David McKnight kicks this episode off by explaining how, for decades, conventional financial wisdom has been saying that, as you approach retirement, you should begin dialing down your stock exposure and increasing your bond allocation.
A 60-year-old, for example, would have 40% of their portfolio in stocks and 60% in bonds.
Historically, bonds served three primary functions: They provided income, they reduced portfolio volatility, and they protected retirees from so-called sequence of returns risk.
David touches upon how the sequence of returns risk works.
Retirees who get hit early often run out of money earlier – in some cases, even 15 years prior to life expectancy.
The old approach to retirement planning assumes that bonds could provide meaningful returns while still acting as a stabilizer. However, recent years have shown that bonds are not risk-free.
Back in 2022, for instance, the Bloomberg U.S. Aggregate Bond Index lost 13%.
Long-term treasuries did even worse, as many lost between 25 to 30% due to rapidly rising interest rates.
David stresses that an annuity can do something bonds cannot do: It can guarantee income that you cannot outlive.
It’s important to realize that whenever your basic living expenses are covered, something profound happens psychologically: You stop depending on your investment portfolio to solve every problem.
Furthermore, you feel as if you now have permission to spend.
Studies show that those who have guaranteed lifetime income spend 22% more than those who rely strictly on a stock bond portfolio.
A properly funded IUL can create a pool of tax-free money that’s insulated from stock market loss and available during downturns.
David unpacks a strategy that can increase the sustainable withdrawal rate on your stock portfolio from 4% to as high as 8% with a 95% success rate.
When you combine guaranteed lifetime income from annuities with a volatility shield in the form of IUL, you are no longer reliant on bonds, says David.
He also touches upon why retirees who adopt the no-bond power of zero approach begin to take a lot more risk in their stock market allocations.
David wraps things up by sharing insights on what retirees should think about and do to increase the likelihood that, in retirement, their money will last as long as they do.
Mentioned in this episode:
David’s new book: The Secret Order of Millionaires
David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track
Tax-Free Income for Life: A Step-by-Step Plan for a Secure Retirement by David McKnight
PowerOfZero.com (free video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
Get David’s Tax-free Tool Kit at taxfreetoolkit.com
