Let me show you a great strategy guaranteed to lose money every time. Welcome, everyone, to the Highball Advisors Railroad Retirement Whiteboard. My name's John McNamara of Highball Advisors and today we're going to just talk about kind of reality of where the markets are and what's going on as far as investing money. So this is my guaranteed way to lose money strategy in Railroad Retirement.
So what does that really mean? Well, the reality is interest rates are just at historical, historical lows, right? And you really ... you understand why they're here. The Fed's printing money. They're trying to boost the economy. But let's just go over that and kind of the implications that has for investing and then maybe try to reposition it how we really want to think about that.
So let's just go through this and see if this will spark a little something. So, return on investment, that's the big thing. You want your money to grow. So let's say you have cash. You have $100,000 in cash sitting around. What are your options to deal with it? You're nervous about it. You just want to hold onto the money. So you could buy a 10 year bond, but it's .7%, is where the 10-year is right now, so that's going to earn you $700 a year on $100,000. That's not really too good.
Then you could do a savings account. I looked online there. I think Goldman Sachs has an online bank. They'll do .6% for $600, so you have that option there, but that's still $100,000. $600, not that great. So what's going on? How are you losing money? Well, it's inflation. Inflation's around 2%, which is low. Historically speaking, that's a low number. So you're losing $2,000 every year on the $100,000. So if you get $700 or $600 back, you're only ... you're still down $1,300 or $1,400.
And then as we approach retirement, the big expenses in retirement are going to be on the medical side as we age and we break down a little bit. So that's running at 5% a year, so that's really significant. So you're down $5,000. So you haven't done anything. You've done everything right. Say, "Hey, I'll be safe," but the problem is inflation's going away and is eating it up. So that's a big problem.
So let's think about how we want to address that, kind of give you some ideas. So, the cash solution. What should I do with it? Well, the first thing, if you're nervous about it, is build that emergency fund. I tell clients all the time, three months of emergency money or maybe go six months of emergency, right? Have that, put it away in case something happens, you'll have the emergency fund. So that give you ... maybe sleep a little better off of that.
And then when you take the money, then you say, "Okay, well now I'm going to invest it and try to grow it," is diversify it. Don't put all your eggs in one basket. "Oh, I got a hot stock that my brother-in-law gave me," or whatever. No, diversification. Just a couple stocks go up, a few down or we're in some equities and some fixed income, right? A diversified portfolio.
And if you're still not comfortable with that, another way to do it is dollar cost averaging. You're thinking, "Oh, the market's going to go down. The election's coming. The world's going to end." All that stuff, dollar cost average [inaudible 00:03:36] will address that. Market goes down, buy a little bit more. Market goes down, buy a little bit more, or market goes up, you buy a little bit more, but you're just averaging into the marketplace. Maybe every third Friday of the month or something, you're going to purchase a little bit. That's just one strategy to kind of ease that nervousness of always buying the top. Everybody's always nervous. "I'm going to buy the top of the market and it's going to go down." This is one way to do it.
And then as Railroaders, what you want to think about now that we're talking about cash, is treat tier two, part of your annuity, like cash, right? Because it really is. It's as safe as cash. It's backed by the government. What's cash? Cash is backed by the government. This is backed by the government.
I'll give you an example. If you're married with ... you're 60 years old with 30 years of service, what's the cash equivalent of that? That's like $600,000 in cash, and how would I get to that? Well, I'm going to need $600,000 in cash to give to an insurance company to get an immediate annuity. So you've been saving that money up all those years in the railroad. Treat that as cash.
So, the way I look at it is if you have $500,000 in your 401(k), let's say the 60 and 30, they actually have another $600,000 in cash, so you're already well positioned in cash and to put more cash in is something ... maybe that's too much cash. So that's one way to think of it. Think of it as your tier two. That's a pile of cash. Think of it that way. Obviously you can't withdraw your tier two if you want to buy a house or something, but it's a cash equivalent, is kind of the way you want to start thinking about it.
And finally the other thing is come up with a three year spending plan as you come into retirement. Say to yourselves, "Okay, well, what am I going to be spending on coming up the next three years?" So you're going to have some increases obviously. If you retire early, you might have health insurance issues, that type of thing that you're going to have to be paying out. Maybe there's travel plans early in retirement. A lot of people scale their retirement. They travel early in their retirement, that type of thing.
So just say, "Okay, well I'll have enough cash for a three year plan" and then grow the remaining amount. All right, so I hope you've found this helpful. These are some ideas to address the cash situation. You're not earning any money sitting there. It's just deteriorating, so to speak. It's decreasing in value, so this is a couple ways to kind of address that.
Reach out to me if you have any questions about this. Sign up for my free Railroad Retirement Assessment. It's great. We'll give you some ideas on how to position this stuff so it will grow throughout your retirement. If you're retiring, especially if you're retiring at 60 or before, you've got a lot of jeopardy left in the game there, so you've got to grow that money.
As always, everyone, please subscribe to my YouTube channel. I appreciate that and until next time, everyone, please stay safe, stay on track and take care. So long, everybody. Bye.
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