Step 5 – Upside without the downside (protect income plan)
Buy Tony’s book here: MONEY Master the Game: 7 Simple Steps to Financial Freedom
Don’t out live your money! Ray Dalio’s (he’s an investment guru worth about $15 billion and is the CEO of Bridgewater Associates) first insight: The balanced portfolio theory (50% in stocks and 50% in bonds) doesn’t work. Generally it is thought that the two are correlated, but this is not always the case and both can fail at the same time. When you have this so-called “balanced portfolio”, your risk is very high, like 95% risk. It is lacking in security because stocks are 3 time more risky. Again, Ray also stresses here, don’t try and beat the market.
Ray’s second insight: There is a season for everything. As he sees it, there are 4 seasons: higher inflation with rising prices, lower inflation, higher economic growth, and lower economic growth. You want 25% of risk in each season because we don’t know which season will come next. We don’t know the future. Here is a portfolio Tony calls the all-weather portfolio.
Stocks – 30% (use a low cost index fund)
Long term treasury bonds – 55% (put 15% in intermediate 7-10 year bonds and 40% in long term 20-25 year bonds (The longer the higher the rate of return).
7.5% in commodities
7.5% in gold
These last two (commodities and gold) have a high volatility which will help keep your portfolio in check with inflation. Make sure to re-balance this portfolio annually. This portfolio can increase tax efficiency and it spreads the risk while still getting returns. It is also possible to implement this plan within your 401K.
The goal of investing and saving money is to have an income for life, right? Imagine having no financial stress (or at least a lot less) and being able to do what you wanted to do. As Tony says, income is the outcome. You want to have the freedom and stress free lifestyle that comes with that. It used to be thought that you only needed to save 4% over your career to have a retirement that would support you. The 4% rule is dead by Kelly Greene.
Let’s talk about sequence of returns. This is the period of time when you are in the first few years of retirement. If your investments are still allocated a certain way, a bad year can hurt your early in your retirement. The earliest years will define your later years and if you take a big hit during the first several years, you may find yourself back at work. So, the solution…. get income insurance! Couple this with an all-weather portfolio and you are looking good!
According to the Government Accountability Office, in their report to the Chairman, Special Committee on Aging, U.S. Senate, Americans should “convert at least half of their retirement savings into an annuity.” Doing this will secure your financial future. People are living longer than ever before, so we need to make sure we have a paycheck for life. Let’s talk about annuities again. As I said before, avoid variable annuities. But let’s look at two other types of annuities.
Immediate annuities – These are used at retirement age and are guaranteed lifetime incomes. You may leave your money on the table, but who cares, you’re dead. Or, get the trade off and your money goes to your heirs (but you will get a smaller pay check each month). There is a great solution here – leave your money on the table and get a life insurance policy. Win-win.
Deferred annuities – You pay into this annuity and you can turn on the “paycheck for life” whenever you want. The longer you pour money into it, the higher your paycheck will be. Use an annuity that uses a S&P low cost index or similar. There are three types of deferred annuities.
Fixed (independent of any stock market activity)
Index (tied to stock market – no possibility of loss) and you get some of the returns) and
Hybrid (benefits of index plus income lifetime rider (turn on paycheck for life).
Note: pick a highly rated insurance company and pick one that is in tax deferred environment.
Fixed index annuity (FIA) – These sound amazing. You have control, it comes back with higher annual returns, it is tax deferred, it has an optional lifetime income rider (when you turn it on), and you will not lose your original deposit/principal each year you are locked in. The catch, you need to be in your mid 50s or older. It only lasts for 20 years and you need a big deposit. This obviously won’t work for the mass public, so, Advisors Excel is pushing insurance companies to begin offering this kind of product to younger people. Go to lifetimeincome.com to educate yourself on it and set up plan.
Now let’s look at what Tony calls, “secrets of the ultra-wealthy”.
Some billionaires use life insurance to reduce taxes. This is also referred to as the rich man’s Roth. You can still withdraw money, and you don’t have to pay taxes when growing or withdrawing. It’s kind of like a Roth IRA in a sense. Being able to reduce taxes this drastically will allow you to reach your critical mass will quicker. Your critical mass is the amount of money you have to have to be able to live off of the interest it creates. Your critical mass usually has to be 20 times your income, but if you have a tax deferment like this, it will only be 10 times your annual income.
Ultra wealthy also use PPLI – private placement life insurance. You must invest $250K per year and be an accredited advisor, so obviously most people can’t use this, but we have another option. Some of us can use something called TIAA CREF. There is no commission, so it is not widely advertised, and you must set it up, or get help from your fiduciary.