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Is Two Years of Reserves Enough? · How to Retire on Time

• 0:00
  Mike: Hi. Mike Decker, author of the book How to Retire on Time. Here's a question I was recently asked on my Retire on Time q and a. Check it out.
• 0:12
  David: Yeah. Next question. I've got everything invested in the stock market with two years of income needs as my reserves. Does that sound about right?
• 0:23
  Mike: It's the right idea. It's the wrong execution. Alright. And this seems counterintuitive, but the day you retire is the day you want the least amount at risk. Mhmm.
• 0:35
  So two years, you might spend through the res... Those reserves and be up a creek without a paddle. So if you think about 2008, it took five years for it to recover.
• 0:46
  David: And two is less than five here. So...
• 0:48
  Mike: That's some... Yeah. Some great math. Yeah. Yeah.
• 0:50
  David: I'm good at that.
• 0:51
  Mike: I can tell what you studied in school. Yeah. So the idea is typically the first part of your retirement, you might wanna guarantee even for up to five years.
• 1:02
  David: Okay.
• 1:04
  Mike: Just even if it's fixed growth. CDs, treasuries, which isn't really fixed growth unless you do like a tips or something like that, or a zero coupon. You could do those too, but but you just know exactly where your income is gonna come from. It's laddered out. We call them laddered reserves.
• 1:20
  Because think from a timeline standpoint. If you trip up at the beginning of your retirement, you're limping the rest of your retirement. Mhmm. If you trip up fifteen years in your retirement, you've got less time that you're having to limp. So there there's a there's a lot to consider here, but also how did you get to you need to two years of income?
• 1:41
  David: Yeah. Right.
• 1:42
  Mike: You have to plan first, then you need to explore the strategy second, then you need to fund the portfolio correctly. And typically, you just... You wanna have enough in reserves, and the the way I look at it is timeline. Okay? There's three different groups.
• 1:58
  There's fixed, there's index, and there's variable. Okay? Not variable annuity by the way. People hate when I say the word variable. It's like, well, what are your stocks?
• 2:07
  Yeah. It's a variable return.
• 2:09
  David: Those vary by the minute. Yeah.
• 2:12
  Mike: If you wanna have a heart attack, just watch the stock market every day. Just try on MSNBC and be just, oh. Uh-huh. But fixed has inflation risk, but no market risk. Uh-huh.
• 2:24
  Okay? Think CDs. So that, if you're assigning missions to your plan, you know how much you need each year, don't just have 200 thousands or whatever that, you know, two years of of income in cash. Say, okay, I need one year of cash. Maybe I'll do a CD for the second year.
• 2:42
  But fixed is the mission or the needs of the money that you have in retirement, your income needs for the first part of your retirement. Then you have the index category. This is the middle. The index has upside potential, no downside risk. Mhmm.
• 2:54
  So we're looking at structured notes. We're looking at buffered ETFs. We're looking at indexed annuities without the fee. Don't do the fee. Don't do the riders.
• 3:01
  Don't do any of that that business. It's just... It's it's basically a buffered ETF or a structured note from an insurance company. Alright. Right?
• 3:08
  Pick... Bank, investment bank, insurance company. These are all the kind of same products when you look at the engines. That's the best middle ground. Why?
• 3:17
  Because it has more growth potential than the fixed, so it has a better hedge against inflation. Can't lose money, and you can let it out the liquidity. So if the markets go down, you can tap into it, and you've got this dynamic kind of situation. And then the variable isn't as risky because you don't need to touch it. You could, but you don't need to touch it for at least ten years.
• 3:38
  David: Mhmm.
• 3:39
  Mike: Therefore, the markets crash in two or three years, you've got seven, eight years for it to recover.
• 3:47
  David: And historically, that's about right.
• 3:48
  Mike: I mean Do you see the divide and conquer of these camps?
• 3:50
  David: Mhmm.
• 3:51
  Mike: Yes. And everything in retirement is three. Plan, strategies, portfolio. Pretax, these are the tax buckets. Pretax, after tax, taxable.
• 4:00
  Right? So IRA, Roth, and your brokerage account. Mhmm. Fixed, great for growth, for fixed growth, but it's got inflation risk. You got the middle is the index category, and then you've got the variable.
• 4:13
  I don't know why everything's in threes. Maybe that's... My mind just works in threes. But you can't know what to do with any of this until you do a plan first. You look at the stress points, the the pressure on the portfolio, the tax strategy, all those things, and then once you have all of that articulated, you then pick out the right tools in the toolbox.
• 4:33
  Imagine going to war. That's a probably a terrible analogy for today. But let's let's say it's like, I don't know, the 18... No. Let's say it's the twelve hundreds.
• 4:41
  Okay? So we got swords. Yeah. And you're gonna go to war, and you never send a scout to figure out what the train looks like. So it's alright guys, we're gonna go to sandals, and we're gonna go this way.
• 4:51
  We're gonna fight them, and your sandals don't really work with the rocky muddy terrain. Should have brought boots. It's a terrible analogy, but you get the idea.
• 4:58
  David: Like Yeah.
• 4:59
  Mike: You wanna go on a nice long hike? Maybe you should study some maps first before you know what to pack and then go along that journey.
• 5:07
  David: Right. Yeah. Because you might not know once we get to 8,000 feet elevation, we could encounter this. Right? And and we're starting way down here at whatever 4,000 feet, 3,000.
• 5:17
  So you have you have to know what's ahead and so you can prepare for it so you can be comfortable or survive. Yeah. Or not go hungry or thirsty.
• 5:26
  Mike: Yeah. That's that's the goal.
• 5:28
  David: Yeah. You wanna get back to the starting point.
• 5:30
  Mike: If if you were to boil it down to two questions, what's your strategy for when the markets go up, and what's your strategy for the markets go down? Mhmm. Most people don't know what to do when the markets go down other than spend less and hold on. What a horrible way that to live retirement.
• 5:47
  David: Yeah. If you don't have to, why why choose that? Right?
• 5:49
  Mike: Yeah. That's that's the premise of the book How to Retire on Time is being able to answer that second question. Because if you don't answer the question, your money controls you. You don't want that.
• 6:02
  David: No. You want your money serving you. You've worked all those decades to earn it.
• 6:05
  Mike: Yeah. So for all those who are tuning right now going, hey, this is this is great. What's the next step? I'd say come to our workshop. It's this Tuesday night at 06:30 central time.
• 6:16
  We're hosting it on Zoom, so you can attend the comfort of your home. Just go to retireontime.com/workshop to RSVP. That's retireontime.com/workshop. We'll see you there. That's all the time we've got for today's show.
• 6:30
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