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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.
Welcome to How to Retire on Time, a 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 on Amazon or go to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial advisor, a licensed insurance agent, and a tax professional. In other words, I could actually do your taxes.
Mike:When it comes to financial topics on the show, pretty much talk about anything, and that's really important. We wanna be able to talk about anything. Now that said, please remember this is just a show. Everything you hear should be considered informational as a not financial advice. I don't know you.
Mike:You don't know me. If you want personal financial advice, then request your wealth analysis from my team today, my team of fiduciaries. You can do that by going to www.yourwealthanalysis.com. With me in the studio today is my esteemed colleague, mister David Fransen. David, thanks for being here today.
David:Good morning.
Mike:David's job, his mission is to be the voice of the people. He's gonna be reading off your questions, and I'm gonna do my best to answer them. You can send your questions in at any time by either texting them to 913-363-1234. That's 913 363-1234, or email them to hey mike@howtoretireontime.com. Let's begin.
David:Hey, Mike. I am starting to hear talk about another possible recession. I am 2 years away from when I want to retire. How would you recommend someone who wants to retire soon prepare their portfolio for a potential recession?
Mike:Okay. Yeah. This is, very much a big topic. You may or may not have heard in the news, something called the Sam rule. S a h m is how it's spelled.
Mike:And it's an economist that basically figured out when jobs are going down. There's a certain indicator that happens over a couple of months. If it's triggered, there's a high probability of a recession happening in the near future. Now that sounds scary. It's not as scary as I think a lot of people would realize.
Mike:A recession is defined as 2 quarters of negative GDP output. It's just going down over 2 quarters. It could be slight. It could be great. It just depends.
Mike:Of of just a a moment ago I mean, what was it? Like, last year or 2 years ago, I can't remember exactly. We had 2 negative GDP, quarters. They didn't call it a recession. They said it was an, you know, unconventional or unforeseen time.
Mike:But they made up an excuse to not officially call, but it wasn't it was recession.
David:Okay. Yeah.
Mike:And the same rule called that too. And so we don't know when it will happen. We just know that there is a possible recession on the horizon. A recession is different than a depression. A depression is 4 negative quarters of GDP output.
Mike:So just a little bit longer. But it doesn't talk about the severity of the negative output. It might be slight. It might be great. We don't know.
Mike:What we do know is we can't control the market. What we do know is that the markets tend to correct, so a 10% drop or so on average every 1.8 years. It seems to be happening more than 1.8 years, but, you know, it's just an average. The markets we know do crash, at least historically speaking, every 7 to 8 years, but it's not every 7 to 8 years. So 1987, the market crashed.
Mike:1990, the market crashed. And by the way, let's point out some of the interesting parts of that that moment in time. In 1987 the market crashed because of technology so there's something out there called stop losses basically when the price of a position hits a certain point electronically it would just sell and so if Microsoft or Nvidia or Apple Tesla whatever the company is if it if the price goes down a certain point it would trigger saying just sell I want out and so it created a cascading moment of the market dropping very, very quickly. The market what it fell 20% in a day. I mean, it was very scary.
David:Yeah.
Mike:But then when you look at it, it recovered really quickly. Shortly after that, it was fine. The reason why I bring this up is twofold. 1 is a market can crash pretty quickly, but it can rebound pretty quickly. You can't time the market, and that rebound is important.
Mike:But the second thing is notice the influence of technology.
David:Mhmm.
Mike:When I go on x, when I go on, blogs and other places, it's all about an algorithm. And we use an algorithm for our trades. We wanna take the emotions out of it and and be algorithmic or use a systems based approach.
David:Yeah. We at Kedrec do that. You're saying?
Mike:Yeah. We at Kedrick do that, but many other investors or financial professionals or fund managers have an algorithm or algorithms that they use to make decisions. Many normal investors will use stop loss or other systems computer systems to try and protect themselves people are using chat gpt to make investment decisions I don't think they understand how chat GPT can actually work, how how there's a lag. But Yeah. The reason why I bring this up is, yeah, there there could be more volatility.
Mike:Volatility being defined as the ups and downs of the market due to algorithmic trading. It's very possible. We can trade on our phones that also can there's all sorts of things that can influence trading. Technology can influence these things. And so I wanna highlight that in 2020, it bounced back pretty quickly.
Mike:We printed a lot of money for that. In 2022, it it I think it came back pretty quickly. I mean, it was, what, a 1 year situate I mean, it's it wasn't like 2,000, 2,001, 2,002 was a very long and painful 50% downturn in the market. That's what I'm getting at.
David:Okay.
Mike:1990 , when Iraq invaded Kuwait, that created another market crash. It was kind of a smaller crash. That was a geopolitical event that could not be planned for. So when you think about Ukraine, when you think about Israel, when you think about the Middle East right now, when you think about politics, do politics really affect the stock market? You could argue yes or no.
Mike:Businesses are gonna try and make money regardless.
David:That's their job.
Mike:Yeah. That is literally their job. Yeah. But the fear of the market can also affect it. And so there's a lot of nuance going on into today that is creating fear.
Mike:If you are fearful, then there's a higher chance, in my opinion, that you're gonna make emotional decisions. So when I hear a question like, hey. I'm hearing, talk of another recession. Like, what should I do? Okay.
Mike:Well, what is your system? A system should be able to support your lifestyle plan and still be on track to fulfill your legacy intentions in a recession, in a depression, in an up market, in a down market, in a flat market, in whatever the situation is. When we are adapting ourselves drastically based on the sentiment of the market, it's a very stressful experience. You probably won't sleep well at night. Let's put a framework around this.
Mike:Let's let's kind of build a structure for all those listening in on what they can do. Let's do it. As a rule of thumb, if you have 5 years or more time before your retirement, there's a good chance that you're focused more on growth. Because if the markets were to crash, you still have more than 5 years, you have a good chance to recover from any sort of crash, but you wanna grow, grow, grow, grow. I think of the the, the lunch I had with some brilliant fund managers on Wall Street, some of the most brilliant people I've ever met.
Mike:And they joked about how their colleagues sold in 1997 when the tech was booming, and they missed out on tons of growth because they tried to time the market. You don't try to time the market. Then what you've got, is all those who are 5 years or sooner. So 5 years or less in time for your target retirement date. That is when you start transitioning a portfolio into more protection.
Mike:What do I mean by protection? Well, it could be anything. You could either be taking less risk. I think it's appropriate to consider bond funds at this point, which is crazy to think about. Because from when I started it in my career until 2023, I was against bond funds.
Mike:And the reason is if interest rates are low, bond funds, in my opinion, are risky. Because if interest rates increase, bond funds lose money. But if interest rates are relatively high, and I think it would be reasonable to say that they're at a higher rate now than they would be expected in the future. It's either gonna stay the same or probably go down. That's kind of it.
Mike:If interest rates go down, then bond funds make money. Bond funds have less growth potential, but they have less volatility, less growth. So that's okay. So transitioning maybe more into bond funds could be appropriate. I'm a bit more personally extreme for these situations.
Mike:I think going into actual treasuries would be appropriate. I think in many situations, looking at fixed indexed annuities as a bond or CD alternative. If you have a 5 year time horizon, it might be more appropriate as well and so on. But everyone's different. And so whatever is right for you, that's that's the key here, but you're taking less risk.
Mike:Here's why. There's a rule out there called the rule of 100, and it suggests that your age is basically the percentage of assets you should have in bond funds.
David:Okay.
Mike:The idea is bond funds are less risky. So with less risk, with more age, you can't afford more market crashes. I am against that rule, and here's why. The day you retire is the day that you need them, I believe, the most protection possible that's appropriate for you based on your suitability, based on your comfort level, based on your emotional and economic limits. Let's say that's 60 years old.
Mike:Okay? And you're gonna live to, let's say, 90 years old. So you've got probably 3 to 5 significant market crashes you've gotta get through and maybe a flat market cycle. So let's say you get through one market crash. Now you've got one less probably that you'd have to face.
Mike:You've got less time for income, and let's say your your assets have grown at a nice rate. Things are well. Are you really investing for just yourself? At some point, you might have more money than you can spend based on your lifestyle needs, and you could start transitioning part of your portfolio more towards legacy. Let's say now you're 80 years old.
Mike:Health isn't really well. You might live 5, 6 more years. Would you put all of your assets in in bond funds or most of your assets in bond funds that have lower growth potential? You know that you don't need much more income for a couple of years. Or would you start investing it based on the age and suitability of your kids?
Mike:Am I explaining this okay?
David:Yeah. Yeah.
Mike:This is unconventional.
David:Right. Right. Yeah.
Mike:But to me, it makes all the sense in the world.
David:Yep. No. I think it does too. I mean, yeah, you think about, it just depends on what what you want. Right?
Mike:Depends on what you want and how you wanna allocate it. That's why we say plan your lifestyle and legacy first. When we when we talk about planning efficient portfolios, it's about having them together in harmony of what's going on. Yeah. So all of that to be said, for someone to say I'm 2 years away from retirement.
Mike:Great. In 2 years, the market may crash. The market may just grow like gangbusters. We don't know what's gonna happen. No one knows the future of the market.
Mike:So making sure that the first couple of years, maybe the first 5 years of your retirement, you can draw income from principal guaranteed sources, whether it's CDs, treasuries, fixed or fixed index annuities, or if you have cash value life insurance that you can utilize, maybe that's appropriate. So that if the markets do go down your 1st year of retirement, you're not delaying your retirement start date. You're just taking income from a principal guaranteed source, allowing your other accounts to recover. We call this the reservoir strategy. It's unconventional.
Mike:It's different than locking up assets to an annuitized income stream. You buy an annuity, you turn on the income. We kind of argue against that. It's okay if you want that. It's just you need to understand the cost of that decision.
Mike:And we also disagree with keeping all of your assets at risk. We believe having some assets in a reservoir, it's principle protected. When markets go down, you draw income from that reservoir. That's it.
David:Makes sense.
Mike:Simple as can be. And then you you ladder out some of your income there, and then you could be a little bit more dynamic in how you wanna structure your plan. But, you know, it's the idea what's right for you. Can you do this? Are you stuck with your 401 k?
Mike:Do you need to make adjustments within your 401 k? That's where the nuance really comes into play. But if you're 2 years away from the target retirement you want, there's a reasonable argument saying we're headed to to choppy waters when it comes to our economics, when it comes to our markets. No one knows the future. We can't control the market, but we can control how we plan.
Mike:We can control how we put together our lifestyle and legacy plan. We can control the efficiencies, the strategies that we put together. And we can control how we allocate that portfolio. So So if you're within 5 years of retirement or you're retired and or newly retired, consider the importance of having a certain amount of your assets protected. So when the markets do go down at some point, you can draw income from that resource.
Mike:It's duality. Having a plan for the markets go up and if the markets go down.
David:Yeah. And then you're not being reactive. You've been proactive.
Mike:You gotta be proactive. I cannot emphasize that enough, especially because there's no such thing as a perfect investment product or strategy. Nothing does everything well. We all want growth. We want protection, and we want liquidity, but you get to pick 2.
Mike:So when you consider growth and liquidity, you've got risk. But that's appropriate for a part of your portfolio. Growth is important, so you got the other group, the growth with protection, but you have to give up liquidity for that. And if you're giving up liquidity, then you've gotta be very careful about how you structure the liquidity schedule of those assets, investments, or products so that you don't run into liquidity issues. Basically, what I'm saying is don't go out and buy a bunch of 10 year fixed index annuities.
Mike:That's a bad thing. Don't don't don't. Uh-huh. I can't see many situations where that would make sense. Anyway, if you want to explore this, it is highly nuanced.
Mike:There's a lot of things that can be done, especially in the strategy category, which we didn't really talk about. Go to www.yourwealthanalysis.com. It doesn't cost you a dime, but we can take what you're doing right now, run it through our analysis. It's 2 60 minute visits where we dive deep into the details of what's going on. We kinda show you what the process could look like.
Mike:We actually so this is funny. I'm gonna go down a little bit of a tangent here. I get this a lot. Well, you know, hey. We're gonna come in.
Mike:We want the analysis, but, you know, we we wanna work with you. We just can we just get to the answers? I said, yeah. We'll show you the answers in the analysis. I don't believe in this.
Mike:Well, if you work with us, we'll solve the problems, but we're not gonna tell you until afterwards how to solve the problems. That's stupid. If you wanna work with us, it should be based on mutual trust and respect. Plans change and evolve over time. If you want a relationship, great.
Mike:Whether it's all in, whether it's part in, or you want us to teach you how to manage your assets on your own. I don't really mind either option. Has to be what is right for you. But the analysis we're showing you all of the solutions, we're showing you the strategies. We're we're explaining to you your IRA to Roth conversions.
Mike:It's a comprehensive analysis that often, in my opinion, and what I've heard, offers people more financial clarity than their actual retirement plan that they've already put together. It's pretty vast. So if you want one of these, doesn't cost you a dime, just a little bit of your time, go to www.yourwealthanalysis.com to request yours at no cost. You'll fill out 10 questions, schedule a 30 minute call with me. We'll have a quick chat, and then we'll schedule that analysis.
Mike:Again, that's www.yourwealthanalysis.com. You can also text keyword analysis to 913-363-1234. Again, that's keyword analysis to 913-363-1234. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast.
Mike: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.
David:Learn more about Your Wealth Analysis and what
Mike: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.