Afford Anything - The Risk of Not Fully Living, with Michael Lynch

Episode Date: March 15, 2023

#432: Have you ever worried about running out of money after you retire? Do you keep checking your net worth to make sure you have enough? Does this always feel a little … unsatisfying? This episode discusses why. Today's guest, Michael Lynch, is a certified financial planner and author. His most recent book, “It’s All About The Income,” says that we’re obsessed with the wrong thing. Retirement planning is focused on growing assets. But your assets aren’t going to keep the lights on. Your INCOME, not your assets, is the centerpiece of your retirement. He shares real-life examples of the biggest risks to your income — the risks that might halt you from enjoying your retirement years. He shares tips on how to make sure your income is smooth and secure, even when you’re not punching the clock anymore. Enjoy! For more information, visit the show notes at https://affordanything.com/episode432 Estimated timing of discussion points as of March 2023: 01:36: The disconnect between living on income vs. assets in retirement 02:15: “There’s no such thing as safe” 04:41: The three-bucket approach to retirement 08:17: Sources to learn the history of the stock market 10:33: This historical best hedge against a declining stock market 16:25: The ideal asset mix for short-, medium- and long-term investments 17:01: The need to distinguish between money you’ll need vs money you’ll need to generate income 20:16: When to be a saver vs. an investor 23:49: How to approach the medium-term bucket 36:03: Lowering sequence of returns risk with the three-bucket method 37:02: Inflation risk and the impact on retirement Learn more about your ad choices. Visit podcastchoices.com/adchoices

When do you have enough money to call it quits from your job? When do you know that you'll have a steady enough stream of reliable inflation-adjusted income? We're going to chat about that today with financial advisor, Michael Lynch. Welcome to the Afford Anything Podcast. You can afford anything but not everything. Every choice that you make carries trade-offs, and that applies not just to your money but to your time, your focus, your energy, your attention. What matters most and how do you make choices accordingly? That's what this podcast is here to explore.

My name is Paula Pant. Today, we are talking to author and financial planner Michael Lynch about how to make sure that you have a solid income stream in your retirement, whether you retire at 35 or 65. Michael is a former on-site financial planner at ESPN. He's contributed to the Wall Street Journal, The Street's Retirement Daily, and Investors Business Daily. And he was the host of Smart Money Radio for a decade. He's also a five-time recipient of Financial Planner of the Year for MetLife. And recently, he authored the book, It's All About the Income. Now, because he is a practicing certified financial planner, there's a disclaimer that we're required to read out loud.

Here's my producer, Steve, making sure that we cover our bases. Hey, everybody, it's Steve, that guy that does stuff for Paula. Michael Lynch, certified financial planner, is a registered representative of and offers securities and investment advisory services through M.M. ML Investors Services LLC, member SIPC. Hi, Michael. Hello, Paula. How are you? I'm great. How are you doing?

Can't complain. Can't complain. Michael, you have a thesis when it comes to how to prepare for retirement, and your thesis is that we live on income. We don't live on accumulated principle. And yet, so much of the conversation around retirement savings, including the very definition of wealth itself, is defined as our accumulated asset. That's right. It's an absolute disconnect, and it causes, I think, people a lot of pain, a fair amount of stress. I know consumption is a bad word in certain circles, but consumption can mean spending

money on your grandkids, on your kids, you know, anything that they would find pleasurable other than sending it when they're gone. So you see risk not just as the risk of running out of money, but also the risk of living more frugally than you otherwise would need to? Yeah, sure. There's no such thing as safe. The world doesn't provide safety. The world provides options, diversifications, choices.

Like, go out and get it. If you hunkered down, so when I see people that are hunkered down in fixed assets, and they were earning 1%, inflation's at 3. I mean, they're losing money safely. They're absolutely, absolutely taking on a lot of risk. And, you know, today it's nice. We could talk about it because I'm all for higher interest rates, and they've popped, and it's a beautiful thing because now we have other options for clients.

But, hey, inflation is running at 6. Even if you're getting 4 in the bank, you're going backwards at 2%. So it's an illusion of safety. There's no such thing as safety. And even pensions aren't safe. Pensions lose half of their value over lifetime. There's probably nothing more risky than a pension because, you know, all the inflation risk just comes right at you. And so what we have to do is have a sense of options, choices, and then deploy them.

And if we do that, most all, of us will end up doing pretty well. So your approach is a three-bucket approach, and it's an approach that marries together reliability of income with growth that keeps pace with inflation, with preservation of principle. Yeah, that's right. We talk to clients, are getting ready to retire, say, look, you need three things. You need to be able to write the biggest check that you ever need to be able to write.

What's safe today is something that won't go down in value. But what's safe in 20 years is something that has the same value that it would have today, right? So you need something that's going to grow and keep up with inflation because inflation is relentless. Even 2% is constantly eroding the value money. And finally, you want money that comes the same day, roughly the same amount, every single month. Because unless you're a business owner client, I mean, some of us are used to uneven cash flow. It's a big amount here, nothing here. but most people are used to regular paychecks.

You want a regular paycheck as well. You know, nothing's perfect. So things that protect your principal will not grow. Things that give you reliable income will not give you liquidity or grow typically. Social Security does. And things that grow over time will shrink. And we all need to look at last year for that, right? Great reminder of how these things work.

All right. So the three bucket approach is essentially an approach that simply segregates your money into short-term, medium, term and long term and then invests accordingly. What we always have to have is simple systems for people to organize stuff so that they can make sense of it, have confidence, and then live their lives and spend their actual money. So it's not like short term, the stable stuff, you spend that, and then you go to the medium term, then you go to longer term. It's let's think of last year.

Last year, stocks went down anywhere from 15 to 30 percent, energy went up, so some stuff went up. Bonds, what was really weird last year was our bonds drop, because the interest rates went up so our bonds dropped 13%. That's what was unprecedented. So what we don't want to do is we don't want to have to sell stuff that's at a loss because loss is temporary unless you sell and make it permanent, especially in fixed income and bonds. Government bonds are not defaulting. All that money's coming back. You just have to wait for it to come back. So last year we'd want something that is not going to go down. Bank cash, a stable value fund in an employer plan or something like that.

So last year we take out of that. Now, this year, we'll see what happens in the market. But if bonds snap back and stocks run a little bit, equity's run, then we'll be back to sort of taking off of those. There's some systems out there where you exhaust one bucket before going to the next. Nope, this is a dynamic system. So then what I'm hearing from you is that even though it is a three bucket strategy, as you said, it's not that you exhaust one and then move to the next, meaning that your drawdown

from each bucket is not time delineated, but rather you're. your drawdown from each bucket is based on current market conditions. Yes, absolutely right. And where you need the money and how much. So the metaphor in my mind is big reservoirs out in California. I grew up in Northern California. My grandparents had a double-white on this lake called Lake Beriasso, which is just basically a big, big reservoir as they used to dam up a valley and flood it

and kick the people out. And that's how the farmers had water in cities too. Normally, in normal times, that water was right up to their residence, which, as I said, was a nice double-white with a deck on it. We sat out there, play cards, parents would drink. We'd go fishing off the deck. And if the water got too high, there was a spillover. When the droughts came, guess what?

That water ran down. You may have seen the pictures. Out West was a big deal. There would be hundreds and hundreds and hundreds of yards of beach in front of the place. But guess what? The rain always came back and it always filled up as it did last year. And that's the same thing. So that safe bucket, that stable bucket is a reservoir.

That's when the drought comes. Last year was a drought year in financial markets. It was a double whammy. So we start draining off of that. The rain is going to come again. The most common year in the S&P 500, which is the proxy for the big U.S. stock market, is more than 20 percent returns. That is the most common year return is more than 20.

So when we get our next 20 percent year, then we start taking off of that. And we just fill back up the reservoir as the snow melt does. So it's a natural system. And I think markets are natural systems. I mean, that's more of an intellectual debate. But I think they're fundamentally natural systems, and as such, they're fundamentally stable, but they're unpredictable. And the source that you have for the market doing over 20 percent as the returns that happen most frequently in the year in which markets are positive, that comes from the Ivotson SBBI, large cap index from 1925. Yeah, so there's a couple of them.

They all tracks. The one is you can see in the book. I use the Ibsen as BBI, and that's almost 100 years, and it's stacked up. It's quite shocking. Another great place for listeners to go. They want to verify. J.P. Morgan puts out a great book called Your Guide to Markets or the J.P. Morgan Guide to Markets. It'll show about 30 years of history there, 40 years of history.

And it's just calendar year returns. And it's stacked up, and it's quite shocking. The ratio over time is three and four. So out of four years in S&P, you're going to get one down and three up, right? But you could get three in a row down as we did. 99, 2000, 2001. So there's no guarantees in that marketplace. In that marketplace, you're buying companies, you're owning companies, you're sharing in the risk and sharing in the rewards. But historically, the reality is a world gets better and you own the world, you get better with

it. The opposite is trying to bond market. And what you see is very little volatility and very few downs. One in 10 out of 47 years is up 42. So round up to 50 and take five down. You've one in 10, right? One in 10. And most downs are two, three percent. Except for last year, it was 13. It's a big outlier last year when you look at it just just bang pops out at you. And that's fine, though. Those happen. Hundred-year floods happen. You know, I'm saying in southwest Florida, my house got hit by a hurricane. Guess what? It was built for it. I lost 21 roof shingles. That's it. As most people in my community. So you just got to build your retirement plan for the hurricanes. And if you do it, you'll be fine. I think last year shocked a lot of people

because many people were under the erroneous assumption that stocks and bonds were inversely correlated. And that is not the case. Prices and bond yields are inversely correlated, but equities, bonds are not. Yeah, so it's tough because we live in a world of probabilities, not certainties. So I listen to another podcast by an economist. A physicist asked him a question at a cocktail party. What do you guys actually know? He starts babbling about supply and demand.

He's like, no, that's obvious. What do you actually know? Like in physics, we know where the moon's going to be at every minute of the day, right? What do you actually know? And what he had to admit was that he knew nothing. And that is true in all social sciences and human affairs. You can predict nothing. Only probabilities, only bell curves, only relationships as if existed over time.

And so that's how markets are. Morningstar did this report. They looked at historically what your best hedge is against a declining stock market. So people sell stocks, what's the best hedge to have something go up? And it's a five-year treasury, right? Five-year treasury, which is essentially what most core bond funds are, right? Either government bonds or, you know, there are funds with a duration of like average maturity of five, six percent. Well, that's the best probabilistically. But last year, that went down 10 percent, right? 10 to 15 percent. So we had a bad result and we learned why we want to keep a little bit of cash into

portfolios as well. But it will snap back. One thing that I just want to say to the listeners, given that we are so recently on the heels of our previous conversation about the 20% returns, because I know that there are going to be some listeners out there who are thinking, wow, 20% that intuitively feels large, right? So one thing I want to say, and then this is not in any way meant to dissuade anyone from investing in the stock market. I'm very, very pro-equities. But just to highlight the math a little bit, to use an extreme example, if a stock falls by 50% it has to grow 200% in order to regain its previous value. So if you buy a share of Coca-Cola at

$100 and it drops to $50, now that share which is worth $50 has to double or grow 200% to get back to the original 100. So for the listeners who are thinking, wow, a 20% return in a given year sounds like a lot, given the context of that 20% return off sending years of decline, that's how we get to a long-term annualized average of between 8 to 12%. percent. Yeah, absolutely. That's a great point. And that's why you never get too happy and you never get too sad. And that's why the big mistake is locking in the 20 percent loss and then go into a product that gives you four or five percent guaranteed when inflation's running at five to seven, right? So you sign up and you ride that thing. So yes, that is to say that the most common, so there's three

averages, as you know, there's the mean, the median, the mode. So we learned that in basic statistics class. The mean is what people tend to think is an average. The median oftentimes is more accurate. And all the mode is is what's the most common occurrence. And what's shocking is what the most common occurrence is on a calendar year in a stock market is big. But we get the big declines too and you need big ups, offset big declines. A lot of volatility. And volatility, by the way, means up to.

It's just a big spread. It's a big standard deviation on a pretty decent mean. So it's volatile when you make 30%. It's volatile when you lose 30%. It swings both ways, but it is skewed to the right. The distribution is skewed to the right or historically has been. We'll come back to this episode after this word from our sponsors. Fifth Third Bank's commercial payments are fast and efficient,

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We'll do each of these separately. Let's start with the short term. There are many investors who are saying, hey, I have this pile of money that I want to spend in the next one to three years or even three to five years. I hate the idea of it losing to inflation, but I also know that the stock market is not a high-yield savings account. And if I need this money in 24 months, I shouldn't be putting it into small caps. So what do I do? You have to distinguish between money that you want to spend as a lump sum versus money that you want to put into service of generating income for you. Two different things.

So a lump sum. I'm saving for a second home. I'm saving for a first home. I'm saying the hardest one is kids college education, by the way. It's like land in a plane on aircraft carrier, right? Four years, that's it. So very difficult. So money that you're going to spend completely is different than money that you're going to put in the service for 20, 30 years, perhaps.

But we're talking about the short term bucket specifically. So let's say I got a cash reserve that's $50,000. Well, that cash reserve should never be put in anything other than bank accounts getting the highest interest possible. So right now that money's in a high-eield bank getting 3.8 or it's in my money market getting 4.2. But that money is designed to be there for a rainy day. then I might have money for let's say I want to I got to buy house in Connecticut so I'm going to need a couple hundred thousand up there and so that money too I don't want to take any risk with that money I just want to pile that money up it's going to all be spent all of it and therefore that money is going to be in a bank account or in a money market account if I know it's two years I might and I knew exactly the date I could do six month year two year CDs right I could use CDs to get a little bit extra yield but again I the idea, Paul, is that I'm not going to take any risk on that principle. If you have a lot of time and energy, you could buy individual like treasuries that came

due with those dates, right? That's the same as the CD, backed by the U.S. government. So for that money, it's all money that you're going to exhaust completely. Now, for money that is for retirement income, that's part of a dynamic system that you're never going to spend at all. It's the matter of what you're going to dip and what you're going to replenish. It's that reservoir I'm talking about is never goes to the bottom and they're never going to plant crops in the bottom that valley. Why would this be in a short-term bucket? Because you need

income. Because you're going to need income every year. So what you're going to have is three years of income. So that too will be cash and then short-term bonds. And I will use intermediate term bonds as well, government bonds, but we got burnt on that last year, right? So it's a matter of how much you want to stretch for yield. In a world where cash was earning zero, that bucket was not really contributing to the overall returns of the portfolio. One great thing about where we are now, is now that that bucket is contributing to the yields. We're getting between 4 and 5% in that bucket right now. Okay, so what you're talking about is that the short-term bucket is also comprised of the portion of the principle

that you will draw down as you harvest income from that particular portion. Yes, but again, remember, it's dynamic. So in this model, you're never using all your money. You're just yanking between 4% and 6% off of it every year. And over time, you think it's going to grow more than that. Yes, for sure. Yeah. Okay.

So the short-term bucket then is comprised of a few hours. elements. Partially, it is comprised of the portion of the principle from which you will draw down income. And also partially, it is comprised of lump sums that you intend to spend in the short term. Yep. Yeah, over and above regular budget items. Correct. Yeah. The regular budget items come from the income that you harvest from the principal. And in addition to that, there are specific lump sums for specific goals. Absolutely. And you don't want to take it. So in general, this is a rule I tell clients. If your goal is within two years, you're a saver. You're a saver. You can't take any risk. The market can't help you that much. You're not going to bet on one stock and double it because you go to zero and you can not have it. So if you're within two years, you're a saver, go get the best interest rate you can get for something that has no risk. That's not high-yield bonds. It might be high-yield savings, but the savings better have FDIC if it's high-yield. That's for two years. Over five years, I tend to think people are investors because your money could double if you catch a bit. It could also be less, but if it's a five-year goal, you can adjust around it and there's other

assets. So over five years, I think you put in a portfolio that's consistent with your general level of risk tolerance. That's going to be different for everybody. And then that needs to be customized. And then if you're between two to five, that's a tough space, two to five. Really, it's an art. You've got to talk to people.

How sad are you going to be if you're down when you go to buy it? What are your other options? How happy you're going to be if it's up? and you customize that per person at the time. Okay. Going back to the short-term bucket, where we're going to discuss all of these separately, so the short-term bucket, which is comprised of two distinct elements, one being the portion of the principle that you harvest from, the other being the lump sum specifically. What particular types of assets should each of those be invested in?

What should the lump sums be invested in? And what should that principle be invested in? Something is backed by the U.S. government, because in the U.S., we're talking, the U.S. audience, something that's backed by your government, the printing press, you're going to get the paper back. So that would be high-yield savings. That would be treasuries, and IBCDs, which are essentially treasuries, right? Right. And so you would do that even for the portion of the principle from which you will draw down income for the next two years? Yeah, for sure. You just have to keep it liquid. So let's use an example. And remember when people get to retirement, in America here,

everybody has either social security or government pension typically right and then a lot of people still have other pensions um they haven't gone away although they are going away and so we're talking only about the portion of your income that you need from your investments so let's say let's just use a round number and say it's uh 50 000 dollars so you got a hot let's say you were doing three years three to five in that bucket so we know we need 50 in year one 50 in your two 50 in your three in your three in your three and you're three in your three and you're three and three and you're three and three and you're three and That's what we need access to. If you're comfortable with the money market fund, you might get a little bit extra year to do that. That's money that you're going to pull as you need over that year. In that annual basis, you could have a one-year CD. Let me pause you here because you're talking about product and I'm asking about strategy. Because what I'm hearing you say right now is if you, for the first three years of your retirement, need $50,000 per year, what I've just heard you say is that that entire $50,000 would go in

to some type of government-backed asset. And that seems to me like a different statement than the previous statement that the short-term bucket of your investments contain the reservoir, i.e. the principle from which you draw down your income. Because if it were to contain the principle from which that 50,000 would be drawn down,

that would be a much greater sum of money. So let's again use round numbers. And let's say we were using $50,000 a year we needed. And let's say our total portfolio then was a million and a half. Out of that, we might have 150 over in that

safe bucket. But then we'd have 1.35 invested over in the growth and income budget. So you need got your three years and that three years basically is offsetting if the portfolio is down, we don't want to sell out of that 1.35 million bucket.

So what we're going to do is we're going to go pull this reservoir down. When the reservoir gets pulled down, it gets pulled back. So your statement then is not that there would be principle in the short-term bucket, but rather that the withdrawal would already be taken and then would be contained in the short-term bucket. Think about as a practical matter. So they're getting a certain amount of money a month. And with times are good, we're taking that money, 4% off of an investment portfolio that's growing at 6, 7, 8.

Right? Okay. So we're just going to sell out of shares. But on the side, you have a savings account. You want the highest interest possible. So we know the longer you block money up, the more interest you tend to get in most cases, not always. When that growth and income bucket hits a rough patch.

When that goes down, we don't want to sell out of any of those shares, right? Because what you're typically doing is once you spend money, that money's gone. So now we move that withdrawal over to, of that bucket with the one that's just sitting there. And so now we take that down. And that buys this time for that other portfolio to spring back up. So then what you are saying is that you make the withdrawal, you draw down from the principle that's contained in other buckets, you harvest that withdrawal, and then you store that withdrawal in the short-term bucket. So rather than containing principle in the short-term bucket, instead what you have in the short-term bucket,

is the harvested or withdrawn income from which you will live over the span of that short term, let's say that short term is three years. You have that contained in the bucket rather than principle itself. Yes, that's right, because you have to start it. So you start it all with principle. The system all gets started with principle. And then at some point you turn on the income. So you contain, the way you think about it is you contain three to five years of income needs

and something that's not going to drop. You want all your money to be working. So you get that money working as hard as it can for you. And its job is to not lose money. So that's why we do something that's backed by the U.S. government. Okay. So then the short term bucket contains sufficient income to cover that short term. So let's say it's three years.

The short term bucket contains three years worth of income plus any additional lump sums. Yeah, because lump sums aren't part of your income system, right? They're funded separately. All right. So that's what the short term bucket contains. and that is invested in U.S. government backed assets. Yes. Cool.

Now let's move to the medium term buckets. What is contained inside of that? So it's not really a medium term bucket. It's the rest of your bucket. And that's going to be your investment portfolio. Everybody's going to be different based on how much volatility they can withstand. And so that bucket you want to do is you want that bucket to hopefully outpace inflation, but at least keep up with it.

because that's a job of making sure that you have to double your money in retirement if you're going to be retired long enough. And most people do not like to see their actual account balances drops substantially year over year. So what you call principal declines, right? And so that bucket needs to be a investment portfolio that goes both up and down. So some people might be 80, 90 percent equity, S&P index, you know, whatever, diversified, not just single stock. and some people may be only 20, 30% equity, and then more in what they would consider conservative fixed income bonds. But that is a portfolio that you would expect to go up and down. So is this the second of three buckets, or is this simply the rest of the money that is not short-term?

That's mostly the rest of your money that's not short-term. We get into the stable income bucket and you could have lumps of money there if you're going to be in the private annuity space. but if not that would just be really composed of any corporate pensions somebody may have and of course a government pension which for most of us is social security but for some people is actually a pension right municipal or state pensions New York here in New York, Connecticut or towns or corporations a lot of corporations still big corporations sell pensions okay so it is is or is not a three bucket strategy then because in the street bucket you think about it's a bucket you could have a bucket there but not everybody will allocate

their capital to that reliability of income bucket. And the reason they won't allocate their capital to the reliability of income bucket is because they've already got capital that they've worked for in that bucket. And that's just in some kind of annuity that they have rights to, be it a corporate private annuity or be it a U.S. government annuity. Okay. So it's a minimum of two buckets with an optional third bucket if a person were to either receive or seek some type of asset that provided a reliable stream of income. Yeah, correct. Correct.

Setting aside the reliable income stream, the annuity or the pension, and focusing on the non-short-term portion of a person's retirement portfolio, which then has the objective of, at a minimum, growth that keeps pace with inflation. Should all of the assets within that be treated the same, regardless of whether they are for year four versus year 40? Yes. There's plenty of systems out there where they exhaust money as you go. I don't think of it like that.

I would think of it like that money's going forever. So what you're saying is that the time frame beyond the immediate short term, beyond three to five years, the remaining time frame for those investments is irrelevant, whether it's money that you're investing for year eight of retirement versus year 28 of retirement. Absolutely, absolutely. For me, personally, in my experience, working with hundreds of people in the marketplace I work. You know, academics will look and they'll say, you spend down your principal and, you know, you're anewitized, and you save during your working lifetime and you spend down during your retirement. That's not what happens in reality.

In reality, people die with more money than they retire with. Old people have all the money. Why? Because it's compounded more. Look at wealth in America. It's an 80-year-olds. And so, yes, people, for some reason, psychologically, we, again, it gets to that what we started talking about, Paula, which is we live on income, but we focus on assets.

People still focus on assets. So that's still their security, right? And when they age, they actually tend to spend less. So they don't want to spend it down in early. retirement because what if they live a long time and they need it and now they either if they die early they didn't need it they didn't spend it so they send it somewhere else and if they do live like the half over 85 then they slow down and they don't spend it because they don't have as much demand for a lot of stuff they do and so it keeps growing and then it's going to hit the next generation or charities or

whatever so yes there are systems out there's typically in the insurance industry they use them where they say okay you're going to have every year and you're going to spend as much but that's way too precise for me It's not actually how people live in my experience. And yes, I constantly tell people, what's your time horizon? When retiring, five years, five years. I'm like, well, when are you going to die? So it's 30 years. But you always have 30-year money.

Even when people are 80, they have 30-year money because they're not going to spend it. So I'm like, what do you worry about it for? Let it ride. Take those downs. Take, you're going to get the ups. Make sure you got all the money you need to spend every year with some safety. And then you're going to bless the next generation if you're blessed enough to have next generation or some charity where it's going to go.

We'll return to the show in just a moment. As a person moves through retirement and what was once short term becomes past, should they continually re-up the short-term bucket such that there is always a three-year bucket ahead of them? Oh, yes, yes, exactly. That's why it's dynamic. Yes, absolutely. Draw it down and then you fill it back up.

Draw it down and fill it back up. And, you know, last year was a drawdown. We're in a drawdown right now. The rains will come. We'll fill it back up. And then once you get enough, again, it's all psychological. So what's going to make somebody happy? Get to your level of happiness because the key is not to have money be a source of stress in retirement.

You've worked hard. You built it up. Don't let it be stressful. Do what you want. But in general, it gives people a roadmap. And that roadmap gives them confidence. If all of the money that is outside of that short-term bucket is being invested in the same way, meaning this is time horizon agnostic outside of the immediate short term.

How does a person avoid sequence of returns risk? Well, the short term bucket is your answer to secrets or return risk. Right? That's it. Well, you want sequence returns. And, you know, for listeners, that says, okay, if you start, you know, your retirement, you get really bad returns early in retirement, and you have to sell out of stock or you sell out of your assets that would grow in the future, you face a diminished retirement versus if you got those same low returns after 10, 15 years in retirement, now it's coming off a higher amount. So perhaps it's a bigger absolute loss, but it has less impairment on your retirement

income strategy because one, you're 10 years older and two, you've had 10 years of gains for it. So that's why we use that three to five years. That's the answer to Sequence or Returns risk. But what I'll tell you, Sequence of Returns is only one risk out there. That's one that's made a big deal out of. But there's a lot of risk out there. I mean, we just went through one with inflation. And I wrote an article for retirement daily on that.

I said, if we get 6% inflation, that steals your pension. I got all kinds of retirees that are getting ready to retire with big pensions. Well, if we get three years of inflation, that takes a big chunk of their wealth because they're never getting that back. So there's all kinds of risk. So what people do is they tend to focus on one risk. Then they assume everything else is constant. And then they say, well, I got the solution for that one. risk. But meanwhile, what they're doing is they're exacerbating other risks, right? They're

exacerbating other risks. So you just got to balance it out. Beyond sequence of returns risk and inflation risk, which you've just described, what are some of the other risks that people often overlook? Well, I think big spending risks, kids getting divorced risk. That's a big one. We're down here in South Florida, so risks of your property casualty. Being down here, if you're down on the ground, I just took people on a boat around Sanibel and Captiva. And I'm like, you would think none of these houses would be there. Plenty are there, right, because they were built for it. But there's plenty that are down because they weren't.

And hopefully, some people had insurance. So what that stuff can wipe you out. You know, unfortunately, we either live where we die, right? We make a big deal. Oh, you've got a 50% chance to live until past 84. But that means you've got a 50% chance of dying before you're 84 too. So dying early and not living. I think that's a big risk.

So what do we regret in life? So I give a lot of speeches and I'll get a room of people free COVID and I'll say, I want you to think about the dumbest thing you ever did that you were like is horrified. Put that in your mind. And eventually what you'll see is you'll see smiles going on people's faces. Because unless they were serving a jail sentence for it or it killed them, it's just kind of a funny story, right? It's like the male version, hold this beer while I do this, right? Not a good idea.

So the things we do that are stupid, the regret, it shrinks over time. it becomes a funny story. And then I say, okay, I want you to think about the shot you didn't take. I want you to think about the thing that you regret not doing. And it's the exact opposite. That regret grows over time. You got a choice. Do it. Do it. And you'll adjust as long as you analyze it. So I think there's a risk of not living. I think there's a risk of worrying too much about things in the future. Most things we worry about don't happen. And the ones that do, we tend not to see coming, like not one Wall Street analyst. They didn't see COVID coming. That wasn't in their reports for that year. Last year, they didn't tell us we were going to have, you know,

inflation and high interest rates. And so most of the stuff people worry about doesn't happen. The stuff that does happen wasn't predicted. So in general, what you want to do is just spread it out, understand what you have, then go as hard as you can at it. The risk of not fully living. That's it. That's a huge risk. Yeah. It's a huge risk. So you know how much money is passing down. It's amazing. I'm telling you, there's such a disconnect between the academics and the writers on retirement and how it is on the ground. It's not even the same world. These 401Ks that have been out there now since the 80s are going to produce the biggest U.S. middle class wealth explosion anybody's ever seen because pensions die with people. Pensions do not

create wealth. They do not create a generational wealth. These 401Ks are unbelievable. And I pretty day over the next 30 years, the story is going to go from, oh, this was a terrible thing. There was a terrible idea to, holy smoke, this was the best thing ever. Well, we are coming to the end of our time. Are there any final messages that you want to impress upon the listeners? Yeah, I started my book with a woman. It was financial crisis. She'd worked.

She did not have children. She had worked hard in factories in Bridgeport, Connecticut. Never made a lot of money. But she made enough. She had a couple thousand a month in solar security. and she had a half million dollars in the bank. And prior to seeing me, that bank money was giving her $2,000 a month. And the Social Security is $2,000.

So she had a good retirement, right? $48,000, very tax-efficient. So that's something you can live on. But when she saw me, interest rate's gone to zero. It was now 2000 a year, 2000 a year. And she was in pain. And I said, look, you got to move out. She couldn't do it.

There was no solution because what she thought was safe was, in fact, risky. Another story met a guy who was in his 80. and he said, I'm running out of money. I said, well, I'm taking $75,000 out of my portfolio, and I have half a million left. Well, the story was he retired 20 years earlier. He had a million dollars, and his financial person said, well, you don't need to take any risk. Just put in treasuries. And I went back and reversed engineered it.

Treasuries are 7%. So, 7%. inflation went up. Treasuries went down to 2%. He got a huge squeeze. Whereas if he just would have done, 50%, stock, S&P 500, Zandex and aft in Treasuries, he would have $2.5 million all through the crisis, all through the up and down. So I think, again, that the risk comes from many different places.

And, you know, it's like you have to know what the background rates are. So when you say, I fail seven out of ten times, am I good or I bet? Well, if I'm a free throw shooter, I'm terrible. But if I'm a baseball player, I'm a millionaire. So what is understanding what we expect to happen? And so you've got to expect certain things out of each of your investments and then you want to spread those asset classes out and then don't get too happy and don't get too sad and you'll be fine you'll be fine well thank you Michael my pleasure thank you Paula enjoyed the conversation and remember again we're not giving any specific investment advice or anything like that just talking in generalities here thank you Michael normally here's where we do key

takeaways but for this show let's not do key takeaways let's do a take Number one, the main idea is sound. It's true that we live on income, but we measure our finances by assets. The definition of wealth is based on net worth that's a measure of assets, not a measure of income. And often people can overfocus on assets without thinking about how to convert those assets into something that they can draw down every month. whether that comes from passive income or residual income, whether that comes from a literal withdrawal, whether that comes from dividends,

whether that comes from a combination of all of the above. So yeah, that problem, which is Michael's central thesis, I think, has been correctly identified. And his proposed solution is pretty straightforward and, frankly, common sense. Michael says, you should divide your retirement money into two buckets. One of those buckets contains money that you're going to spend in the next three to five years. That money, you should keep safe. Don't risk it. Now, how do you know how much

that is? Well, figure out how much you live on. Then add in any big expenses that you might face, big one-time lump sums that you might face. That's how much that is. Easy, straightforward, simple. And then his take is that the rest of your money, anything that you're not going to spend in the next three to years, you should invest. And then also, since we kind of alluded to a third bucket, for some of you, you'll have Social Security, assuming it's a retirement at a traditional age, or a pension, or some other form of reliable income. And that forms the third bucket. It's a straightforward statement of a problem and a straightforward proposed solution, and it can be said in three minutes. everything else is just noise.

If this can be said in three minutes, why do we need an hour to say it and a book? The reason why it takes an hour to say something that can be boiled down to three minutes, and I probably could have said it in two, is because you've got to pull in the Ibbetson-SbBI large cap index, and you've got to pull in the J.P. Morgan research, and you've got to pull in the analogy of reservoir and there's all of this noise in the financial services sector that makes all of this feel more complicated than it actually is. And sometimes you've got to go to an ivory tower and spend years talking to a bunch of nerdy poindexters in order to develop a sharp enough spidey sense and a sophisticated enough vocabulary to be.

be able to listen to the cacophony of sounds and pick out the one or two notes that actually matter to hear the music in the clamor. Sometimes you have to deep dive in order to learn how to simplify, because there's a difference between simplifying versus being simplistic. and often ideas that are simplistic get talked up with a bunch of bloviating while the ideas that are simple, not simplistic but simple,

are the ones most worthy of attention. And yet they take the least amount of time to say. Good ideas are economical. And so here's what I would tell you, Right? So many of you have called in to this podcast with questions, such as, do I need a financial advisor? How do I pick a good one? To that first question, yeah, I think it's great to get advisors on your team, not necessarily a certified financial planner, although that can help. I don't have one, but I probably should. But broadly, using the term advisors in a broad context, absolutely you want to surround yourself. with your own informal board of trustees,

people who can provide you with wise counsel. But how do you pick a good one? That is literally the million dollar question. It's a $10 to $30 million question if you start young, play your cards right, and have a couple good economic tailwinds. You know, I think rule number one when you are picking out a good financial advisor

or accountant or real estate agent or insurance broker or literally anyone on your team, a contractor. Rule number one is you need to understand every word that comes out of their mouth. Understand it clearly. If you can't follow along, then either they're bad at explaining things or they don't know either and they're using a lot of bluster to make shit. sound complicated so that you get intimidated so that you just abdicate everything over to them. Sometimes people use opakness and complexity as an intimidation tactic as a scare tactic

in order to drum up business. And those are the people that you should avoid. By contrast, when you talk to someone and the conversation is easy, not because of charm, not because of chit-chat, but when the conversation around the topic that you are there to discuss, your investment portfolio, your tax strategy, your estate plan, when those conversations are easy to follow, and that advisor is taking you in several different directions saying, hey, we could do this and here are the pros and cons,

we could do that, and here are the pros and cons, we could do this other thing and hear the pros and cons, and all of those are easy to follow. That's when you know that you're talking to someone who is nuanced, who can frame a problem in many different ways, look at the problem like a prism, check it out from all angles, see how it shines brightest, and you're talking to a person who wants you to understand,

who want you to follow along, and who understands the subject matter deeply enough to state it simply. So that's what's been on my mind today, as I've been reflecting on both the book which I read this morning, as well as the interview, which we had at 9 a.m., because the morning started at 6. And on that note, I got to go to bed. So thank you for being part of this. I hope that you learned from today's episode. I hope it sparked some ideas in you.

I would love for you to share those ideas in our community. Afford Anything.com slash community. It's a great place to share feedback, thoughts, takes on everything that you hear on this show. Affordanithing.com slash community. Hit me up on Insta. I'm at Paula P-A-U-L-A-N-T. And don't forget to subscribe. to this show and share it with your friends.

This is the Afford Anything podcast. So thrilled that we are on this financial journey together and I will catch you in the next episode.