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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.
Hey, thanks for joining. Here's a question I was recently asked on my show, how to retire on time. Take a look. Alright. We got questions popping in here.
Mike:Let's just take it one at a time, shall we?
David:That sounds good.
Mike:Alright. So the first one here is from Scott. He's asking about sequence of returns risk especially retiring in the early fifties.
David:Oh, like your age early fifties not retiring in the nineteen fifties?
Mike:Yeah. I'm assuming.
David:That was a different thing.
Mike:Yeah. So there's a really cool thing happening right now called the FIRE movement.
David:Oh, yeah. I don't think we've talked
Mike:about it before on
David:the Is that Financial Independence Retire Early? Yeah.
Mike:Yeah. Yeah. I've seen them on YouTube. Everyone loves a good acronym. Yeah.
Mike:Works well too. So FIRE is wonderful because it prioritizes people's time over trying to become the richest person in the graveyard. Right. The the part that hangs me up a little bit is the longevity risk. And you can't really, like, let's say go buy an income annuity in your fifties and hedge against that longevity risk.
Mike:That's a different equation. You buy it in your sixties, that's different. If you're in your fifties, you could take IRA funds, buy an annuity and turn it on, but I don't know insurance companies are gonna pay you a reasonable rate for the rest of your life.
David:Yeah. That's a lot of life to pay.
Mike:That's a lot of life to pay. So, you have to, in my opinion, be very growth oriented. Here is how I like to see it typically done. Now these are broad brushes. Okay?
Mike:So don't go home and just do this.
David:Okay. Yep. That's why
Mike:the planning process exists because there's a number of factors. But one ask yourself, is it you or do you have a spouse? If you're married, you're gonna handle this differently if it's your individual. Okay? If you're married, you might want to have some sort of form of life insurance, whether it's term life insurance or indexed universal life, in case you were to pass sooner than, let's say 65, because the surviving spouse gets a massive bump from the death benefit, that helps hedge against longevity risk.
Mike:Okay? Because you're not getting two social securities. You're retiring early and you planned on two social securities and now you're only gonna one. So, there's certain longevity factors just to be aware of. And you can get term pretty cheap Mhmm.
Mike:All things considered, if you're in your fifties to get you closer to, you know, 65 or so. Yeah. Just a thought. But, assuming, let's say you're by yourself. Okay.
Mike:It's You've got to first navigate the rule of 55. Rule of 55 says if you retire after the, you know, age of 55 or so, you can tap into your four zero one k, as long as the funds are still in your four zero one k. As long as the funds are still in your four zero one k at the time you retire and you don't roll into an IRA, you can take it out without that 10% penalty.
David:Oh, right. Okay. It'll still count as income but it just The problem. Yeah. Back on that.
Mike:But the problem is, a lot of these four zero one k's are heavily restrictive.
David:You
Mike:can't do proper investment picking, in my opinion, in most four zero one k's because they have like the target fund here, and an arbitrary mutual fund here, and that's So, kind of I've joked with some people, get a job right before you want to retire with someone that has a four zero one ks with a brokerage link. Which then gives you basically full access to what you could buy publicly traded. Oh. You know, you could do buffered ETFs in here. You could do all sorts of other things.
Mike:That's gonna help you have more investment options than a restrictive four zero one ks. So you're kind of setting yourself up to keep funds in your four zero one ks, and then pick the right investments.
David:Alright.
Mike:It's very difficult to maintain retirement with most four zero one k options, at least in my opinion.
David:Yeah. Because you get this menu that's very abbreviated, right, of just, these mutual funds and
Mike:And then here's here's first part. I call them the reserves. This is what I talk about in the book, How to Retire On Time, specifically in chapter four. You need to have something that has growth potential that has more growth potential than bond funds or CDs, but has very little if not no downside risk. Very few buffered ETFs offer this.
Mike:You probably can't use index annuities to do this. You're operating within a very restrictive kind of few investment options in your four zero one k to generate your income. But you could do it. To get rid of sequence of returns risk, you need to have, let's say for easy math, half your portfolio that can't lose money and the other half that can but has more growth potential. Now, is essentially the 4% rule reinvented.
Mike:The 4% rule said 50% bond funds, 50% stocks, take out 4%, you should be fine. Well, if you're 50 or early fifties, or so, let's say 55 years old, you can operate within the, the rule of 55. 50% maybe in buffered ETFs, or maybe more than half of that allocation is in ones that can't lose money. And then the other half, or the other part of it has maybe more upside potential, then you've this long term stocks. Because it's this simple.
Mike:I said all of that to give you the trick here. Alright. If markets go down and you have assets that are protected, they can't lose money, you just take income from those assets and let your other accounts recover. That's how you solve sequence of returns risk.
David:That's it. Seems fairly simple.
Mike:It's simple, but it's very difficult to execute.
David:Because?
Mike:Because it's in the moment. And you're going to probably second guess, is this still going to work?
David:Oh, yeah.
Mike:When you see half your portfolio going down 3040%.
David:Uh-huh.
Mike:Now, your your overall portfolio might be down like 25% or so Yeah. Of your life savings that has to last. You can tell yourself, oh, markets have always recovered, but you don't know how long until it starts recovering. Yeah. And you you start getting mind games.
David:That would be tough.
Mike:It is tough. You have to follow systems and not sentiment. But just like a city has a reservoir of water in case of a drought, if you have a significant portion and the day you retire is probably the most you want in your reserves. If you have a a portion of your assets that can't lose money, so that you can take income from that source while your other accounts who are that are down have time to recover, that's kind of how you can solve sequence of returns risk in a very dynamic way. Now, should you just arbitrarily do that portfolio strategy?
Mike:Absolutely not. You're going to want to hedge different bets. You're gonna wanna look at the tax planning. You're gonna wanna segment the how do you take income from the day you retire to 60 years old, and then 60 to 65, and then 65 to 75, and so on and so forth. Have different seasons and different methodologies, and have different backup plans.
Mike:It's a very complicated plan, but I love helping people retire early because they get more time, their most precious asset. It's just different. You're using different strategies. And there's other tax code in here. You've got We talked about the rule of 55.
Mike:You've got 72 t. You've got 72 q. You 72 is the line of the tax code. By the way, that talks about when you take money out of an IRA, what you can and can't do.
David:Oh, okay.
Mike:A lot of it's misunderstood. Yes. But Scott, and to all those who wanna retire early, the answer is you can. As long as you've saved enough, you can live within your means, and there's a system in place to solve sequence of returns risk. And one quick, I guess, cautionary tale.
Mike:I know there are ETFs out there that pay a great cover call income. I know there are real estate deals paying nine plus percent in quote unquote income. Just remember, they pay until they don't. Mhmm. And when they don't have If you haven't prepared for it, you are in a tough spot.
Mike:Right. And you don't wanna be there. Real estate for example. A lot of these deals are callable. They're gonna pay 9% until the rates shift.
Mike:Let's say interest rates go down, they can reissue and they can pay 6% to new issues. So, they're gonna give you your money back and they don't need to pay you that 9% anymore. They're gonna pay you 6% now moving forward. You just lost a third of your income. Uh-huh.
Mike:Be very careful with product pitches. It doesn't make the instrument wrong. You just can't leave yourself that exposed, especially for longevity reasons. So, you're getting fancy with low risk assets and how you're structuring it. Scott, let me know if that resonates or if you got follow-up questions.
Mike:Alright. This next one's with I love it. Yeah. People, people You're welcome, Scott. He says thank you.
Mike:Alright. Love it. Alright. This next one comes from Mike. If we face hyperinflation such as the nineteen thirties in Europe, very tough time.
Mike:What are the safest instruments? So, this is a tricky one. But as a general rule, it's your assets in the market Mhmm. That are gonna help hedge against inflation. Think about it.
Mike:When we printed lots of money because of the pandemic Yeah. Where did it go? It went to people's pockets. Then where did it go? They spent it.
Mike:Some of them saved it and invested it which boosted the stock market, others spent it. Where when you spend money, where does it go? It goes to the business. And then the businesses circulate and because we have basically overemphasized the large companies, it slowly made its way up to the large US companies.
David:Right. Like your Home Depots and your Home Depot was killer. Yeah. That's I remember that. Everybody got that cash and then they Yeah.
David:Did remodeling work. Right?
Mike:Yeah. GameStop, that was wasn't real. That was more hype.
David:But Right.
Mike:But assets in the market is how you hedge against inflation. Assets in fixed accounts, whether it's fixed lifetime income, right? Like an annuity or a CD ladder or a MYGA ladder or anything low risk is what has inflation risk. So, in my mind, it's appropriate to blend between market risk and you've you've lined up your short term risks. Market risks specifically, that you never take income from an account that's lost money.
Mike:Never lock in those losses. Mhmm. So in the short term, your spending is taken care of by protected accounts, while long term you're hedging against inflation. You know, the yin and yang kind of symbol?
David:Yeah. Do. A lot
Mike:of people think it's paradoxical. They're at odds with each other. It's not right. They're actually It's a beautiful harmony of two opposites that are complementing each other.
David:Mhmm.
Mike:Yeah. When I think of paradoxes, one of my favorites is the paradox of speech. You can be frank or you can be diplomatic.
David:Mhmm.
Mike:If you're all frank, you're blunt.
David:Yeah.
Mike:And people don't necessarily wanna talk with you.
David:Yeah. Yeah.
Mike:If you're all diplomatic, you're evasive, you're a politician. People don't really wanna talk with you. Yeah. But if you can blend being frank and diplomatic, you've got forthright diplomacy. It's a beautiful balance.
Mike:When you look at financial planning or retirement planning, you need to have a balance of hedging against market risk and hedging against inflation risk. It's a beautiful balance. And too often, we're stuck in that spot of the markets are gonna crash, so I'm gonna go all against market risk and put myself in all in inflation risk. Or risk means reward. I'm gonna put myself all at, you know, I'm gonna get rid of inflation I'm now all in market risk.
Mike:Finance is about balancing paradoxes. If you're listening in on this and you're going, gosh, I wanna do on my own, but just want some guidelines. Look, if you go to retireontime.com, subscribe to our newsletter, you'll be a part of our first wave of our public subscribers. This is something we've held for our private clients. This is something we've been holding for a very special group of people, but we're making it more public for for anyone that wants access.
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