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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, the show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire On Time, which you can grab today digitally for free on retireontime.com, or you can go to Amazon and buy a paper copy. My name is Mike Decker. I'm the author of the book, How to Retire On Time, but I'm also a licensed financial adviser, insurance agent, and tax preparer, which means when it comes to financial topics, we can talk about it all. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational, educational, as in not financial advice. If you want financial advice, you can request your wealth analysis from me and my team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Franson. David, thanks for being here. Yep.
Mike:Glad to be here. David's gonna read your questions, and I will do my best to answer them. You can text your questions in at any time during the week by texting (913) 363-1234. Again, that's (913) 363-1234, or you can email us at heyMike@howtoretireontime.com. Let's begin.
David:Hey Mike, I don't like anything locked up for a long term period of time. What are my reservoir options?
Mike:For all those
Mike:who are unfamiliar with the term reservoir, it's our thesis, reservoir or storehouse. The idea is like a city has a reservoir of water in case of drought. We believe people should have a reservoir of principal protected assets so that when the markets go down, you can take income out of those protected accounts while your other assets have time to recover. The idea is simple. Just as the quick explanation for an introduction, if the markets go down 10, it takes 11% of a return to break even, not the end of the world.
Mike:That can happen that same year. But if markets go down 30%, you then need a 43% return to break even. That could take two, three years. If markets go down 30%, which they historically do every seven or eight years, and you took out 4%, you're now down 34%. So you've accentuated the loss.
Mike:Right? Lost money, took money out to pay the bills. If you're down 34%, it's a 50% return to breakeven. That could take five years to recover, assuming you don't take income out for those five years following. And those are averages anything could happen.
Mike:If the markets and your assets go down 50%, that's a % return to break even. You're not walking away from that lightly. So the idea is simple, and admittedly, a lot of this came from the bible, the story of Joseph in Egypt, Seven Years of plenty, seven years of famine. Work allowed us to say, those were our years of plenty. You've got to have then some grains in the storehouse so that when the markets go down, you can eat the grains, or when the markets go down, you can take the grains and plant again and recover.
Mike:There are many layers of principles here, whether it's the reservoir in the city, whether it's the biblical story of Joseph in Egypt and the seven years of famine and all that. But the idea is no one knows the future of the market. So we have to explore what are your options for principal protected accounts for when the markets not if, but when the markets go down. You with me so far?
David:I'm with you. I'm following.
Mike:So what are your options? You've got CDs, treasuries, fixed index annuities, cash value life insurance, like index universal life insurance, buffered ETFs, or structured notes. All of these assets, they offer you growth potential and protection, but you have to give up liquidity. It is economically impossible to offer you protection, liquidity, and growth. Cannot happen the second you think it's happening, you're missing something or you're getting sold something.
Mike:Don't fall for it. Can't happen. And the reason is to offer that protection and growth potential, whether it's the insurance company, the bank, whoever it is, has to line up structured products with contracts that are long term to offer you that growth potential with protection. Can't magically happen. So many people struggle with liquidity because they have control issues.
Mike:I've got no problem with that. Our experiences in life have shaped our behavior. Our behavior is what dictates our results. If you can't get past this idea that you have to give up some control, some liquidity, you have to have protection, you're either stuck with no growth and protection or growth and liquidity, but no protection. It's a problematic situation.
Mike:So I see this from time to time. It's not a huge deal. It's just you need to know that you're going to be subject to reinvestment risk. Here's an easy example. Let's say you buy a five year CD, and that's your reservoir.
Mike:Okay? Five year CDs aren't very competitive. It is what it is. K? And in five years, interest rates have dropped.
Mike:Let's say in the fourth year, the markets crash, interest rates go down, the ten year treasury goes down. We're back in a time like February to 02/2010. So your five year CD, let's give an arbitrary made up rate of 4%, is gonna roll over to 1%. That's called reinvestment risk. That's a problem.
Mike:So that's why I believe it makes sense to ladder out one year maturities to three years to five years to seven years to ten years, so you've got enough liquidity slowly coming due that you can use it. Or if you just have extra money in your reservoir, you don't need that much protection, then you can slowly drain it. What do I mean by you don't need that much protection? The day you retire, you've got roughly thirty years of life left, all things being equal. Right?
Mike:Arbitrary number. Okay. So that means you've got, let's say, three or four market crashes to go. Halfway through retirement, you've got maybe two market crashes to go. So that means you don't need to have enough in your reservoir for four market crashes.
Mike:Roughly, it's like two. So the deeper you get into retirement, the less protection I think people actually need. I know that goes against conventional wisdom with the rule of 100. The older you get, the more protection you need. Mhmm.
Mike:Doctor. Wade Pfau did some research, and he's in harmony with what I'm suggesting. So it's always nice to have confirmation bias from a doctor, a PhD. But what I'm getting at is, okay. If you can't handle illiquidity for a longer term period of time, then look for certainty.
Mike:Maybe you look at some fixed annuities, which offer you a fixed rate. I don't know. Whatever the going rate is, five or 6% for maybe a four, five, six year period of time, and you're just laddering out that certainty. Yeah. You've got less growth potential perhaps than a structured note or a fixed index duty or index universal life insurance, but it's still protection when you need it.
David:Sure. And so the ladder is you're climbing the rungs of the ladder, that's sort of you passing through time, and then, oh, here, I get this money this year, and you keep going up the ladder, and then here's this money this year. Is that kinda what
Mike:that Yeah. Think of buckets and ladders. Okay. What's due and what's available at certain times. Okay.
Mike:A buffered ETF, it's great for a year over year return. Right? So you've got up to 7% in today's rates for most of them that I see if you want a % protection. So you get up to 7%. The S and P goes up 10%.
Mike:You got 7%. The S and P goes 5%. You get 5%. If the S and P goes down negative 20%, you get zero. You don't lose money, but you don't make money.
David:And so that's where the buffer comes in. You're buffered from loss, or you're sort of buffered from really high gains.
Mike:Yeah. Yeah. You're just taking a little bit and then giving the rest away. It's done through contracts, option trade offs and so on. Yeah.
Mike:Yeah. There's no such thing as a perfect investment product or strategy. But all that said, the idea is is pretty straightforward. You've got this structure that allows you to have growth potential, but you're hedging against the downside risk so that when the markets go down, you know you can take income from these assets, from these investments or products without accentuating losses. So you can blend some longer term fixed, like a CD, and you know what you're gonna get, so there's some clarity there.
Mike:But you might be giving up some returns, and you might not be giving up some returns. You just don't know. There's always a potential reward, but a cost associated with it. Not a literal cost, but, you know, opportunity cost, so to speak. Blend them together, understand what that looks like, and then maybe you just slowly maintain a certain amount of the buffer.
Mike:Not the buffered ETF, but the reservoir or the storehouse. That there's just enough that's there for two market crashes, and that that rolls over time after time after time. That would be appropriate. I think that that would make sense. It gets more technical from a managerial standpoint to be able to navigate that because you don't know the future.
Mike:So you're banking on these recoveries, and that you'll have enough of the recovery that you can refill what you need. That's the risk that you're taking. But buffered ETF structured notes and fixed products, whether it's CDs, bonds, and or fixed annuities like MYGAs, those could work in that sense. You gotta do what is right for you, explore your options, and then go from there, but that's roughly what it could look like. 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 podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax 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.