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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. My name is Mike Decker. I'm the founder of Kedric Wealth. And joining me in the studio today is my colleague, mister David Franson. David, thanks for being here.
David:Glad to be here. We're gonna be
Mike:taking your questions. Text them right now to (913) 363-1234. Again, that number, (913) 363-1234. Let's begin.
David:Hey, Mike. I'm being told by others that 8% works as a retirement withdrawal rate. Is that true? If you want it to be. Okay.
Mike:You can do whatever you want, but is that right for you? I don't know. Are you gonna live five years? Then maybe. If you're gonna live ten years, probably.
Mike:Mhmm. I don't know. If you're gonna live twenty years, probably not. Here's what gets my goat. I know who says this.
Mike:I'm not gonna say the person's name, but here's what their rationale is. The markets, if you're a smart investor, have averaged around 12%. And so if you just take out 8%, you should be fine. They're saying that on the radio. What the Right.
Mike:Here's here's why it really gets my goat. Okay? It is how to lie with statistics one zero one, chapter one of that book. Okay? Here's what's really going on.
Mike:The last ten years or so, yeah, the S and P 500, a volatile market, if you're okay with the ups and downs, have averaged around 12% or so. But you know what? If you look back at the S and P 500 from today back to February, the S and P has averaged 7% year over year. So what number is it? Is it 12%?
Mike:Is it 7%? You tell me. That's ridiculous, but it's oversimplified, and it's this ideology of, well, we fixed the market, and it's only gonna go up, and technology is gonna take us to the new level, and blah blah blah blah blah blah. You're fine. Just do this.
Mike:Forget financial advisers. You're gonna be fine. And here's what really gets me. When this individual, one of the most prominent personal finance names in the country, who is very informed about certain parts of personal finances, spending habits, I'm in harmony with what he says on those things, comes out and says, yeah. The reason why you're recommended 4% is because advisers suck at portfolios, and their portfolios average 6% year over year.
Mike:And so that's why you have to take 4% out because they're bad at their job, so you can take less income in retirement. That is ridiculous. Here's why. If you want more risk, you can take on more risk. You can have more growth potential, but it's when the other shoe drops that you are SOL.
Mike:Are you willing to take that risk because he's not paying the price? You are. K? The markets go flat every ten plus years, every twenty years or so. It did from 2000 to 02/2010.
Mike:It did it from 1965 for what was it? Nineteen years or so after that? Mean, it was almost two decades. Flat. No market returns.
Mike:1929 for twenty four years, the markets did not make any money. And then nineteen o six, it was over ten years, no growth. So this idea that markets, quote, quote, the S and P 500, and you could throw in the Dow, you could throw in the Nasdaq, whatever, just grow by 12% year over year is a gross oversimplification, and it's dangerous advice. And it drives me crazy because the reality is that's the person that they're talking because we want to believe that financial advisers suck. I have no problem with that because I think a lot of them maybe are not as proactive in their job as it would be.
Mike:I get that there's bad apples in every industry, but that's every industry. There are good engineers. There are bad engineers. There are good teachers. There are bad teachers.
Mike:Fine. But the idea that the markets are gonna continue to average 12% is ludicrous. And we can look back
David:and see the actual raw numbers. Right? Yeah. If everyone wants to
Mike:do some homework, here you go. Look at from 1990 to 1999, and look at what the markets did. Now look at what the markets have done the last ten years. It's eerily similar. And around year '8 or '9, there was like a little bit of a crash, but it quickly recovered in both situations.
Mike:And if you look back at news clips in 1999, the news, the media, they're out there saying, the markets keep going up, and we fix the economy, and it's the booming era, and all is well, and then it rolls over. And if we looked at the same trajectory of 1999 and what could have happened to today based on technical analysis and looking at all of this, we could receive a 50% crash top to bottom at any point. Now do I think that's gonna happen? No. Should you make a fear based decision, go out of cash based on me saying that?
Mike:No. What I'm saying though is it is possible that you don't make money in the market for ten plus years in your twenty to thirty year retirement. So to take 8% out, if we were to simulate this
David:Yeah.
Mike:In a flat market, let's say the markets go flat during the beginning of your retirement, 8% on a flat market cycle, you're out of money in about eight to ten years. If you take 6% because you're being modest, it's like twelve, thirteen, fourteen years, you're out of money. And if you take out 4% and you're all in equities in a flat market cycle, you're out of money within twenty years. You're not making it. Now that doesn't mean you go out and buy an annuity and turn on lifetime income.
Mike:It means stop listening to bad advice, oversimplified advice, or just this polarizing advice. It's ridiculous.
David:So we're asked to sort of be retirement experts, right, when we we retire and our we have our four zero one k, and we have to just kinda figure all this stuff out on our own seemingly. Right?
Mike:Yeah. Greed is the killer of retirement plans. It is the killer. And so it's it's ridiculous that the the industry when I say the industry, the the business, the private sector has said, well, let's get rid of pensions and give people four zero one k's, and they'll figure it out. Okay.
Mike:There was a Boston College study that showed that one of the number one indicators for happiness in retirement was guaranteed income for life. It's because they don't really know what the other option is. They could either buy an annuity and call it a pension, or they could keep all their assets at risk and hope it works out. So you can either be a financial professional and understand how to do this, or you can just sign up for a self made pension. I'm not saying either option's right.
Mike:What I'm saying is those are kind of extreme options. Mhmm. And I have found balance in all things might be more healthy. And I'm not saying have some lifetime income and some in the market. There are other ways to plan for this.
Mike:This is a text I got recently, and it was some covered call income ETF. It did, like, 12% as a quote, unquote dividend. It's not actually a dividend. It's just they made money off of selling options within the ETF, and they give out the profits. That's how it works.
Mike:12%. You think it's gonna make 12% year over year? If you take the same model, you look it back, it might average actually 6% because you're gonna have dips. You're gonna have issues with it. Some years, you might not have any money.
Mike:If the markets grow too much or whatever it is, it will get called away. And if you don't understand what that means, that's okay. Here's what you need to understand. It ain't paying 12% year over year. That's not guaranteed.
David:Yeah.
Mike:So the exercise I like to do with people, let's just do it right now. Let's do it. And and we've done this before, but just indulge me.
David:Okay.
Mike:So alright, David. The treasury is offering around four percents. You can get 4% year over year roughly from treasuries. K? United States government, probably not gonna blow up anytime soon.
Mike:K. There you go. But what if I can get you 6%? Oh. 6% growth or dividends paying out year over year.
Mike:Does that sound nice?
David:It does sound nice. I'll take it.
Mike:What about 8%?
David:Oh, hold the phones. Okay.
Mike:How about 10%? Keep going. What if I can give you 15%? I like those numbers. Any skepticism?
Mike:You want 20%?
David:Part of me would be willing to just go along with it, and hope that it's not too good to be true.
Mike:Yeah. And it always is too good to be true. Yeah. The reason why I say it is the higher the dividend, the growth potential, the income, whatever it is, the more risk you're taking whether you realize it or not. I have a theory.
Mike:This isn't a thesis. I'm still researching it, but I wanna throw it out there just to consider. I believe that most of the major market crashes that were not due to geopolitical events were because of abuse of a new regulatory loosening or a financial instrument that everyone went to. Here's an example. Why did the .com crash happen?
Mike:Because you could not not make money if you just invested in anything that had .com in the name. That created a bubble. Everyone flocked to it. It got overpriced, and then it popped. Why is it that we had such an issue with the two thousand eight financial crisis?
Mike:Because you could get a great return on these mortgage backed securities, and who doesn't pay their mortgage? I know who doesn't pay their mortgage. A person that's got seven mortgages with no credit and no income, you know, all these, and they weren't being properly explained. Since then, there's been incredible regulatory changes, and so now many smaller companies can't actually get the lending they need from banks. Banks won't touch them anymore, so they went to private credit.
Mike:Why is it that we think that we're getting a good deal by doing private credit? So, basically, like, you're you're going through a specific channel to lend a business money, a debt instrument, a bond to them, and that you're gonna make some great returns, some great dividends, some great income from it, and it's not more risky than these other assets. It's like, well, there's a reason why the bank won't touch them, and why is it that they need money under this private credit umbrella when corporate profits are at record highs? Why aren't they having corporate profits? Because the big companies, the established companies, the well run companies, are having a hard time figuring out what to do with their excess capital.
Mike:But these other companies, they need debt. Why? What risk are you really taking? And will that become a bubble that implodes as private credit continues to grow and grow and grow? Is that a bubble?
Mike:I don't know. We'll find out. In 2018, there was some ETF regulation updates that have significantly shifted, and a lot of people are going to this passive income side. When I say passive income or passive investments, just buying ETFs and calling it good instead of stocks. Is the theater getting more and more crowded when the exit doors are the same size?
David:Yeah. Good analogy.
Mike:So when you take a step back and you're being told the same things that we were told in 1999 and the same things we were told throughout history I mean, you can go back in the twenties and thirties, I would say, well, the '19 the tens and early twenties when railroad, that was the tech stock back in the day until there were regulatory adjustments, and it imploded. History repeats itself. Greed blinds people. So this idea that you can have high withdrawal rates and expect it to be okay, the only way that works if the markets only go up, which would defy the last hundred and twenty years of our historical market data. Please, whether you work with us or not, do not let yourself fall into the trap of greed.
Mike:Please don't. Please take a moment and check yourself. What is it that I don't know that if I understood would change my opinion, would change my strategy, would change my expectations in retirement? Only the people that have the courage to check their own assumptions, in my opinion, are the ones that will be well whenever the markets crash next, whether it's a 30% correction, whether it's a 50% correction, whether we enter into a flat market cycle soon or later. No one knows the future.
Mike:But it would be well to just get that second opinion and say, Am I really taking more risk than I realize? 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. Just Discover
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