not going back to previous habits based on traumatic experiences. They've redefined. They've got new neurological pathways in their head. They know what to do in that moment, and they're comfortable with that.
Mike:Yeah. It takes work to do. But what that person asked is basically saying, hey, I want an unhealthy relationship with my adviser, who is either gonna take advantage of me or sell a product, and I also want a portfolio that is not healthy, because I'm only concerned about one risk, and I'm completely ignorant to all the other risks. Advisor, take advantage of my situation. And I don't know a single advisor in the country, and I coached advisors all over the country.
Mike:I've been on many panels speaking. I've been the keynote speaker of different events. I don't know a single adviser that would say what I just said in the country. You have to push back when it comes to your money. And if you don't push back, that's when people end up in crappy situations with illiquid assets that aren't serving their needs, when their lifestyle and legacy goals are not properly aligned with their plan and portfolio, when people are getting into tough spots, and sometimes you might not realize you're heading that direction until ten or thirty years later, and then you're kinda stuck.
Mike:If you have an emotional resistance towards anything financially related, what if you could become neutral and define it as it is? That doesn't mean you need it. That means you can define the investment or product as is. What if instead of you saying, well, this is what my work income is, I'm just gonna make everything work in life. What if you deliberately designed your next phase of life, figured out how much that would cost, and then started putting your plan together, then you started putting together your strategies, and then you looked at the investments or products that would fulfill your plan and your strategies.
Mike:There's a certain sequence that has to be done for this to work, and too often, it's in the first or second visit. Here's something that just helps you grow your money. You've made enough. Don't worry about it. You're fine.
Mike:Now go live your life, whatever you want. We'll just figure it out along the way. That's a great way to live in chaos and uncertainty, which creates a lot of emotional distress, especially for someone that's had a traumatic experience no matter how big or small it is when it comes to their money. We need to work through these things, and the financial advisers need to do people a service in slowing down and having more deliberate conversations like this. 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 podcasts. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing 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.