In honor of Christmas being today and the 12 days of Christmas, we’re going to go over the 12 essentials of a retirement plan. Brian and Mike Decker are going through them one by one in detail. So, pull up a chair and take notes if you are planning to retire anytime soon!
MIKE: Good morning, and thank you for listening to Decker Talk Radio’s Protected Retirement, a radio program brought to you by Decker Retirement Planning. In honor of Christmas being today and the 12 days of Christmas, we’re gonna go over the 12 essentials of a retirement plan. The comments on Decker talk radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good morning everyone. This is Brian Decker and Mike Decker here with Decker Talk Radio’s Protect Your Retirement and Brian Decker from Decker Retirement Planning. We’ve got a great show lined up today, kind of doing a spin-off of 12 days of Christmas, 12 parts of financial planning and retirement planning. But before we get to that, let’s talk about what’s going on in the world today. Brian, what you have for us?
BRIAN: After Renzi’s ouster in Italy, some might think that Italy might not remain in the euro zone. And think it’s entirely probable that they will leave. There was an analysis done that said one day Italy will be led by a party in favor of withdrawal from the euro. When that happens, not if, when that happens, the euro exit will turn into a self-fulfilling prophecy. They’ll be a run on the Italian banks and its government bonds.
BRIAN: Angela Merkel, she has a choice between political union or Italy’s withdrawal from the euro. The latter would imply the biggest default in history. Decker Talk Radio listeners, watch the Italian banks because there’s a major problem that’s brewing over there. Italy’s treasury right now has 90 billion euros, or 76 billion lira, in arrears in debt. That’s 90 billion euros in debt for Italy. The cleanest option is for Germany to leave the euro zone.
BRIAN: If that isn’t possible, Italy can pass a law to convert its debt obligations to lira overnight. But with Germany owning all the problems of Spain and Italy and the euro’s debt, it’s been a problem for the currency to fluctuate because the currency of the euro is based on the strength of the German economy. That makes it very difficult for the weaker economies to have a currency that is very expensive, makes wages expensive, makes benefits in Italy and the weaker countries more expensive.
BRIAN: So Italy right now, bottom line, is a ticking time bomb. Let’s go over to Russia. This is a very fascinating discussion on Russia and the Russian military capability. So we begin forecasting processes with Russia by looking at the country’s military capability. Russia has intervened with Syria. The Russian military is far weaker than most make it out to be. Is that a surprise you?
MIKE: A little bit, yeah, actually.
BRIAN: ‘Cause what about the Ukraine? The performance of the Russian military in the 2008 Georgia War showed serious deficiencies. The Russians have serious difficulties maintaining supply lines for food, fuel, and ammunition. Much of Russia’s military equipment was old and falling apart. The Russian suppression of enemy air defenses and electronic warfare were deficient. And use of precision guided ammunition was rare. Joint operations of planning between different services were either nonexistent or ineffective.
BRIAN: After the war in 2008, Russia began an ambitious and vast military modernization program. They started a program to build up their defenses worth almost 700 billion at the time to revamp the equipment and the weapons used by Russian Armed Forces. According to Russian military officials, conscripts in the military have been reduced from roughly 600,000 in 2011 to 200,000 by the end of 2016.
BRIAN: Despite these improvements, Russia has neither the military capability nor the political capital to conquer Ukraine even if it wanted to. I was stunned, Decker Talk Radio listeners, to hear this because I thought that the Russian army had been kept up and modernized, but apparently it hasn’t. Russia beat Georgia because Georgia is a small country, and Russia could overwhelm the Georgians with large numbers.
BRIAN: The Ukraine is eight times the size of Georgia, in terms of total land and can field a much larger infantry. Even if Russia could blitz us all the way to Kiev, it couldn’t hold the country considering the long supply lines and Ukraine’s hostile army. The oil price collapse of 2014 has severely damaged many economies around the world. Oil has averaged between 34 and 35 dollars a barrel in 2016. Yes, it’s above 50 dollars a barrel at year-end, but it’s average price is 34.35.
BRIAN: Modernizing Russia’s military forces is one of the top priorities of the government in the next three years. But it’s not clear if Russia has the money to spend because the low price of oil. The main issue for Russia in 2017 is not gonna be a military one. Russia does not want to get bogged down in Syria, so it will be looking to extricate itself from that conflict.
BRIAN: As long as Kiev remains neutral, this is very important. As long as Kiev remains neutral and not a basing point for major US or NATO assets, the Russians will be content, though uncomfortable. The problem for Russia is that its economy is in shambles right now, and it’s trying to pour money in modernizing the military, at the same time that disturbing cracks in the Russian economy are beginning to show.
BRIAN: Since July of 2014, the ruble has lost almost 50, 5-0, 50 percent of its value. In 2010, Putin promised to spend 19 trillion rubles on upgrading the Russian military, which was the equivalent to almost 700 billion at the time. Today, 19 trillion rubles is worth only 300 billion. So the reason I bring this up is because Russia has been damaged by the lower price of oil.
BRIAN: Russia has been shutting down banks at an increasing rate and blaming them for irresponsible lending practices. Watch Russia in 2017 to kind of pull in and save its money from geopolitical conflicts like Syria. Watch and see in 2017 that they pullout of Syria and try to save money for modernizing their army and their weapons. So that was what I thought this week was very interesting.
BRIAN: Now let’s talk about the 12-in the theme of the 12 days of Christmas, Mike, let’s jot down 12 points, and talk about 12 points of a financial plan for 2017. The first thing I’m gonna do is read them off, so that Decker Talk Radios, if you have them, write them down because these will be very important to have in your financial plan. Instead of the 12 days of Christmas, we’ll have the 12 points of a solid financial plan.
BRIAN: Number one, use a distribution plan. If you’re over 50 years old and you’ve got an accumulation plan, which is the pie chart, you’re going down the wrong path. An accumulation plan is the pie chart, an asset allocation pie chart, that provides growth. It’s an accumulation plan, totally fine in your 20s, 30s, and 40s. But if you use the pie chart when you’re over 50 years old or within five years of retirement, you will put your retirement at jeopardy.
BRIAN: Markets get slammed. Your buy-and-hold strategy, that’s fine in your 20s and 30s and 40s, doesn’t help you. It hurts you when you’re over 50 years old. So number one, use a distribution plan. A distribution plan is a very effective tool that we use at Decker Retirement Planning in Kirkland. As a matter of fact, Mike, I’d love to make an offer and have people come in and see what it is. On the left side of the distribution plan, it shows all your sources of income.
BRIAN: Income from your assets, from your portfolio, income from rental real estate, income from pension and Social Security, we total it up, minus your taxes, and that gives an annual and monthly income with usually about a 3 percent COLA to age 100. Our clients know how much they can draw from their income for the rest of their lives. You can’t know that from a pie chart. The banker and broker model don’t tell you how much money you can draw. Our distribution plan does.
BRIAN: And then on the right side of the distribution plan are laddered, principle-guaranteed accounts. Bucket one is responsible for the first five years of income. Bucket two is principle guaranteed account responsible for years six through 10. And bucket three is a laddered, principle-guaranteed account that’s responsible for income for years 11 through 20. And then we have a risk account that grows with stock market exposure.
BRIAN: But we use a two-sided strategy. The stock market is a two-sided market. It goes up and it goes down. Why in the world would you use a one-sided strategy in a two-sided market? That makes no sense to us. Decker Talk Radio Listeners know we use what’s called mathematical algorithms that are trend-following. So when the trend is higher, we the market. When the trend is lower, then we’re able to use models that can protect capital and actually make money in a down market.
BRIAN: If you’re not using these types of tools, you should come in and see us.
MIKE: So when we build this distribution plan for you, that we can do it for you customized to you and your needs as well.
MIKE: So all right, Brian, that’s number one of the list of 12 distribution plan. What’s number two?
BRIAN: Number two is to know how much income you can spend for the rest of your life. If you don’t know that number, you’re guessing. And if you’re guessing, you’re putting your retirement at risk. Decker talk radio listeners, I challenge you in 2017 to know how much you can spend. If you’re guessing, we hope that you come in and see us, and we can tell you and help you. And we can do the calculations with the distribution plan on how much you can spend.
BRIAN: Before 2008, the number one fear in the United States was running out of money. I’m sorry-
MIKE: You gave away the answer. It was public speaking, wasn’t it?
BRIAN: It was public speaking. Number one was public speaking, and number two was the fear of death. And number three was the fear of going to war. So, that cracks me up. People would rather die and go to the front lines than to speak in public. After 2008, the number one fear is running out of money before you die.
BRIAN: Because of the devastating impact that that 55 percent drop in the market from October of ’07 to March of ’09, people were devastated. They got calls. This would make me angry, they got calls from their banker broker saying markets down 37 percent in ’08, but we only lost at 25 percent. And that’s supposed to make you feel good. So, we don’t like that model. We don’t use that model. We warn you that if you draw income from fluctuating accounts, you compromise the gains when the markets go up.
BRIAN: You accentuate the losses when the markets go down. And you are committing financial suicide in retirement. So, we hope that you, in 2017, know how much income you can spend. Let us help you with that. Number three, take less risks. So, in the 12 days of Christmas theme, number one is to use a distribution plan. Number two is to know how much income that you can spend in retirement.
BRIAN: And number three is to take less risk. Right now, your banker and broker model has you taking way too much risk. In fact, most of the people who come in have all their money at risk. Now try to think about that for a minute. Why in the world after working for a lifetime, 40 years, to gather assets, and now that you’ve gathered a nice nest egg to generate income, why would you keep all that money at risk? I’ll tell you why. Because your banker broker who’s giving advice, your financial advisor, is paid only if he keeps you at risk.
BRIAN: He doesn’t get paid for money that’s sitting in the money market, or in CDs, or anything that’s principal guaranteed. He gets paid management fees by keeping you at risk. So, we want you to know why your advisor is keeping you all at risk because that’s how he or she gets paid. So, in 2017, we hope you take less risk. Number four is to eliminate interest rate risk. What is interest rate risk?
BRIAN: Interest rate risk is the risk that as interest rates go up, you lose principal on your bonds and bond funds. So, when interest rates are at all-time record lows, interest rate risk are at all-time record highs. Interest rate risk is demonstrated in 1994, when the 10-year treasury went from six to eight percent in one year, when interest rates bumped higher, the average loss in bond funds that year, according to MorningStar, was around 20 percent.
BRIAN: In 1999, the 10-year treasury went from about four to six percent. And in that year, the average lost bond funds was around 17 percent. Now if we go from where we were in mid-year 2016 with the 10-year treasury around 1.6 percent back to just 4 percent-by the way, we are at 2.6 right now on the 10 year treasury-but if we go back to just 4 percent, that’s a hit to principal of about 25 percent on what banks and brokers are telling you is your safe money.
BRIAN: Please know that when interest rates are low, one of the worst investments you can own are bond funds. We wanna warn you about this, Decker Talk Radio listeners. We want you to know that the banker broker model that tells you that your safe money is in bonds or bond funds, when interest rates are this low, your money is not safe in bonds or bond funds. It is not. So we want to make sure that you know better when you’re getting bad advice.
BRIAN: Number five is to get a good return on your safe money. So here’s another reason to have people come in, Mike. A lot of people have no idea, a lot of very, very smart people have no idea that there are principal-guaranteed accounts that are making nine percent this year, nine percent.
MIKE: That’s a lot.
BRIAN: And so we want to have people come in and see the different options that they have. This would be a great time to make an offer.
BRIAN: The 10-year returns right now for CDs, treasuries, corporates, agencies, municipals, you’re lucky to find five-year returns above two and a half percent. And you’re lucky to find ten-year returns around three or so. The ten-year returns that we’re seeing on money that is principal-guaranteed that have averaged around seven percent in the last 25 years is what we, as fiduciaries, use for our clients, mostly in our planning that we do.
BRIAN: So this is something that I’d love to show clients or show any Decker Talk Radio listeners, there are options out there that are fantastic for principal-guaranteed accounts.
MIKE: Yeah, at the bottom line, the show’s called Protect Your Retirement, and that’s what we’re trying to do is show you real options to be able to help protect your retirement. Because you spent a lifetime working for it, and you don’t want it to go up in flames with the next market crash
BRIAN: On this last one, getting a good return on your safe money, there’s a lot of people who just have no idea about the options that we use because bankers and brokers are not paid security commissions on what we use. So there’s no real incentive to go out there and tell you about these good options. All right-
MIKE: Can I tell a quick story, actually, about this to put it in perspective?
MIKE: At a previous job, I was working at-and this was a while ago-I was working at a tradeshow. And one of our giveaways, just for people to talk to us, for women, we give them nail files. And for the men, I can’t remember what we gave them. I think it was like a little LED flashlight. And I walked around the entire convention just to see what else was out there, and someone was selling the exact same nail file that we were giving away for 10 dollars. They found it from the same place. They put some logo on it.
MIKE: And they were selling it for 10 dollars, and we were giving it away for free.
BRIAN: Oh, that’s good.
MIKE: So if you are smart, are you going to take the one for 10 dollars or are you gonna get the one for free out of the same products? The story I’m trying to say here is you might not know what options you have to choose from when you work with the banker or broker because they’re incentivized to only tell you about what makes them money. They’re not gonna recommend you something that they don’t make any money off of. Because we’re fiduciaries, and we do what’s in your best interest. We’re legally bound to do what’s in your best interest. We do have to show you all the options. And that’s just plain and simple how it should work.
MIKE: That’s how we do retirement planning. That’s how it should be. It’s transparency.
BRIAN: Yup, good story. Okay, so in the theme of 12 days of Christmas, we’re talking about 12 foundational parts of your financial plan.
MIKE: Can we do a quick recap of what we covered so far? Distribution plan, how much income you should take, mathematically calculating. We’re supposed to take less risk. So you know all of your assets are at risk in the market. And then interest rate risk with especially your safe money, is that right, Brian?
BRIAN: We wanna eliminate interest rate risk. And then number five is get a good return on your safe money. We made an offer to have people come in and see what we use. One of the principal-guaranteed accounts, their returns so far this year, year to date, and were getting close to year end, it’s up nine percent. Okay, number six, use trend-following risk models. If we are fiduciaries to our clients, here’s what we don’t do.
BRIAN: We don’t just go out and buy-have our clients use some mutual funds that pay us more, but give the clients less. We, as fiduciaries, can’t do that. What I just described is what a lot of bankers and brokers use. A lot of bankers and brokers will use, as mutual funds, the ones that give them the highest commissions. We don’t do that.
BRIAN: We look at NETA feed performance. So let’s talk about the portion of your portfolio that you should have in the stock market is far less than what most people have in the stock market right now. The reason is because you don’t need to take the risk that you’re taking once you’re retired. And you’re using a distribution plan. Markets seem to crash every seven or eight years like clockwork. So every seven or eight years, we have a crash like 2008.
BRIAN: Seven years before 2008 was 2001. That was in the middle of a three-year bare market, where 50 percent came out of the market during the tech wreck, the technology correction. Seven years before 2001, which by the way was when the twin towers came down, seven years before that was 1994. Iraq invaded Kuwait. Interest rates went up. The economy slowed down. We went into recession, the stock market struggle.
BRIAN: Seven years before that was Black Monday, October 19th, 550-point drop in one day, 30 percent in one day. Seven years before that was 1980. Interest rates were sky high. The economy was in recession. And in the next two years, ’80, ’81, ’82, the next couple years, the stock market took a 40-plus percent drop. Seven years before that was the ’73, ’74 bear market, 40-plus percent drop. Seven years before that was ’66, ’67. That was also about a 40 percent drop.
BRIAN: So this is where we have a pattern that every seven years or so, the markets take a big hit. And we want to make sure that you know that the markets bottomed in March of ’09 and started up in this recent bull market. The recent bull market is the second longest bull market ever in our stock market’s history, second only to the one that started in 1990 and lasted 10 years without a 20+-plus-percent correction.
BRIAN: So right now, we are in the eighth year of the stock market expansion, and the Catch-22, the conundrum, that people have that are retired is on the one hand, can’t live on CDs at one or two percent. But on the other, you can’t afford a hit like the stock market every seven or eight years in retirement. So what do we do? We do what you would expect of fiduciary to do. We go to the Wilshire database, the largest database of money managers and mutual funds in the country, and we use the MorningStar database, the largest database of mutual funds in the country, and we even use FETA and Timer Track. Those four databases, we scour through four times a year, once a quarter, to see if we can improve upon the managers, the six managers that we’re using right now.
BRIAN: Because as an independent company who can work with any mutual fund or manager, why in the world would we use someone who is second or third rate? We’re not gonna do that. We’re smarter than that. Our mathematical approach has our clients that have risk money using models that are designed to make money in up markets or down markets. These are quantitative, computer-driven, trend-following models that in 2000, ’01 and ’02, the markets were down 50 percent, these models made money every year.
BRIAN: And then when the markets went up from ’03 to ’07 and the S&P doubled, these models tracked with the S&P and also doubled. Then when the markets tanked in ’08, of the six managers that we had, four of them lost a little bit. But two of them made enough money to have the average return be nicely positive in ’08. Now let me pause there. Who do you know that made money in 2008 with the models that they’re using? And then from ’09 to present when the markets have more than doubled, these models have just kind of tract with S&P.
BRIAN: So in the January 1 of 2000 to 12-31-10, that 10-year period, is the worst decade ever, worse than the Great Depression in the 1930s. That’s a good laboratory to look and see how well these different models have done. The models that we are using now collectively have made money every year in 2000, ’01, ’02, ’03, ’04, ’05, ’06, ’07, ’08, nine, ’10, ’11, ’12, ’13, ’14, ’15, and year-to-date 2016.
BRIAN: So this is important for you to know that there’s models like these out there. Number one, they’ve been around for 30 years. The whole idea of computer-driven models is not new at all. This has been around for 30 years, and we simply use-we act as fiduciaries to our clients to make sure that you know that we are using the best models that we can find. Now our mission statement to our clients and using the risk money or the stock market monies is two-fold. Number one, we wanna keep up with the S&P when the markets go up.
BRIAN: That’s not a small task because 85 percent of money managers and mutual funds underperform the S&P every year. So it’s not an easy task to use models that are there that are keeping up with the S&P every year. So that’s number one. Number two, we want to make sure that the models that we’re using, when the markets turn lower, that these models will protect client capital and also be able to actually make money in a down-trending market.
BRIAN: So that’s what we use. We simply, on a quarterly basis, we look at all the different models out there based on NETA feed performance to see if we can improve the models that we’re using for our clients. Every quarter, I get around 60 or 70 that legitimately are beating the models that we’re using. But they fall into four categories. Yes, they’re beating us, but number one, they’re closed to new investors. I can’t use that mutual fund or money manager because they’re closed. They’re not taking any new money.
BRIAN: Number two, yes, they’re beating us. But they’re hedge funds, and we’re not interested in putting any money in a hedge fund for client who’s retired. The reason is because hedge funds have a bad habit of blowing up, of just one day, they go sideways. And we’re not interested in having our clients take that kind of a risk. Number three, yes, these managers qualify to be on their platform. But we can’t use them because the per account minimum is 3 million or more.
BRIAN: And a lot of clients don’t have that. And number four is yes, they’re beating us. But we can’t use them because they’re highly volatile. Classic example is two mutual funds, the CGM Focus Fund and also the Bruce Fund qualify based on NETA feed performance to be on our platform. But we can’t use them because in 2008, they both lost over 40 percent. So what’s left is the best six managers that we can find based on NETA feed performance.
BRIAN: So when we talk about fees, we want you to know that we, as fiduciaries, have to be sensitive to our clients paying fees. But we give a silly example that I just want to repeat here. Let’s say, Decker Talk Radio listener, I give you a dollar, and you give me a 1.10 back. And Mike here gives you 3 dollars and-actually, you give 3 dollars, and he gives you six back. So you gave me a dollar, and I gave you a 1.10 back.
BRIAN: And you gave Mike 3 dollars, and he gave you six back. Who are you happiest with? Obviously, you’re happiest with Mike because Mike gave you 100 percent return, which is higher than the 10 percent return that I gave you. And I would cry out justifiably, hey, why are using Mike because Mike is three times more expensive than I am? And you would predictably, accurately say it’s because it’s all about NETA feed performance.
BRIAN: People are willing to pay a higher fee if they’re getting a higher rate of return on a consistent basis. That’s where we’re coming from. So 100,000 base invested in the S&P 500, January 1 of 2000, in 16 years, has grown to, with dividends reinvested, around 200,000. The average annual return is around four and a half percent. 100,000 invested in the models that we use right now have grown to over 900,000. Average annual return is 16 and a half percent.
BRIAN: These are two-sided risk models that are trend-following algorithms. And these are models that if you come in, we would love to show you the names of the managers, break down every year for you because seeing is believing. We’ll show you the platform of managers that were using.
BRIAN: Okay, I’m gonna total up the first six at the bottom half hour of the show. The 12 days of Christmas, we’re offering the 12 parts of the solid financial plan. Number one, use a distribution plan. Number two, know how much income you can spend in retirement.
BRIAN: Number three, take less risk. Number four, eliminate interest rate risk on your bonds and bond funds. Number five, get a good return on your safe money. Number six, use trend-following risk models.
MIKE: Can I interject here real quick? This is not some wish list of things. These should be realistic goals that you’re putting forth to accomplish in 2017. This is something we go through with our clients here at Decker Retirement Planning, so it’s not some impossible wish-you-could-have list. These are actual things that are accomplishable, that you can implement in your retirement planning, which is a great goal, entering in 2017.
MIKE: So let’s go into number seven which is?
BRIAN: Lower your taxes. So we want to make sure once you’re income plan is finished, that we comprehensively lower your taxes. There’s four parts to our comprehensive tax minimization plan. Number one, we go to lines eight and nine of your 1040, and that’s where you have dividends and interest that show up on your 1040 IRS tax form. You have dividends and interest showing there most of the time because you have reinvested dividends and interest on your mutual funds.
BRIAN: Many people that I’ve seen their 1040, they have 15, 20,000 dollars here. And you’re paying taxes of five to 7,000 on that money every year, on money you never even touched. That’s an inefficiency that we fix by either moving those reinvested mutual funds into retirement plans like your IRA so that you don’t get taxed on them and still have the benefit of reinvestment, number one. And number two, or that we turn on your income so that instead of reinvesting that, you’re receiving it.
BRIAN: Because ideally, the only taxes you pay on your plan are the taxes that you-on money that you’re spending. And we try to reduce that is much as possible as well. So number one, we want to minimize the taxes on lines eight or nine of your 1040, where you have dividends and interest income. Number two, for tax minimization strategy, for most of you, it’s the biggest tax savings strategy in your lifetime. And for most of you, this is a six-figure tax-saving strategy.
BRIAN: And this is where we take your risk money-and this is 20-year money for our models that we use in distribution planning. We want to convert your IRA to a RAF in that account because a RAF account grows tax-free. It distributes income back to you tax-free. And it transfers to your children or your beneficiaries tax-free. It’s a beautiful account. It’s a golden account. And in fact, the color gold is the color of our risk account at Decker Retirement Planning in Kirkland for that reason.
BRIAN: It’s RAF money. We don’t convert you all at once. But over five to seven years, we have the discussion of how much money you’re making, what is your net, what is your standard deduction? We look at your adjusted gross income. And we see where you are. And without raising your bracket, we wanna convert what we can from an IRA to an RAF so that we bang away at this every year. We are not doing you a favor in 20 years by taking your IRA from 350,000 to 900,000. Now you have to pay taxes on 900,000. And the difference in taxes between 900,000 and 300,000 is dramatic.
BRIAN: So we want to help you grow that account, sure. But we also wanna minimize the taxes on it. So this point, number seven, to lower your taxes, this is the second part of a comprehensive tax minimization plan. And mathematically, we know exactly how much money you should have in a RAF account. Bankers and brokers don’t, we do. Number three, we want to make sure that if you have a state tax exposure at the state and federal level, that we zero that out.
BRIAN: And we use standard strategies to eliminate or minimize the estate tax, so that you can pass assets with zero taxes to your beneficiaries. And then fourth and final on the tax minimization plan is we wanna help you reduce the taxes on the income that you’re spending. So let’s talk about-these are for the higher net worth clients. So with 3 million or more in assets, if you think that you’re still going to work, then what you could do is have a Nevada Corporation that can lower-
BRIAN: You can get the write-offs that you can’t have without a corporation. And if you think you’re gonna work and you own your own company, the Nevada Corporation could help you receive tax-preferenced income. If you have charitable intent, then we could set up a foundation so that you could have the benefits of write-offs not possible without a foundation. And if you have a heavy real estate portfolio in your estate, then we could help you set up a family-limited partnership to transfer those assets
BRIAN: So these are ways that you can significantly reduce your income, or your taxes on your income, and receive more net after-tax income. So those are the four ways that we lower your taxes. Number eight, okay, now this is the theme of the 12 days of Christmas. These are the 12 parts of a solid financial plan. One is to use a distribution plan. Two is to know how much income you can spend for the rest of your life. Number three is to take less risk. Number four is to eliminate interest-rate risk.
BRIAN: Number five is to get a good return on your safe money. Number six, use trend-following risk models to significantly lower your risk with your stock market money. Number seven is to lower your taxes. Number eight is to use a Roth account properly. Now we touched on the Roth in tax minimization. But a Roth account, too often we see people using a Roth account and drawing from it in the first five or 10 years. We don’t want you to do that.
BRIAN: We want you to know that a Roth account should be used in your longest-term account, number one, and in your highest-growing account, number two. That combination is where we use our Roth accounts. We don’t use it in buckets one, two, or three because those accounts you’re drawing from too soon. And the returns aren’t high enough. It’s only the risk account that we use for your Roth conversion.
BRIAN: Just yesterday, we had a client come in and say that they’ve converted quite a bit of money from IRA to Roth. And they plan on using the Roth for distributions right away. And I said, geez, what a tragedy, why don’t you use it here? And mathematically, we pointed out where there were many many, many thousands of dollars ahead by using it the way that it was intended to. All right, number nine is to stay away from variable annuities.
BRIAN: We, at Decker Talk Radio, for years now have warned people to stay the heck away from variable annuities. Don’t bite on the deceptive marketing strategy of bankers and brokers that say, hey, Decker Talk Radio listener, here’s a principal-guaranteed way for you to invest in the stock market. Well, that’s a come on. It sounds really good. The problem is you have to die to get that benefit. It’s on your life.
BRIAN: And we don’t like it. We don’t use it. We warn people against the fraud and how it’s sold because it’s very deceptive. Here’s why we don’t like variable annuities. Number one, broker makes about eight percent commission right up front on that initial transaction. And then he gets paid every year you own the variable annuity. Number two, the mutual fund companies get paid every year you own it. The broker gets paid every year you own it.
BRIAN: And the insurance companies get paid every year you own it. Three layers of fees that usually add up to five to seven percent in total costs before you make a dime. We don’t like them because in upmarkets with all the costs, they lag the performance in a market like we’ve had in the last seven or eight years. And then when the markets go down, they drop faster because of all their fees.
BRIAN: There’s no downside protection. And there’s no benefit. There’s no place that we can use these types of models. They’re not a fit. We want to warn you that we have a saying that variable annuities aren’t bought, there’s sold, meaning that if you could have all the information in total transparency to make your investment decision, you never would buy a variable annuity.
BRIAN: So we wanna warn you to stay to heck away. Okay, so number 10 in the 12 days of Christmas theme, and were talking about the 12 parts to a solid financial plan, number 10 is to review your will, power of attorney, living will, trust documents. To review them to make sure that they say what you want them to say. Now here I’m gonna hit on a few things that we see. We’re not attorneys, but we work with your attorney.
BRIAN: So whatever attorney you have, if you don’t have an attorney, we have many clients that we refer business to for attorneys that are fantastic here on the east side or in Seattle. On your will, we care about two very, very important things. On your will at Decker Talk Radio, when we listen to attorneys talk through the problems, number one is to make sure that you have selected carefully-my voice is running out-is that you carefully choose your executors and your co-executors.
BRIAN: Your executors, if you’re married, is easy, that’s the spouse. But your secondary choice is usually your children. And if it is, let’s say you have two children-if you have one child, that’s a no-brainer. That’s easy. But if you have to children, there are benefits and problems with having co-executors. Let’s say that one child is right brained, and the other child is left brained. And it’s a very stressful time. They’re co-executors. Mom and dad are gone.
BRIAN: And they’re processing your estate. Sometimes being co-executors in that stressful situation, there will be friction that will separate those two siblings for the rest of their lives. So we wanna make sure, we strongly recommend that you pick one, the one that is the most logical, mathematical, linear-thinking child to process your estate with transparency to the others. So you write this into the will on what you want your secondary choice of executors to do for processing your estate.
BRIAN: So that’s the first thing when it comes to the will, we wanna make sure that you have a logical choice of primary and secondary executors. Number two is when it comes to tangible assets, typically, it’s at the bottom of page one. And it says something so ridiculous, boilerplate documents say,: “Tangible assets are to be equally divided.” The problem is you can’t do that. If you have a piano, let’s say a gorgeous Steinway piano, and you have three piano players and they’re-what are they supposed to do?
BRIAN: You can’t divide tangible assets equally. This is your house, your cars, your jewelry, your artwork. Those are tangible assets. So this is something that our experiences when we’re talking about wonderful things in the planning process and having a great time, when we talk about distributing tangible assets, almost every time, our client’s countenance goes dark. And they say, yes, my situation, I was burned in how the assets were distributed.
BRIAN: So let’s solve this. This is very easy, Decker Talk Radio listeners.
MIKE: But just a quick side, Brian, with all of this, I mean, technically, we’re talking about estate planning here. If you are listening to this and you realize, hey, there might be some things that we need to talk about with our kids or with those, what a great time, Christmas Day. Hopefully, you’re able to enjoy family around and friends. And that’s a great time to say, hey, we’re not gonna be here forever. Let’s talk about the assets that you really, really want, and we can figure out a plan.
BRIAN: So we’re not having to cut a Steinway three ways or other horrible situations that could happen. So you can preserve the relationship and have a transition for the day that you pass. We all will pass. But the planning now is gonna help make that time was painful. So I think we’re on 11 now.
MIKE: No, we’re gonna finish on the will. So on the will, we wanna make sure that, Mike-and you nailed it right there. Gosh, we’re gonna have to hurry because we’ve only got a few minutes left. On the will, you can easily put the tangible asset problems to bed by doing what you suggested.
MIKE: Thanksgiving or Christmas, having your family in the house saying, hey guys, we’re not gonna be around forever. If you see something in the house that you want, not the cars, not the house, though should have a sell provision in your tangible assets section, where the assets are equally divided. But when it comes to the other assets, do you see something you want? Put your name on it. We’ll write it down in appendix A, so that we will make sure that you get that. Now typically, commonly, we see if there’s a few girls that want mom’s wedding ring and mom’s wedding dress.
MIKE: So you have to work it out with them. But now you’re having the conversation. You’re trying to create a fairness in distributing assets. And it solves the problem, and it dissolves the issue of probably, high probability, of having a strange relationship with those siblings. They all feel that they were burned and ripped off after going through the process of distributing assets of mom and dad. All right, so that’s the will.
MIKE: The power of attorney documents, we want to make sure that your trigger clauses to activate your power of attorney documents, these are documents where you’re not dead. You’re incapacitated, and your power of attorney health care has someone represent you as spokesman. If you’re in a coma or an unable to represent yourself, usually, the spouse is your agent, your primary choice. Who is your contingent agent? It’s the same type of discussion. Hopefully, a linear thinker, objective, someone that the rest of the siblings would expect to be that choice.
MIKE: And it’s activated. Sadly, we see the primary care physician thrown in there a lot of times. Well, what happens if you’re in France or in Florida or in Maui or something on vacation and you’re incapacitated? We recommend two doctors. Any emergency you can go in and get two doctors to state that you’re incapacitated by running some easy tests. So that’s what we recommend is just simply two doctors. Why not one? Because if you go in to an emergency room and one of the docs is up over 30 hours, that decision is very, very important.
MIKE: You wanna have two doctors state that you’re incapacitated and can’t make your own finance or healthcare decisions. So those are two separate documents, power of attorney finance, and power of attorney health care. Anyhow, I’m just gonna move on because we only have a few more minutes.
BRIAN: Yeah, but for-if you want more information on estate planning, go to our website, www.Deckerretirementplanning.com. We’ve got a number of articles there, as well as you can listen to this radio show, the previous times we’ve addressed estate planning, to get more information, but let’s go on to our next point.
BRIAN: Okay, darn, there’s more information on wills and-there’s more information on trust. And maybe we’ll have time to go back to that. Number 11, eliminate estate taxes. Paying estate tax-actually, there’s a 50-50 split when it comes to estate taxes. Estate taxes are when your total estate is over 2.2 million at the state level and a little over 5 million at the federal level per person, you are exempt on the first 5 million for the federal level in 2.2 on the state level. You will pay estate taxes if your estate is above that.
BRIAN: Now you’ve got to make sure-let’s say that you’ve got a husband and wife. They have 4.4 million dollars. They’re not exposed to any federal taxes, but you’ve gotta make sure in the will or in your trust documents, that you have the exclusion that you’re going to use and have a decedent trust, so that you have the ability to take that exclusion of 2.2 million
BRIAN: And then when the other spouse dies, the other 2.2 is also guarded and protected for the exclusion. If you don’t use the exclusion, here’s what happens. And this sadly happens to far too many times. You have a 4.4 million dollar estate with a couple that’s still alive. It shouldn’t have any problem with it. But the problem is that you have-let’s say one spouse dies, and then the other spouse receives, in a community property estate receives, all those assets
BRIAN: So now we’ve got a situation where one person, the surviving spouse, has a 4.4 million dollar estate. That’s higher than the individual exclusion of 2.2. Now that person is going to pay unnecessary estate taxes on 2.2 million dollars. And it’s a tragedy because for very little money and some easy work done on your will or trust documents, those estate taxes could be eliminated.
BRIAN: But back to the beginning on estate taxes.
On estate taxes, half of our clients feel this way. Hey, whatever Johnny and Sally get, net of estate taxes, is more than we ever got. And so we’re not gonna do anything. We’ll pay the estate taxes and net of estate taxes, they can get whatever’s left. The other feeling and philosophy on estate taxes is after a lifetime of paying taxes, I would roll over in my grave if I knew that they would take another hunk of flesh, that’s not gonna happen.
BRIAN: So we wanna make sure that we help you minimize the estate taxes. Number 12, we have, I think, 60 seconds-
MIKE: Yeah, we gotta wrap this up quick.
BRIAN: Number 12 is inflation protection. So the 12 days of Christmas theme is to make sure that you have income 20 years from now with COLAs to make sure that your protected and make sure that the dollar you have today is gonna pay you the dollars that you need to receive, net of inflation, 15, 20 years from now. So we have a four point part of inflation protection.
BRIAN: But Mike, I don’t have time to go into it. I’m gonna say real quickly the 12-do you wanna say the 12 parts of-
MIKE: Yeah, I’ll go over the 12 days of Christmas.
BRIAN: Close it up.
MIKE: Absolutely, so the 12 parts of a solid financial plan and in memory of the 12 days of Christmas is distribution plan, how much income you can take, take less risk, interest rate risk. Number five is a good return on your safe money. Number six, use trend following models, two-sided models for a two-sided market. Number seven is lower your taxes. Eight, use a Roth properly. Nine is stay away from variable annuities.
MIKE: Number 10, review will, power of attorney. Eleven is eliminate estate tax. And 12 is inflation protection. And for more information, go to our website, www.deckerretirementplanning.com. You can catch the show, past shows, and a number of articles to benefit you. So until next week, take care. Have a Merry Christmas, and Happy Holidays.
