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The Bond Market Warning Sign Behind This Year's Market Jitters · How to Retire on Time

• 0:00
  Mke: Welcome everyone to the Retire On Time q and a show. I'm Michael Decker here with David Franson from Kedrick Wealth. As always, this show is about getting into the nitty gritty. We wanna answer your questions, not that oversimplified advice you've heard hundreds of times. We wanna get into the nitty gritty here.
• 0:13
  The details, they matter. So as always, you can submit your questions to retireontime.com/ask, or if you're joining us live, put them in the chat. And then also, remember this is a show. This is not financial advice. Financial advice is a one on one conversation where there's context.
• 0:30
  We talk about this all the time. It's not that everyone should do IRA to Roth conversions. It's not that everyone should do an annuity. It's not that everyone should do fill in the blank. Mhmm.
• 0:39
  There are many paths to success here, and you gotta find the one that's right for you. So, just to show context, clarity, education. We're we're getting questions in. This is great. Put them in chat.
• 0:52
  Put them in retireontime.com/ask anytime during the week. We always submit a poll. I've got some things to talk about today. We always submit a poll at the beginning of the show, and the reason why we submit this poll is we wanted to see what our listeners are concerned about. And this is interesting that the top two, it changes every week.
• 1:08
  The top two right now are taxes going up and inflation, which tax increases kind of like an inflationary issue too. It's just things become more expensive because you get less out of your money.
• 1:19
  David: Right.
• 1:19
  Mke: That's a problem.
• 1:21
  David: Yeah. So if if, you know, whatever bread or eggs or milk used to be this price, now they're now they're at this price. It's more money. So my my $2 that used to buy this now doesn't buy that anymore. Is that what we mean?
• 1:32
  Mke: Yeah. Yeah. Or with the tax issue, You've got this partner with your qualified assets, your IRA.
• 1:41
  David: Oh, yeah.
• 1:41
  Mke: The partner's called the IRS. Oh. And what the partner said is, hey, we will ignore this benefit. You're deferring taxes until the piper calls and we want it back. And so some people realize this, some people don't.
• 1:55
  But if you have a million dollars in your... Let me... Let's play a game.
• 1:59
  David: Okay.
• 1:59
  Mke: It's the new game show. Would you rather?
• 2:02
  David: Okay.
• 2:02
  Mke: Would you rather have a million dollars in an IRA Okay. Or $900,000 in a brokerage account, taxable, whatever?
• 2:12
  David: Oh, yes. This makes me have to think deep here. Like, what are the pros and cons of both accounts? Well, there's a $100,000 difference there too, it sounds like.
• 2:21
  Mke: Yeah. But if you just withdrew all of it, there could be... Then this is why it's complicated.
• 2:27
  David: Oh, right.
• 2:28
  Mke: People typically will make this stupid argument. I shouldn't say stupid, I'm being mean. People make the argument saying, oh, well, you know, hey, that million dollars is really worth 700,000 because if you took it all out today, like who's going to take a million dollars out of an IRA in one year?
• 2:44
  David: Yeah. One So it's not
• 2:46
  Mke: worth $700,000 It grows without the capital gain issues, you know, buying and selling all the capital gains. Yeah. But when you pay it out, you're gonna pay income tax. So you've got one tax bracket. And on the brokerage side, you can't really actively trade that without tax issues.
• 3:03
  It's a detriment. But the benefit is if you strategically structure it, you're now dealing with 015% capital gains or long term capital gains, assuming that you let it sit there for a while. Yeah. And so, therein lies the nuance of where is your money? How did you save?
• 3:20
  How did you collect your your dollars? Yeah. If you do anything with it, the IRS is a partner. That's how governments are funded.
• 3:29
  David: Yeah. There are our partner that maybe we didn't ask for, but we got them anyway. So... Yeah.
• 3:34
  Mke: Yeah. I mean, it's nice to have clean infrastructure. Yes. It's nice to have police and fire and utilities regulated and, you know, those are the... It's true.
• 3:45
  But we need to understand the rules of the game. Mhmm. And part of the conversation that we've got today, and I've got some notes here on this that I wanted to talk about, and that is, if you haven't noticed, the the market's a little bumpy right now.
• 4:00
  David: Did notice. Took note of that.
• 4:02
  Mke: Yeah. Have you ever been on a roller coaster and like you're getting ready and there's this chunk Yeah. That hits and you're kinda like, oh, did the ride break? Uh-huh. Yeah.
• 4:11
  These these big shifts in the market back and forth. It's like, oh, is this is this the moment where we crash? And people feel it. It's in the ether. Mhmm.
• 4:20
  But you don't really know for sure. It could be in two years. But when we look at where the money is, and then you look at what the market conditions are, it stirs up all sorts of questions. And those questions lead to anxiety, and anxiety has uncertainty, and then we panic and make emotional decisions. I want to get ahead of that in today's conversation.
• 4:42
  Alright. I wanna get ahead of that. I wanna talk about a couple of things here when it comes to risk and risk management. So, what is risk? I'm not gonna be existential with this.
• 4:51
  You know, risk is just when do you need the money? And is the dollar amount that you put in there gonna be there, or a larger amount?
• 4:59
  David: Oh, right.
• 5:00
  Mke: So you put some money in the market. Do you need it one year, two year, five year, ten years? If you can stick it in there, and you don't need it for ten years, that is less risk if you're doing broad diversification than if you need it next year because the markets could crash next year. But in ten years, it might be a little bit higher. At least a little bit.
• 5:19
  That's the idea.
• 5:20
  David: Like the balance would be higher,
• 5:21
  Mke: you mean? That's that's the goal. Yeah. That's the hope.
• 5:23
  David: Yes. That's what we're hoping for. Well, that's why we do it.
• 5:25
  Mke: Not always the case. Yeah. There's no guarantee. Mm-mm. But if you explore that for a second, the thing I think people fail to understand is people associate with risk with the ride along the way.
• 5:43
  The only numbers that really matter with your investments is how much did you buy it, and then how much did you sell it. Oh, yeah. And were you able to sell it in a condition that was favorable to you? See, when you're working, you have risk. Risk is on your side.
• 6:00
  You're working. You don't need to touch the money for several years. Markets crash great. Buy the dip.
• 6:05
  David: Because it could be decades before you need it. Yeah. If you're young younger.
• 6:10
  Mke: So, this goes to the other problem, which is people assume they need access to all of their money in retirement immediately. And we we fail because we're sold a product called a stock bond fund portfolio.
• 6:25
  David: Where
• 6:27
  Mke: we need access to all the money at any point because we might trade, we might make an adjustment and so on. So, if we pull back and ask ourselves, okay, when do we need the money? And we start to parcel out when we're gonna take what, and why, then we start to have a more comprehensive conversation. Let me give you an example.
• 6:47
  David: Alright.
• 6:48
  Mke: Would you rather...
• 6:49
  David: Oh, yes. Version two. Here we go.
• 6:52
  Mke: Would you rather put... Let's say you need a $100,000 of income in retirement next year.
• 6:58
  David: Okay.
• 6:59
  Mke: Would you rather put it in something, and I'm making up rates.
• 7:02
  David: Okay.
• 7:02
  Mke: Not quoting any investments or products here. But would you rather put it into something that's gonna grow about for 4% fixed for one year?
• 7:08
  David: Okay.
• 7:09
  Mke: Have, let's say, 10% upside.
• 7:14
  David: Okay.
• 7:14
  Mke: So if the if the S and P or the markets go up by 10%, you get all the upside. But if markets go down, you get zero.
• 7:21
  David: Alright.
• 7:22
  Mke: Or you put it in the market unlimited growth, unlimited downside. Completely variable outcome. Which would you choose? Yes. And this is a conundrum.
• 7:33
  Right?
• 7:33
  David: Right.
• 7:34
  Mke: Now, this is a million dollar portfolio or 2,000,000 or whatever the amount is. But do you notice how we took a section of money Mhmm. And then asked the question?
• 7:42
  David: Yeah. I'm curious.
• 7:45
  Mke: Let's get your real answer.
• 7:46
  David: I could either guarantee myself 4%, so maybe that keeps up with inflation. Maybe it doesn't. Maybe maybe it's a little bit better. Mhmm. Alright.
• 7:54
  So I'll know exactly what I'll have plus a little extra, or I can go... I can semi roll the dice when... In that. I'll have at least my 100,000. Right?
• 8:04
  I can't go backwards. I know I'll have at least that. Or I'm... If if the market's up next year, I'll get to participate in that upside.
• 8:11
  Mke: Mhmm.
• 8:11
  David: Or there's like, who knows what happens.
• 8:13
  Mke: Doesn't it feel like you're at the casino right
• 8:14
  David: now? Yeah. Right. I have these three sort of paths, and I have to choose which one, I guess, how risky I'm feeling or how adventurous. Would I sleep better at night knowing that, okay, well, I'll have exactly this much going the fixed rate way.
• 8:32
  Yeah. Or, hey, I know I'll have at least my principal, but maybe some upside or the third option is who knows what.
• 8:39
  Mke: Yeah. Now, notice the time. It's one year away. Yeah. Risk is a time equation.
• 8:47
  And when you take sections of your portfolio, and you allocate them, which you can't do this by the way with a sixtyforty or a fiftyfifty allocation. It doesn't work that way. Yeah. But if you plan first, and you identify how much you need in each year, as a general rule, you can start to assign specific investments with specific missions and specific strategies.
• 9:08
  David: I think I would choose the middle option if you want my answer. Yeah. The upside one.
• 9:13
  Mke: Which is appropriate. Yeah. Your plan still works.
• 9:15
  David: Right. Because I know that the bare minimum, hey, I can live off that. That's my income, 100 k, no problem. And if I get a little bit of extra, that's great too. Okay.
• 9:24
  Maybe I'll take an extra vacation or something. Everyone's different.
• 9:27
  Mke: Yeah. But that that that's an appropriate response. Thank you. So, you're welcome. Put in the chat here if you're curious for us to expand on this analogy, but now let me let me give you some other other information.
• 9:40
  Alright. These are the questions you wouldn't know to ask.
• 9:43
  David: Yeah.
• 9:44
  Mke: Okay? And play along. I know you work here, but play along. Okay. Actually, some of this I haven't shared with you guys yet.
• 9:51
  David: Okay.
• 9:51
  Mke: So the first thing I wanna talk about is credit stress. What is credit stress? Credit stress is really the difference between the overnight market returns. So the Fed return. Okay.
• 10:03
  Okay. You know how the Fed people say, oh, the Fed raise rates or lower rates. Right. Okay. That's for more liquid assets.
• 10:08
  That's the the how expensive money is in the shortest term. So think of like a high yield savings. Mhmm. So take that percentage, and then now let's take the ten year treasury. The closer those are, the less stress, the less risk is associated in the market.
• 10:28
  David: Okay.
• 10:29
  Mke: The greater the gap is, the more stress there is in the market. Oh. And it might seem insignificant, like 0.10% of a difference, or, you know, these little shifts, But those little shifts have a ripple effect in the entire economy.
• 10:47
  David: Okay.
• 10:49
  Mke: I mean, financial plumbing is one of those things that most people don't seem to understand. How advanced and how sophisticated our economic system is, our financial system is. It is insane. My point being is, we are seeing that the longer term bond rates, so treasuries, the ten year treasury, the thirty year treasury, are increasing those rates. Those rates are set by the market.
• 11:12
  What the market is willing to pay for new debt issued. Okay. The Fed controls its rates based on its board. So as these two navigate, we are seeing rates go up. Why is that a concern?
• 11:26
  Because there's a concern about bailouts or the ease that the American government's gonna be able to pay its debts, and a default isn't that the debt goes away. It's they missed a payment. It's not the end of the world. It's just, oh, that's scary. It's kinda like when you're driving, you hit a really rough pothole.
• 11:44
  You're like, oh, did the tire break? Yeah. I hope not, but it could. So the point being is we're seeing cracks in the foundation just by looking at the bond market, and the American dream is based on debt. That's how it is.
• 12:02
  David: Yeah, that's kind of interesting because we're preached at this... Sorry, Dave Ramsey. Yeah, was thinking about him. Yeah. We're sort of preached at, no, no, It's bad to be in debt, get out of debt.
• 12:11
  Mke: And I like Dave. Yeah. That's not a criticism to him.
• 12:13
  David: No, not at all.
• 12:14
  Mke: And it's bad to have debt. And he focuses a lot on like credit card debt, and the predatory debts, and all that.
• 12:21
  David: Right. Right.
• 12:21
  Mke: Right. But when you're looking at a business, like Meta funded most of its AI research with debt, or a lot of its research with debt. Yeah. It is normal for an insurance company or for a bank for the mortgage department to take on risk, and then back it up based on a treasury, like a ten year treasury. Mhmm.
• 12:40
  So we live off of debt that exists because they're predictable payments, and you can hedge your risk accordingly.
• 12:45
  David: Okay.
• 12:45
  Mke: So, we like debt. We are built on the bedrock of debt.
• 12:50
  David: From the very beginning of the country. Right? Yeah.
• 12:52
  Mke: The foundations. Thanks, Alexander Hamilton. Yep. He did not miss his shot. That's His banking system.
• 12:58
  Uh-huh. Though he did get shot later. Yeah. That's sad. Please don't shoot people.
• 13:02
  Yeah. But the the reason why I say this is a lot of people, like, I would say earlier in the year and even last year, oh, is this the AI bubble? Is it gonna crash? Mhmm. But the bond market was stable.
• 13:14
  It was very calm.
• 13:16
  David: Mhmm.
• 13:16
  Mke: So I was going, not really. Now I'm I'm getting a little nervous. I'm not losing sleep. I'm saying, oh, we're getting close to a 3% difference or disparagement there. And there's a whole calculation of that, won't bore you with the details.
• 13:31
  But if that keeps going up, this is exactly what happened before the two thousand eight financial crisis. We see this kind of roll up. Look in the seventies. It wasn't necessarily a financial crisis, but it was an inflationary issue that kept roaring back.
• 13:46
  David: Mhmm.
• 13:47
  Mke: So does that change your answer? Probably not. Because if you have index growth, if inflation gets out of control, then the markets would go up. But if inflation gets out of control, the markets go up, and that triggers some issues like the AI affordability, bankrupts, AI stops paying, bonds start going bust, whatever, that that could lead to the collapse. All we're saying is we're walking on thinner and thinner ice.
• 14:10
  David: Okay.
• 14:12
  Mke: In addition to that, you know, markets are pretty expensive right now. We see more and more people talking about AI bubbles. I mean, it's... We see... We recently noticed in a lot of momentum models, common growth stocks like Nvidia are being taken out.
• 14:30
  David: Mhmm.
• 14:31
  Mke: These are just hints of what could be... It's... I don't know. What what what... Maybe is there a Harry Potter reference here of like, this could be the future, but it also could be this...
• 14:41
  I'm thinking of the Encanto movie. Bruno?
• 14:45
  David: Oh, yes. Yes. Yes.
• 14:46
  Mke: It's like the fortune teller says, oh, you got two paths ahead of you, and it doesn't know which one it's gonna be. It's gonna be your choices. But we don't know what the future's gonna be. That's why we say a prepared reaction is better than a risky prediction. Mhmm.
• 15:00
  You don't want to put all of your money in variable returns like the stock market, and hope it works out. That helps you with inflation risk, but it certainly doesn't help you with market risk. But you also don't want to put everything into fixed growth accounts, bonds, MYGAs, CDs, that is inflation risk.
• 15:18
  David: Mhmm.
• 15:19
  Mke: So, when you take a step back and you look at the plan first, then you look at the strategies you want to implement, then you look at the portfolio, and you're selecting strategically, very surgically, what goes where, and what its mission is gonna be. That's a cool thing. On Sunday, I've got a Kipling article coming out that addresses this very issue. Mhmm. Houston, what's what's the mission?
• 15:43
  And I just go through simple protocols, and I compare the NASA trips and their protocols for when things go wrong, they knew what to do. They didn't panic. Right. Neil Armstrong wasn't winging it. As they're getting close to landing, there's about, you know, sensors are going off.
• 16:00
  They were going to land somewhere. Oh, there's a bunch of rocks there. They can't land anymore. What do you do? And so he just, you know, the pilot he was, how do you even train for that?
• 16:09
  So apparently, they figured out how to navigate the flight with zero gravity and all this. Anyway, and then they'd land the moon, and it was a safe and successful mission. They had prepared reactions for the unknown situation they didn't know. And my fear is that too many people are saying, well, eventually it will work out. Because the long term investor, buy and hold, has been rewarded for the last fifteen years.
• 16:35
  The problem is it works until it doesn't. And these strategies completely change when the rules of your money change and the rules change in retirement. So for the many of you that are on here, if you haven't already, I do wanna invite you to at least start our planning process. Whether it's a thirty minute call or you wanna just dive right in and start the first three sessions, we don't... You don't pay us a dime to get started the planning process.
• 16:57
  And we do that because we feel most people don't actually understand what comprehensive financial planning looks like. What retirement planning looks like. Not just, oh, here's a portfolio, take four percent, you'll be fine. But actually surgically going around and figuring out what you need, when do you need it, and so on. Yeah.
• 17:17
  That's that's... So you can go to retireontime.com/call to be able to get that. Schedule thirty minutes, ask us a bunch of questions before we get started, or just dive right in sixty minutes, start that plan process. You only pay for the plan. So one time fee at the end of the planning process if you're like, yeah, this is exactly what I want, And then you pay.
• 17:41
  Walk away at any time. Retire on time.com/call. There's a lot of clients on here. A lot of people go through the planning process on here. I recognize some of the names, but also a lot of you I don't recognize.
• 17:51
  So I'd encourage you to go through that process with us. That's all the time we've got for today's show. If you enjoyed the show, thanks for tuning the podcast. Don't forget to subscribe, leave a rating, and as always, tell your friends, the larger the subscribers are, the better the content can be that fuels your preparation for retirement. We'll see you in the next show.