AWS 070122.mp3: Audio automatically transcribed by Sonix

AWS 070122.mp3: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Producer:
Any examples used are for illustrative purposes only, and do not take into account your particular investment objectives, financial situation or needs, and may not be suitable for all investors. It is not intended to predict the performance of any specific investment and is not a solicitation or recommendation of any investment strategy. Welcome to the Act of Wealth Show with your host Ford. Stokes Ford is a fiduciary and licensed financial advisor who places your needs first. You’ll help you protect and grow your wealth. The act of wealth show has grown because activators like you want to activate their retirement planning with sound tax efficient investing. And now your host Forde Stokes.

Ford Stokes:
And welcome to the active wealth show activators on board Stokes, your chief financial advisor. And I’m joined by Sam Davis, our executive producer, on this Independence Day weekend. And happy birthday, happy 246th birthday America. Sam, what are your thoughts on this Independence Day weekend?

Sarah Baldwin:
Well, first of all, Forde happy to be here. And I’m glad everyone is able to tune in and get some information over their holiday weekend. Appreciate you and all the activators being with us today. And yeah, happy birthday to America. We’re coming up on 250 years old this year. It’s 246 years from the Declaration of Independence being signed and hope everyone has a good time with family and friends.

Ford Stokes:
Absolutely. I hope everybody really enjoys it. We’re going to share in the second segment. We’re going to share how much more the July 4th picnic is going to cost this year, which is not all that great news, but at least, at least it’s good information for you to have. I want to share a little bit of history. So on July 4th, the Continental Congress formally adopted the Declaration of Independence, which had been written largely by Jefferson through the vote for actual independence, took place on July 2nd, and from then on the fourth became the day that was celebrated as the birth of American Independence, early 4th of July celebrations and traditions. According to History.com. It says that in the pre revolutionary years, colonists had held annual celebrations of the King’s birthday, which traditionally included ringing the bells, bonfires, processions and speechmaking. By contrast, during the summer of 1776, some colonists celebrated the birth of independence by holding mock funerals of King George the third as a way of symbolizing the end of the monarchy’s hold on America and the Triumph of Liberty festivities included concerts, bonfires, parades, and the firing of cannons and muskets, usually accompanied by the first public readings of the Declaration of Independence. Beginning immediately after its adoption, Philadelphia held the first annual commemoration of Independence on July 4th, 1777, while Congress was still occupied with the ongoing war. George Washington issued double rations of rum to all of his soldiers to mark the anniversary of independence in 1778 and in 1781, several months before the key American victory at the Battle of Yorktown, Massachusetts became the first state to make July 4th an official state holiday.

Ford Stokes:
And after the Revolutionary War, Americans continue to commemorate independence every year in celebrations that allowed the new nation’s emerging political leaders to address citizens and create a feeling of unity. By the last decade of the 18th century, two major political parties, the Federalist Party and the Democrat Republicans that had risen began holding separate 4th of July celebrations in many large cities. And we got a little bit of information on 4th of July fireworks. And everybody loves fireworks. The first fireworks were used as early as 200 B.C. The tradition of setting off fireworks on the 4th of July began in Philadelphia on July four, 1777, to the first organized celebration of Independence Day ships. Cannon fired a 13 gun salute in honor of the 13 colonies, the Pennsylvania Evening Post reported. At night there was a grand exhibition of fireworks. We began and concluded with 13 rockets on the commons and the city was beautifully illuminated. Just happy birthday, America. Say, I’m so glad you’re with us on this show this week. And we wanted to kind of talk about how you really should be considering investing with income in mind. And we also had a we wanted to stay colonial here. And what we’re doing is we’re we’re going to share a financial quote of the week every single week moving forward. And we want to start with this one from Benjamin Franklin.

Ford Stokes:
Beware of little expenses. A small leak will sink a great ship. And that’s from Benjamin Franklin. So be careful on the expenses that you’re spending on a daily basis. On a monthly basis, try to stay within your spending guidelines with your income guidelines as well, based on what you’re able to make from by doing a 4% withdrawal, plus your Social Security income payment and any pensions you may have, things like that. We want you to be very careful. We we want you to try to be careful about the expenses that you’re incurring on a monthly basis. We don’t want you to outlive your means. We don’t want you. To outlive your money. We want your money to outlive you. We want you to live a very long time, obviously. But one thing I want to make sure this is a really good thing to do is there’s ways to to patch up the leaks in your ship. And one of those the first one is you want to keep your expense ratio down. So within your portfolio, there are something called an expense ratio. And a lot of it comes from. Mutual funds and even ETFs. But ETFs are far more fee efficient than mutual funds. And with mutual funds are 1281 fees or sub account fees, there’s admin fees, and with variable annuities you’ve got mortality and expense fees and other types of fees. And what I would encourage you to do is to get an analysis of your current portfolio so you understand the fees that you’re paying, the risks that you’re taking, and the correlation of your assets.

Ford Stokes:
And that’s the first step to take when you’re trying to patch up leaks in your ship and. I just would tell you that most mutual funds are averaging between 0.34 and all the way up to over 1%. A year in fees. And if you’re in a variable annuity, guess what? Those those fees are adding up to 3 to 6% a year. There’s no reason to make it that much harder on your portfolio to generate a rate of return. You need to take care of yourself. So if you own a variable annuity or if you own a lot of mutual funds you bought at the bank, you walked in and walked in and bought some mutual funds in the bank, or you had a lot of mutual funds that you held in your foreign K and you did your transfer and you moved everything over value in kind from your 41k to your IRA and you decided, you know what, I’m just going to stick with these mutual funds. You’re probably overpaying. You probably have an expense ratio that’s way high. The expense ratio, the target expense ratio that we have for our portfolio is between 0.15 and 0.17. Most people that bring their fallen cars to us when they’re when they don’t have an advisor yet, they’re in the process of retiring. Guess what they are looking at? Between 0.78 and over 1% on their expense ratio that’s coming out of their account every year.

Ford Stokes:
That doesn’t show up in their statement except for the actual bottom line valuation of their one k. A lot of people don’t know that. And we’re going to drop that wisdom here on you on this Independence Day weekend, on July 4th weekend. We want everybody to stay safe out there for sure, but we also want to make sure that you’re staying fee efficient. The next one you want to do is to try to patch up the leaks in your ship. And when you’re trying to invest with income and monies, you want to save between a half a point and 1%. Just like we said, by swapping out mutual funds to ETFs, exchange traded funds will give you the same level of diversification. But at a much lower fee level, we use ETFs to implement our portfolios and we would just encourage you to do the same. And one of the best ways to do that is schedule a consultation with us and visit Active Wealth dot com and click that schedule a consultation in the upper right corner. Also, if you want to listen to any of our shows, you can always listen to our shows at Active Wealth Show that’s Active Wealth Showcase and we have that same schedule of consultation button in the upper right corner on that side as well on active wealth show dot com. You can also pick the phone up and give us a call at 7706851777.

Ford Stokes:
Again, 7706851777. Deborah and her team are standing by, but you want to get some diversification. Etfs can still offer you that same level of diversification, but a much lower expense ratio because they do not have things like 1281 fees that are marketing fees that mutual fund companies are allowed to charge for. Let me ask you, how much value are you getting for the 1281 fees, the marketing fees, the mutual fund companies are allowing you they’re allowed to charge you not a lot. When’s the last time you saw a mutual fund advertised on a billboard or on a television advertisement? I haven’t seen one in a very long time. What they’re doing is they’re taking those marketing fees and they’re putting it in their pocket. They’re not giving you any educational value. So that’s another way that the second way is a way, a great way to plug up any leaks in your ship. The third way to do, and that is replacing the bonds in your portfolio right now, because we’re in a slightly rising interest rate environment where your bonds that you currently hold are going to be worth less when interest rates go up because the new bonds are paying a higher interest rate are more valuable and they’re paying a higher interest rate. So therefore, they’re in more demand. They’re more in demand by the public. And I just don’t want you to lose market value. I really just do not want you to lose market value with your bonds.

Ford Stokes:
So that’s what we want to do. We’ve got like a minute left here. Let me get to the next one. You could cost yourself a lot more just by also trying to manage your portfolio yourself. A lot of guys out there are managing their own portfolio, even well into their seventies when they’re in a little bit of a cognitive decline as well. Just trying to save money, trying to save advisory money or portfolio advisory fee money or whatever they’re trying to do. But also, what are you going to do when you pass away and your wife is still sitting there and she has no concept and she doesn’t know what you were trying to accomplish from a financial management perspective, if you’ve got if you’re in that situation where you’re managing your own portfolio and you want to talk to somebody who’s going to be very fee efficient, market efficient and tax efficient with your hard earned and hard saved nest egg, then I would encourage you to give us a call at 7706851777. Also, I want you to visit Active Web.com and click that schedule an appointment button or just schedule a consultation button, the upper right corner. And when we come back from the break, we’re going to talk more about how to patch up leaks in your ship right now during this tough time of market volatility and and inflation, whomever is really enjoying this holiday weekend. Happy 246 birthday America. And we were right back right here on AM 920. The answer.

Never been known for his. Third. My back is broken.

Producer:
Remember, all of Ford’s listeners receive a free financial consultation just for listening to the show. Visit active health.com to learn more and schedule an appointment. Thanks for listening to the Active Welsh show and subscribing wherever you listen to podcasts.

Ford Stokes:
And welcome back Activators, the active all show on this Independence Day weekend. Happy 246 Birthday America. Sam and I want to just quickly play this important vignette from Matt McClure, our reporter, our retirement radio reporter. Sam, go ahead and play that news article that Matt is sharing about what’s going on with air conditioning and energy costs.

Producer:
The heat is likely, not the only thing making you sweat this summer. I’m Matt McClure with the Retirement Radio Network. Powered by a mirror life, with energy prices soaring and record breaking heat waves across the country, the cost of cooling your home could set you back a pretty penny this year. The Wall Street Journal reports the average American household will pay $540 in electricity bills during the summer months, up $90 from a year ago. An air conditioning can make up a big chunk of that total, especially in hotter and more humid areas of the country. Sarah Baldwin is with the think tank Energy Innovation.

Sarah Baldwin:
Because we have a confluence of factors, the increased price for both gas and oil, as well as natural gas in homes and buildings, and an extremely hot summer and likely to be record heat all over the country as well as the world, largely due to climate change. We’re feeling the pressures on both sides.

Producer:
But if you think there’s nothing you can do to ease the pain, you’d be wrong, Baldwin says. There are some things you can do that will cost you only a little, if anything at all.

Sarah Baldwin:
Paying attention to when you’re turning on appliances, when you’re turning on the AC, if you have a thermostat that you can program setting that thermostat to a modest temperature instead of going straight to really, really cold, looking at what kind of window coverings you.

Producer:
Have, other improvements may be a bit more costly.

Sarah Baldwin:
Update your air conditioner to the most efficient unit. A heat pump. Air conditioner is going to be your best bet. You can also look at replacing windows and doors. Those can be a bit more costly but can have huge benefits in the long term.

Producer:
And don’t overlook your power company. It could have some programs or incentives to help you cut back on energy use and save yourself some money in the long term, Baldwin says renewable energy is the way to go since prices are much less volatile than things like oil and gas.

Sarah Baldwin:
The sun, the wind, geothermal, hydroelectric, other carbon free sources like nuclear are all generally very cost stable relative to their more volatile and spiking fossil fuel counterparts.

Producer:
So how will you survive the summer heat and its impact on your wallet as you plan for retirement? That’s a key question to consider as the mercury and inflation keep going up with the retirement radio network powered by a life. I’m Matt McClure.

Ford Stokes:
Across the air conditioning is going up, energy costs are going up. So be careful out there trying not to overuse all the stuff. But also let’s be safe. Make sure that you’ve got a good working air condition because goodness gracious, it’s been a hot summer already. Just want to make sure that we’re sharing what’s going on in the marketplace out there for you guys and gals. And again, Matt just does a great job with as our retirement radio reporter, Alison, with inflation at a 41 year high. Americans are reeling from soaring prices. And now brace yourself for a barbecue sticker shock. This July 4th, a new study finds that the cost of the summer cookout menu has risen for some of your favorite items. A half gallon of vanilla ice cream will now cost you $7.44, compared to $4.69 last year. A whopping 58.6% increase. A pack of eight hamburger buns will cost you 55% more, with 2022 prices at $2.58 compared to just $1.66. In 2021, £2 of boneless chicken breast increased 40.7% to $9.48 from $6.74 in 2021. Two and a half pounds of potato salad increased 36% to $3.74, up from $2.75 in 2021. £1 of sliced cheese is now 23% more expensive to $4.98, up from $4.05 in 2021. So Sam, what are your favorite cookout items?

Sarah Baldwin:
Man If I’m putting together my ideal summer cookout plate, got to have a cheeseburger on there. It’s got to be good. It’s got to have some of that cheeseburger seasoning that you gave me on there for sure. I’ve been using that. I like grilled onions on my burger. And then and, you know, if I can if I can fit it on that plate, I’m. To put a bra on there too.

Ford Stokes:
And that’s super good.

Sarah Baldwin:
And I’m a potato salad guy, so I would definitely have a healthy scoop of that.

Ford Stokes:
I like potato salad, too. I like a good, healthy amount of mustard and mayonnaise in my potato salad. Probably more mayonnaise and mustard. But I like putting olives in the potato salad with a little bit with a whole lot of Himalayan salt and and obviously some great potatoes. My wife makes one of the best potato salads out there. She’s incredible at it. But you mentioned that better burger stuff, that seasoning. I mean, I want I just want to put that stuff in my corn flakes. All that stuff is awesome. And we give that to every one of our clients. And I got to tell.

Sarah Baldwin:
You, I was putting it in my taco meat. I was making tacos last night at the house and I was like, I don’t care that this isn’t a burger. It just tastes right.

Ford Stokes:
It does. It’s so good. It’s I don’t know. They’ve got some good dried garlic, dried onions in that and that stuff. It just and also some dried butter. It’s just so good, so tasty. The folks who put that stuff together, it’s just awesome. And we’re happy to be able to share that and give that to our clients because we like quality and that and that that little seasoning bottle in the glass bottle is really good. Next is I’m going to just quickly share my chicken wing recipe on the big green egg. And if you want this recipe, all you got to do is send me an email at four at active wealth dot com. It’s forward and active. So what I do is I take two to flats of chicken wings, whole chicken wings. I don’t like when they’re cut because I don’t want the fat to run out of them and we put them on the big green egg. I’ve got a second grill, so I’m a second grill surface. So that way I can get them up out of the out of the flame a little bit and really, truly smoke the wings. And I put it on at 300 degrees. And what I do is I take those wings. It’s usually 48 wings and or at least 28 wings and I will. And that’s whole wing. So you’ve got the the the drum at and the the flat together and it’s like a full wing. I put them into gallon freezer bags and I dump wishbone Italian dressing. And by the way, I’m I’m not being paid to say it’s wishbone Italian dressing.

Ford Stokes:
It’s any kind of Italian dressing you want. I happen to really like the wishbone regular stuff or you can do the zesty Italian as well. And you put five tablespoons of soy sauce in with those. You soak them overnight, lay flat and stick overnight in the fridge. Obviously leave everything refrigerated and then you take it out, you pat them dry and you put them on the grill about 20 to 23 minutes aside. So I’m cooking them a little bit longer. But the big green egg, it’s always so tender and everything. I pull them off, I take my plate setter off. So I’m now and then I grill on direct heat for a minute each side and I pull them off. And then I take Frank’s red hot sauce, butter and six tablespoons of soy sauce and and mix up a great buffalo wing sauce. It’s a little bit smokier, a little bit saltier. The soy sauce just makes it. I literally could just drink the stuff I find myself. Sam dumping a just dunking Texas toast in the buffalo sauce and then eating that. I’m not sure that’s very healthy, but then we we dust all that stuff and put them all just kind of covered all in the Frank’s Redhot sauce. We put them back on the grill for a minute, pull them back off and it’s crispy and tasting. You taste the smoke, you taste the butter, you taste the Frank’s red hot sauce. You taste the Italian dressing, you taste the soy sauce.

Ford Stokes:
Obviously you taste the chicken, you taste the chicken skin, all of it. And it’s just incredibly tender. And that is my absolute winning recipe for buffalo wings on the big green egg. And we’ve only got 3 minutes left in this segment and we wanted to recap and share. How are you going to patch up leaks in your ship here and your retirement nest egg ship, if you will? Number one is you want to keep your expense ratio down and we can help you do that. If you don’t know what an expense ratio is, I would encourage you to reach out to us at Active Wealth and schedule a consultation that buttons in the upper right corner. You’ll get booked directly into my calendar, by the way. Number two is you’re going to save between a half a point and one percentage point just by swapping mutual funds with ETFs that offer the same diversification but at a much lower expense ratio. Number three is you’re going to replace bonds with fixed indexed annuities to eliminate the fees on the safe money part of your portfolio, but also to really avoid the market risk that doesn’t come with fixed indexed annuities, but it does come with bonds. You guys and gals have probably seen you lose between ten and 15% on your bonds this year already because the interest rate keeps going up. And I would encourage you to consider replacing the bonds, your portfolio with a new type of 6040 portfolio, 60% stocks and 40%. Next annuities, and we can help you do that.

Ford Stokes:
You know, you wouldn’t do surgery on yourself. You wouldn’t represent yourself in a criminal court case. So why would you consider investing your hard earned and hard saved retirement nest egg on your own? I think you can do better and work with a fiduciary that’s got to put your needs out of of our own. And and that’s us. That’s us here at Active Wealth. And then it also comes a time for everyone when they really just can’t manage their own finances. Also, they need to be able to pass it off to somebody else to help their spouse out later when when they’re no longer around. And also, you want to ensure that your family has a plan in place should you pass away. You want to have a plan to at least pay for your funeral so they don’t have to finance your funeral. So that would be an important thing. And you want to work with someone who’s on the same side of the table as you versus the IRS. You want to work with somebody that can help you divest the IRS out of being your partner in retirement. And it can also help you generate a retirement income you can never outlive without market risk and get you some market like gains as well for a portion of your assets. I hope everybody has a fantastic week and stay safe, especially you’re out there on the lake this weekend. Please stay safe. We want everybody to arrive alive this weekend and enjoy the fireworks and enjoy the time of your family, everybody.

And I’m proud to be an American where at least I know I’m free. Google Earth still. There ain’t no doubt. If it’s still lively, even she might. Invincible.

Ford Stokes:
Chapter three Famous people who invested a significant amount of their hard earned wealth in annuities. Big idea. Annuities are for everyone. Even if you’re not worried about outliving your wealth. Annuities are safer for your money than investing in stocks or bonds or simply not investing at all. Babe Ruth, known as the Sultan of SWAT. Babe Ruth came into his glory days during the Roaring Twenties, and his manager was worried that he was blowing through all of his money without putting any of it away. He introduced Babe to an insurance agent from the Equitable Insurance company, now AXA Equitable, from 1923 to 1929. The slugger contributed more than half of his salary annually, purchasing between 35,050 thousand worth of annuities each year. The Great Depression hit the country hard. In October of 1929. Babe Ruth was forced to retire from baseball in 1935 due to health reasons. He was unemployed during the worst time in history, but Babe Ruth had his income annuity. It’s been reported that he received an income of $17,500 a year, which would translate into an annual salary of more than 290,000 in today’s dollars. His famous quote still resonates today. He said, I may take risks in life, but I will never risk my money. I use annuities and I never have to worry about my money. Steve Young. Steve Young was signed out of Brigham Young University into a $40 million contract with the USFL. That was the headline, at least in reality. Young was given an annuity that would pay out something like $40 million over the 50 years that followed.

Ford Stokes:
Given the fact that some players were not paid for playing in the final season or other seasons of the USFL, accepting the annuity appears to have been a genius move on the part of either young or his agent. The annuity payments have lasted longer than the league, and it’s safe to say that he’s made more money than probably anyone else involved with the league. To be fair, it couldn’t have happened to a nicer guy. Even with a large signing bonus and salary, he continued to wear old jeans and drive a 19 year old Oldsmobile dynamic in addition to outlasting the league. That annuity even outlasted the Oldsmobile car company. With a staggering number of pro athletes going broke after they retire. It’s refreshing to read stories about players who made smart financial choices. Shaquille O’Neal. One player who’s used annuities to his advantage is retired star Shaquille O’Neal. Over his 19 year career, he generated $292 million in total compensation in retirement. He is projected to make as much as $1,000,000,000 from endorsements, even after his career is long over, thanks to a wise agent who made him put $1 million annually into annuities from his rookie year onward. Shaq lives off the income the annuity generates with his endorsement legacy for his children. Shaq scenario demonstrates how pro athletes and other prodigious earners can protect themselves against their own personal spending errors.

Ford Stokes:
Allen Iverson. Nba player Allen Iverson earned $200 million during his career, $155 Million in salary and 40 to $50 Million in endorsement deals. Iverson ended up going bankrupt because of his overly lavish lifestyle. In a December 2012 court filing. Iverson told the court that his monthly income was $62,500, but his expenses were 360,000. Luckily for Iverson, Reebok saved him from becoming destitute by paying him an annuity worth $2.3 million in 2001. Iverson made a very smart decision that would ultimately save him. He signed a unique endorsement deal with Reebok. Not only will Reebok pay Iverson 800,000 a year for life, they set aside a $32 Million trust fund that he can begin accessing when he turns 55 years old in 2030. Since he divorced his wife in 2013, he will receive half of the trust. Another way that Iverson will be able to protect himself against future bankruptcy is his access to the NBA pension. Most pensions are set up with single premium, immediate annuities. Benjamin Franklin. When Benjamin Franklin died, he requested that the 2000 sterling he earned as the governor of Pennsylvania from 1785 to 1788 be divided equally between Boston and Pennsylvania. He wanted the money to be dispersed as a legacy 200 years later in the spring of 1990. The balance in the Philadelphia account was valued at approximately $2 million, and the balance in the Boston Trust was about $4.5 million. The money in the Boston Trust was invested using a new take on an old idea the annuity using a tax deferred index variety.

Ford Stokes:
The money was able to benefit from exposure to stock market growth without stock market loss. This allowed the trustees of the Franklin estate. A in Boston to turn an estimated $4,400 into 4.5 million, even while it was paying out an income for 200 years. Beethoven, the social luminaries of Vienna, wanted to keep Ludwig van Beethoven from leaving their country. And so in 1809, two princes and an Archduke Guarantee the musician a generous annuity. All he had to do was stay in Vienna and compose and perform his music. His benefactors have supposedly been quoted as saying something along the lines of only a man free of worries can create with such genius. Interestingly enough, Vienna also saw its time of economic downturn, and one of the annuities guarantors tried to stop paying Beethoven claiming financial hardship. Beethoven sued one and continued to receive his annuity payments. Perhaps this is what inspired the literary genius of Jane Austen, whose character Fanny observes in sense and sensibility. People always live forever when there is an annuity to be paid, and annuity is serious business. It comes over and over every year and there is no getting rid of it. Chapter six, The Rule of 100. Big idea. You want to risk less as you get older because you have less time to make up any big losses. As you get closer to your golden years, many financial professionals advise gradually reducing your risk.

Ford Stokes:
Retirees and pre-retirees don’t have the luxury of waiting for the market to bounce back after a dip. The dilemma is figuring out how safe you should be in certain stages of your life. For years, a commonly cited rule of thumb has helped simplify asset allocation. This rule states that individuals should hold a percentage of their stocks that is equal to 100 minus your age. For example, a six year old would have 40% of their holdings in stocks and 60% in fixed income products like bonds or fixed indexed annuities. Why You Should Follow the Rule of 100. Take our current example of a 60 year old. At age 40, your risk capacity is higher. You have more time to rebuild your wealth should you experience a dip in the market. However, at age 60, you can’t afford to risk as much of your portfolio in the market because the time horizon to rebuild your wealth is much shorter. Rule of 120. Many financial advisors now advocate the rule of 120 so they can get a significant rate of return for their clients and maintain management of the portfolio. I disagree with today’s market volatility. A retiree does not want to go back to work in a job making less than what they made before. They must consider following the rule of 100 or at least a 5050 smart financial plan that is built equally with smart risk and smart, safe investments. Chapter seven The 4% rule.

Ford Stokes:
Big Idea Withdrawing 4% or less annually from your portfolio will ensure that you will not draw down your account too quickly and that your income lasts for your entire retirement. What is it? The 4% rule is a rule of thumb used by investors to determine how much retirees should withdraw from their retirement account each year. This rule should ideally help provide a steady income stream for the retiree, while also maintaining an account balance that keeps their income flowing throughout retirement by withdrawing only 4% from your account. Many financial professionals believe this will help your wealth last through your retirement and that you will be able to live comfortably with this withdrawal rate. This rule helps financial planners and retirees set the withdrawal rate for their portfolios. Life expectancy also plays an important role in this process by determining if the selected rate will be sustainable. Retirees that live longer will need portfolios to last longer, and medical costs and other expenses could increase as retirees age. Where did this rule come from? The 4% rule was created using historical data on stock and bond returns over a 50 year period from 1926 to 1976. Before the early 1990s, experts generally considered 5% to be the safe amount for retirees to withdraw from their portfolio each year. In 1994, William Bengtsson, a financial advisor, conducted a study of historical returns. He focused heavily on the severe market downturns in the 1930s and the 1970s. Bingen concluded that even during those markets there was no historical basis that a withdrawal rate based on the 4% rule would exhaust a retirement portfolio in less than 33 years.

Ford Stokes:
What about inflation? Some retirees will choose to stick to the 4% rule all the time and never adjust for inflation. However, the rule allows retirees to increase the withdrawal rate to keep up with inflation. There are two options to do this. The first option provides steady and predictable increase, while the second option will more effectively match your income to cost of living changes. Option one Setting a flat annual increase of 2%, which is the Federal Reserve’s target inflation rate. Option two Adjusting withdrawals based on actual inflation rates. The first option provides steady and predictable increase, while the second option will more effectively match your income to cost of living changes. Two scenarios where you should avoid using the 4% rule. Scenario one A severe or protracted market downturn can erode the value of a high risk investment vehicle much faster than it can in a typical retirement portfolio. Be cognizant of the health of the market and talk with a professional if you have any questions or want to make changes to your portfolio scenario too. The 4% rule does not work unless you commit to it year in and year out. Violating the rule for one year to splurge on major purchases can have severe consequences down the road. It will reduce the principal, which directly impacts the compound interest that the retiree depends on for sustainability.

Ford Stokes:
Chapter 15 Bond Replacement With Fixed Indexed Annuities. Big idea. Historically, bonds have seen volatility when the market is volatile. Fixed indexed annuities are not subject to the same volatility, which makes them a much safer investment. You might have heard a financial advisor talk about replacing your bonds with annuities to protect your wealth and grow your retirement funds. At my firm Active Wealth Management, we believe this is a smart way to protect your future. Many people have learned that bonds are a safe way to invest your money, but there are some downsides to bonds that should make you think twice. We’ll talk about some reasons why you should consider replacing your bonds with annuities first. Here’s some information on the history of bonds in the United States. Historical bond volatility. The 1900s saw two secular bear and bull markets in US fixed income. Inflation peaked at the end of World War One and World War Two due to increased government spending. The first bull market started after World War One and lasted through World War Two. The US government kept bond yields artificially low until 1951. The long term bond yields were at 1.9% in 1951. They climbed to nearly 15% in 1981. In the 1970s, globalization had a huge impact on bond markets. New asset classes such as inflation protected securities, asset backed securities, mortgage backed securities, high yield securities and catastrophe bonds were created. Early investors in these new asset classes were compensated for taking on the challenge.

Ford Stokes:
The bond market was coming off its greatest bull market coming into the 21st century. Long term bond yields declined from a high of 15% to 7% by the end of the century. The bull market in bond showed continued strength in the early 21st century, but there is no guarantee with our current market volatility that this will hold. See Chart 15.1 to see the incredible difference of investing in a fixed index annuity versus investing in bonds. Why you should consider replacing your bonds with annuities. The first question you should ask yourself is this Why would you take market risk with your bonds when your bonds can lose their value? If you just look at the history alone, you can see how uncertain the future of bonds is. Inflation and fluctuating interest rates play a big role in bond yields. Interest rate risk of bonds. Bonds and interest rates have an inverse relationship. When interest rates fall, bond prices rise. Due to the COVID 19 pandemic, investors have moved their money to bonds because they believe it is a safer investment option. However, this has caused bond yields to fall to all time lows as of May 24, 2020, the ten year Treasury note was yielding 0.64%, and the 30 year Treasury bond was at 1.27%. Reinvestment risk of bonds. This is the likelihood that an investment’s cash flows will earn less in a new security. For example, an investor buys a ten year $100,000 Treasury note with an interest rate of 6%.

Ford Stokes:
They expect it to earn $6,000 a year. At the end of the term, interest rates are 4%. If the investor buys another ten year note, they will earn 4000 instead of 6000 annually. Consider the possibility that interest rates change over time when deciding to invest in bonds. Systematic Market Risk. This refers to the risk that is inherent to the market as a whole. It will affect the overall market, not just a particular stock or industry. This can be unpredictable and it is impossible to avoid. Diversification can not fix this issue, but the correct asset allocation strategy can make a big difference. Unsystematic Market Risk. This type of risk is unique to a specific company or industry. Similar to systematic market risk, it is impossible to know when unsystematic risk will occur. For example, if someone is investing in health care stocks, they may be aware of some major changes coming to the industry. However, there is no way they can know how those changes will affect the market. There are two factors that contribute to company specific risk. There are two types of risk internal and external. Internal refers to operational efficiency. An external would be similar to the FDA banning a specific drug that the company sells. Financial risk. This relates to the capital structure of a company. A weak capital structure can lead to inconsistent earnings and cash flow that can prevent a company from trading.

Ford Stokes:
Reduced advisory fees. Investors who trade individual stocks may know how much commission they are paying their broker, but individuals who buy bonds often have no idea what type of commission they are paying. Bond dealers collect commission on bonds. They sell called markups, but they bundle them into the price that is quoted to the investors. This means you are unaware of how much commission you are. Actually paying Standard and Poor’s estimates of bond markups is 0.85% of the value for corporate bonds and 1.21% for municipal bonds. However, markups can be as high as 5%, up to $50 per bond. Bonds have finite durations. Bonds only provide income for a finite amount of time, unlike an annuity which provides income for life. You must reinvest your money if you want to continue generating interest with bonds. However, reinvesting with a bond can sometimes come at a loss. As we discussed above, annuities will provide you with an income you can never outlive. Chapter 16 Reduce Risk in your Portfolio With Annuities Big idea and annuity can protect against several risks that can affect retirees and pre-retirees and offer a better financial safety net than other investment types. One of the biggest benefits of investing in annuities is reducing risk in your portfolio. With current market volatility, pre-retirees and retirees are more concerned than ever about their retirement funds and protecting their hard earned wealth. We believe that annuities can be the answer to risks in your portfolio longevity risk.

Ford Stokes:
Retirees and pre-retirees are concerned about outliving their wealth. We have offered some strategies in this book that will stretch your retirement funds, such as following the 4% rule. But annuities can offer even more protection against this fear. We are living longer, so it is important to plan for at least three decades of retirement. An annuity can help create an income you can never outlive. Your money will last for your entire retirement by utilizing monthly, quarterly or yearly distributions from your annuity account after your money grows during the accumulation phase. Market risk fixed index annuities can protect you from market risk. These annuities are not actually invested in the market. They are only tied to a specific market index. This means that you enjoy all the benefits of your market index when it performs well, but you are not exposed to any of the market risks. Should your index perform poorly, you will either make money or remain flat. You will never lose any money. Zero is your hero. Inflation Risk. Annuities can offer riders that can help you adjust for inflation, even though a rider might reduce your payout. Protecting yourself from inflation will ensure that your money lasts and is not exposed to any unnecessary risk. It is important to have an annuity with a payout linked to the Consumer Price Index or CPI instead of one that increases at a fixed rate each year. To ensure you are protected against inflation risk. An annuity that increases at a flat rate each year does not offer sufficient protection against inflation.

Ford Stokes:
Sequence of return risk. An annuity with a lifetime withdrawal benefit can counteract the effects of a down market at the start of your retirement. Research conducted by Retire One has shown that you can flip 15 years of returns from retiring during a recession to retiring during a market that is up and completely change your retirement outlook. The positive returns would offset your withdrawals and grow your assets before your account felt the effects of a negative return. Consider a smart, safe plan with a smart, safe plan. Your money is invested not in the market. The characteristics of investing not in the market include growth with safety market upside limited to no downside principal and gains protection. Low cost 0 to 1%. Annual fee time horizon of 7 to 14 years can earn 5 to 7% annually. Options are available for guaranteed income. Here are some examples of not in the market investing bank CDs. The annual percentage yield RPI is about 1 to 2%. Your time horizon is typically 1 to 3 years and you cannot access the funds until the contract is up. Treasuries, the APY is about 3%. Your time horizon is ten years and you cannot access the funds until the ten years is up. Fixed annuities the annual percentage yield is between three and 4%. Your time horizon is typically 4 to 7 years. You are able to access the funds during the contract period multi year guaranteed annuities or minus.

Ford Stokes:
You get between two and 4% growth on your principal depending on the duration of your policy. This is less growth than a fixed indexed annuity, but it is guaranteed. The annuity company is required to pay you the rate they promise for the duration of your policy. Fixed indexed annuities you receive between five and 7% growth on your principal. The time horizon is 7 to 14 years and you do have access to the funds in your account if you need them. A smart, safe plan does not invest your money directly in the market. Your investment is tied to an index without being invested directly in it. This means that you get a portion of the market gains without the. Market risk. You may want to consider investing in a fixed indexed annuity over other not in the market options. If you invest in Treasuries or CDs, you will lose ground in your investment due to inflation. Investing in a fixed index annuity will likely cut down on your inflation risk. We prefer accumulation annuities because they minimize your risk in several areas and they lock in your gains through the use of point to point protection periods, meaning you won’t lose money. Call our office at 7706851777. You can also just send me an email at four at Active Wealth dot com. I wish you a successful retirement fueled by fee efficient, market efficient and tax efficient portfolio.

Producer:
Thanks for listening to the Active Wealth Show. You deserve to work with a private wealth management firm that will strategically work to protect your hard earned assets. To schedule your free consultation, call your Chief Financial Advisor Forward Stokes at 7706851777 or visit Active Wealth Investment Advisory Services offered through Brookstone Capital Management LLC. Become a registered investment advisor. Bcm and Active Wealth Management are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Investments involve risk and unless otherwise stated, are not guaranteed. Past performance can not be used as an indicator to determine future results. Are you concerned about US tax rates being raised by the Biden administration and how that will affect your retirement? Tune in to the Act of Wealth show with Ford Stokes, your chief financial advisor, to learn how you can reduce the taxes you pay before and during retirement. The Act of Wealth show Saturdays at noon and Sundays at 11 a.m..

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