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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. Say goodbye to oversimplified advice you've heard hundreds of times. This show's all about getting down to the nitty gritty. As always, you can your questions to (913) 363-1234. And remember, this is just a show, not financial advice.
Mike:David, what have we got today?
David:Hey, Mike. Can you create a retirement plan using only liquid investments? Yes. You can, but there is a cost. So define liquid investments.
David:What are we talking about
Mike:So liquid investments are gonna be basically, you can get access to the cash or capital within, let's say, three days.
David:Okay.
Mike:Because if you sell a stock, it's gotta settle.
David:Right. Right. Right. Okay.
Mike:Right? You move funds over, it's gotta settle. You write a check, but within three days, most things will settle. K. So we all really want, at the end of the day, three things.
Mike:We want growth, we want protection, and we want liquidity. Can you
David:have all three? No. Oh, darn it.
Mike:Some people will argue that cash value life insurance, like index universal life, is the quote, quote perfect investment. It's not. First off, life insurance is not an investment. Second off, you are often capped or limited on the upside potential. Life insurance is not gonna grow faster than the stock market.
Mike:K? You might have some protection in there, but you're paying fees for life insurance, and you're also limited on the upside growth. You cannot have your cake eat it too. You cannot have growth protection and liquidity. So the question and by the way, that whole life insurance bit Uh-huh.
Mike:Is because a lot of people will do unfair comparisons to make themselves look better. Look. I'm not a runner, but if you compare my running abilities to my five year old, I'm gonna look really good.
David:Right. Right.
Mike:Right. Compare me to an Olympic athlete, it's like I'm standing still. Sure. So a lot of these comparisons are often very manipulative to make something look better than it actually is if we wanna define things objectively.
David:Alright.
Mike:So the question really means if markets only went up, it's a nonissue because you put everything in liquid assets in the market. It only grows, and you take income off the growth, and you're fine. What do you do when the markets go down? You can either keep everything liquid in the market, and when the markets go down, you accentuate your losses. Right.
Mike:So if your accounts go down 30%, you would need a 43% return to break even. That would take two, three, maybe four years. If the markets go down 30% or your accounts go down 30% and you take out 4%, you're now down 34%, that would require a 50% return to break even that may take four or five years. Now let's say it's another 02/2001 and o two situation. Markets are down 50% over three years.
Mike:Let's say you didn't touch anything. You would need a 100% return just to break even. So that's all that risk, and that's a reality. The markets, they go down 10% every 1.8 years or so. They crash every seven or eight years, and they go flat every twenty years or so for over ten years.
Mike:What are you gonna do with that? Just try and outpace the markets? Doesn't work. No. So then you've got this other situation.
Mike:Okay. You need some protection, and you want liquidity. So if you want liquidity and protection, you have to give up growth. You see how that works? You want growth and liquidity, you give up protection.
Mike:You want protection and liquidity, you give up growth. You have to give up something in this triangle of options.
David:Yeah. You get two out of three every time, but never three out of three.
Mike:So now your assets, they're there to help you get through a market crash, but how many years do you need it? Are you gonna really put four to five years of retirement income sitting in a savings account that's not keep up with inflation. Maybe it's barely keeping up with inflation. Sure. But it's not growing, and you need it to grow, probably.
Mike:Very few people have so much money that they don't need their assets to grow. What a good problem to have. So the issue, people don't wanna give up liquidity for two reasons. One is they need complete control. That's trauma that they have not resolved, which is distorting their reality of expectations that's causing them to put together a portfolio that's not in their best interest.
Mike:I say not in your best interest kinda like when my five year old he likes vegetables, but most five year olds are gonna say, I don't eat my veggies. Right. It's not in his best interest to avoid vegetables, and to only eat, I don't know, Twinkies and cereal or whatever. It's in their best interest whether they like it or not to eat their vegetables. It is, in my opinion, in people's best interest to have some assets that are illiquid and protected, because you're lacking liquidity, but you've got protection and growth, which hedges against inflation.
Mike:The trick is knowing what, when, and how. For example, a CD is illiquid for a year. It's growing at a certain rate, and if the markets crash, you can take income from that income source. There are many different income options. When I say income options, sources where it's illiquid for a certain period of time.
Mike:Yeah. It becomes liquid eventually. And if you understand the mechanics, you're giving up liquidity so they can give you better growth potential. For example, a buffered ETF right now, roughly, I'm not quoting any sort of product, but let's say it's giving you up to 7% growth. Downside is, let's say, 60% of the market's loss is buffered out.
Mike:You won't lose it. K? Just for example.
David:Okay.
Mike:So markets go up 10%, you made 7%. But if the markets lost 50%, you didn't lose anything, just whatever was in fees. Okay. But every year that renews. That's only as good as what the Fed's overnight rate is and the ten year treasury or the one year treasury, just treasury rates, what they're doing today.
Mike:Only as good. Because if treasury rates and the one year the Fed rates go down, it's going to be more difficult to keep those rates. So you've got reinvestment risk or renewal rate risk. On the fixed indexed annuity, a different product, it's the same mechanics, but let's say they're gonna keep it in there for five years. Now they can ladder out in year one, two, three, four, and five, a structure that allows them to hopefully maintain rates at either the same or potentially better growth.
David:Okay.
Mike:Let's say for hypothetical purposes, you're now getting up to 10% on the growth of the S and P each year, but no downside risk. But you gave up liquidity to get an extra 3% potential growth. Now maybe that's right for you. Maybe it's not right for you. We're not talking about specific products.
Mike:I'm trying to illustrate the difference here. There's no such thing as a perfect investment product or strategy, and when you're looking for complete liquidity of everything, you're going to give up opportunity cost or growth, which could put you at more risk of inflation, tax risk, health care risk, and a number of other risks that you just gotta be aware of. Be mindful for what you ask for, because if you're unsure about the unintended consequences, it could hurt your overall goals.
David:So the answer is it is possible to create our retirement plan using only liquid investments.
Mike:You've just gotta be able to afford the opportunity cost. You have to have significantly more money than you actually need. Most people are not in that situation. 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 podcasts.
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