MIKE: This week we’re talking about the seven points of risk that you may not be accounting for in your retirement plan.
MIKE: I am here with Brian Decker, from Decker Retirement Planning out of Kirkland and Seattle. I just want to point out that Brian is a licensed fiduciary. That’s an important term here. And I want to bring that up to the beginning of this show because we are covering the seven risks people forget to or might just not be aware of to take into account for their retirement plan. And Brian as a fiduciary and correct me if I’m wrong but you’re legally liable as… and you’re legally bound to do what’s in the best interest of the client with all things aside.
MIKE: And that’s an important thing why Brian we’re going to be going over this and being transparent and letting people know what’s going on so they can make smart decisions for themselves; wouldn’t you say so Brian?
BRIAN: Right a fiduciary Mike, is someone who is required by state law to put clients’ best interests before our company’s best interest. A banker is not a fiduciary. A broker is not a fiduciary. A broker many times will sell whatever he’s incented to sell or pays him the most. Classic example of a non-fiduciary is someone who like a banker or broker will keep all someone’s investable funds in retirement at risk. Because the banker or broker is not paid unless he keeps you in risk.
BRIAN: The funds that are in CDs, treasuries, money market; anything that’s “Safe” is not being able to be part of the fee income, the management fee that the broker or banker gets. So we could never do that. Another classic example, Mike, is the REITs: the non-traded REITs that are horrible. These are where the banker or broker gets paid 12 percent commissions right up front to lock you up into a non-traded real estate investment trust or a variable annuity which we don’t like.
BRIAN: Variable annuities are where the banker or broker gets paid eight percent right up front. He gets paid every year you own it; the insurance company gets paid every year you own it and the mutual fund companies get paid every year you own it. Three layers of fees that usually add up to five to seven percent before you make a dime. When the markets go up you lag because of all the fees. And when the markets go down you lose more than the market because of all the fees.
BRIAN: We don’t like them, we don’t use them, we never have used them. So we act as fiduciary to our clients and we want to perform a community service by warning Decker Talk Radio listeners to stay away from variable annuities and non traded REITs; those are typical types of investments of a non fiduciary salesman but that gets paid a lot of money to paddle those things.
MIKE: Oh yeah, and it’s not that they’re bad people. I mean let’s be very transparent; they just, they need to put food on the table and the way that the banker/broker model is, is a commission structure and they’re only going to tell you what makes the money.
BRIAN: That’s a good point
MIKE: And so we want to be fair to them; they’re good people and when you do sit down they do want to do what’s best for you. But they’re not going to tell you… It’s like saying you know if you walk into a consultant and say, “Hey I have a business, can you help me out, but I don’t want to pay you anything; is that okay if I use your time.” That’s not going to happen. Bankers or brokers they’re happy to help you but they’re only going to tell you about what makes the money or else they just won’t be able to put food on the table. And so it’s a big difference there and not that they’re bad people.
MIKE: They’re good people that just have limited resources and are paid with a conflict of interest in mind. But let’s go over; I want to go over Brian if its okay, all seven right now. And then from there we’re going to go dive into detail about each one of these. And so these are the seven risks that people are probably forgetting to in account for when doing your retirement plan. And just for a heads up here we are going to be extending a few offers throughout this show that if you’re not aware of these risks or maybe or unsure about that you haven’t accounted for the risks call.
MIKE: We are doing this at no cost to you to come in and help protect your retirement. It is only to your advantage to have at the very least a double check to make sure that you’re not going to have another disaster like with so many happened in 2008. So here you go, the seven points or the seven risks to account for. We have interest rate risk, we have credit risk, we have stock market risk, long-term risk, liability risk, spousal risk which is death or divorce and liquidity.
MIKE: Which isn’t necessarily a risk in itself if you do your investments correctly, however we Brain, we had a client, I don’t know if you remember the gentleman a couple of years ago that almost his entire portfolio was in non-traded REITs. That wasn’t a very good situation. So we’re going to talk about that to make sure that no broker or banker backs you into a corner like that. So Brian let’s start right off the bat with number one; interest rate risk.
BRIAN: All right, interest rate risk is where you have risk of loss of principal as interest rates go up on your bond funds. So if I can over the radio describe that interest rates on the 10 year treasury yield have only gone to two percent twice before in the history of the United States. So right now the 10 year treasury is about 2.35 percent. We are at or near all time record lows when it comes to interest rates. They’re very, very low right now.
BRIAN: Interest rate risk is what you lose when your bond funds when interest rates go up. So for example in 1994… I’m sorry; in 1994 the 10 year treasury went from six to eight percent in one year. At that point according to Morning Star the average bond fund lost 20 percent. In 1999 the 10 year treasury went from four to six percent; the average bond fund that year lost 17 percent.
BRIAN: If we go from where we are now which is at 2.3 percent, back up to just four, that’s a hit to principal of 15 to 20 percent and yet… and ladies and gentlemen this makes no sense. Bankers and brokers are telling you to put your “Safe Money” in bond funds. Bond funds are not safe. When interest rates are this low bond funds are not safe. Even Bill Gross of Pimco used to be… I’m sorry; he used to be at Pimco, now he’s at Janus.
BRIAN: He would… He’s had interviews with Barron’s recently that we quote that he talks about in that interview how there’s four important parts to know when it comes to interest rate risk. And Bill Gross is arguably one of the smartest people in the world when it comes to bonds and bond funds. He says, number one, that you’re not paid enough for the interest rate risk that you are taking.
BRIAN: Number one, number two; he says that what the Federal Reserve Bank is doing right now in our country is unsustainable. Number three, he says that eventually interest rates have to go higher and number four, he says that people who have money in bond funds are going to experience significant losses. So this is from the smartest man in the world in bond funds. And he’s warning people to go away from bond funds. And we want to make sure that you, Decker Talk Radio listeners know that when your banker or broker tells you to put your safe money in bond funds that is financial malpractice.
BRIAN: Now like you said Mike, it’s not that these are bad people, they’re just trained differently; mathematically, factually. When interest rates go up you lose money on bond funds. And when interest rates are this low you have very high interest rate risk. And on top of that the bankers and brokers use what’s called the Rule of 100 to identify how much you should have in “Safe Money”. So if you’re… The rule of 100 says if you’re 55 years old you should have 55 percent of your money in bonds or bond funds.
BRIAN: 60, 60 percent. If you’re 65, you should have 65 percent, etcetera. So the people… that makes no sense right there. With interest rates this low, you have 65 percent of your money earning almost nothing and you have seriously high interest rate risk. So Mike, in distribution planning that we do and as fiduciaries to our clients we do believe that some of your money should be safe. We agree with that. But bond funds are not safe. Bond funds are not safe.
BRIAN: So we want you to know that there are options out there that are principal guaranteed that we use for our clients that in the last 15 years have averaged six and a half, seven percent principal guaranteed. In fact the best one that we had last year did over nine percent last year. If you don’t know about these you should come in and see us. Mike, let’s provide an offer for people that know that they should have safe money but are getting a very low return so that they can come in and see what we recommend and what we use for our clients for principal guaranteed money that have averaged six and a half, seven percent.
MIKE: Oh yeah absolutely. But before we go there Brian, I want to kind of wrap up a different aspect of this. I had a great conversation with a very dear friend of mine about interest rates and how I was arguing like we do right now and saying that it doesn’t make any sense to put money in bond funds; with interest rates at all time near lows, with interest rates that possibly could go up it doesn’t make sense. And he said, “Well I’m okay with it personally.” And this is the gentleman I was talking to. “I’m okay with it personally because if bonds lose funds I don’t care. That just helps offset any capital gains I may have incurred.
MIKE: Now Brian can you repeat back what he had just said and kind of put that in prospective. Because if you want a tax efficient strategy then maybe that would work, but big picture for retirement; that doesn’t seem like it would be the best idea. Okay to lose a lot of money in bond funds to offset some tax breaks.
BRIAN: I want to talk about taxes separately, but I want to stay focused on interest rate risk. And this guy is allowing the tax tail to wag the dog. The focus is not to minimize taxes on your portfolio. The focus is to minimize your after-tax return on your portfolio. That’s where we can compare apples and apples. The focus is to maximize your after-tax return on your portfolio.
BRIAN: In fact when we talk about taxes, if we let the tax tail wag the dog; the most ideal… according to taxes. The most ideal portfolio return is to lose 3000 dollars a year, because that ways there’s no dividends or interest to tax. There’s no capital gains to tax. And you have a credit for losing 3000 dollars a year. Now that makes no sense. So we don’t let the tax tail wag the dog.
BRIAN: But Mike I want to stay focused on interest rate risk. There are ways that our clients can have principal guarantees, zero interest rate risk and make six or seven percent on their safe money when CDs and treasuries are down in the twos.
MIKE: And when you call in, just to clarify, they’ll gather your information and then the following week we’ll reach out and schedule a time that works for you and works for us to visit. And I just want to be also pretty transparent here. We do get callers every single week. It usually takes two weeks to schedule with us. Our calendars are full, but we have set aside a couple of spots for our radio show callers so they can come in at their convenience. And we want to be open and transparent to you. So call now while we have those slots still available uh, only for the next 10 callers. Um, all right Brian, are you done with interest rate risks; should we move on to credit risks?
BRIAN: Yeah let’s talk about credit risk. Credit risk is the risk that your municipal bond specifically won’t pay back the full principal at maturity; that’s called credit risk. There is 49 out of 50 states that have taken on pension obligations they can’t possibly pay back. They cannot possibly pay back the pension obligations that they’ve taken on. North Dakota is the only exception. North Dakota two years ago had a referendum to vote out the State Income Tax because they didn’t need the money.
BRIAN: Fracking and energy services have produced so much money up there that they’re awash with cash. The other 49 states, not the case. So what is going to happen; municipalities along with the pension obligations are part of the state obligations and there will be a day of reckoning when they will be required to reorganize and figure out how much or what percentage of that debt that they can pay back.
BRIAN: We don’t want our clients to be involved in it. The last municipal bonds that we held we sold in 2008 and have not purchased a municipal bond since 2008 because the extremely high credit risk. Credit risk can be shown every month; this is very important Decker Talk Radio listeners. I hope that you jot a note down if possible. Every month you get your banker or broker statement.
BRIAN: And in your statement, you have a bond price for your municipal bonds. When interest rates are these low municipal bonds with a coupon payment of three, four or five percent, those should be trading at 109, 110, 115, somewhere in there. If they’re trading below par and they’ve got a coupon of three, four or five percent you have a problem with that bond. Your banker or broker will not have called you and told you about it. You can tell by the price that the confidence in that bonds ability to pay back principal at maturity is very low.
BRIAN: I’m not talking about zero coupon bonds. I’m talking about three, four or five percent coupon bonds that should be trading between 109 and 115. When they trade below par that is a hint that you’ve got problems. What we hope that you do is you pick up the phone and sell the bond. Don’t call your banker or broker who sold it to you because they will want to save face at your expense and tell you that, “Oh there’s nothing wrong with this bond.”
BRIAN: And you hold it and then you find out that it has major problems. The last time we saw this happen… not the last time but four years ago bond prices for Puerto Rican issues started to trade below par. We told people to sell them. And the people who did, remember this is your “Safe Money” were able to receive par for their bonds. The people who didn’t are now sitting with 30 cents on the dollar in principal because Puerto Rico is broke.
BRIAN: There are municipalities that in 2008 and 2009 and even since then have gone broke. And those bonds go to zero. Philadelphia, Detroit, New York City, some California municipalities have had their bond prices drop below par. We want to make sure, Decker Talk Radio listeners, that you have this nailed down in your mind that you look at the bond prices every month and if it trades below par you just sell it. Protect your assets.
BRIAN: Make sure that you don’t have significant credit risk with your municipal bond portfolio. All right Mike, that’s all I want to say on credit risk. And as always, we don’t need to make an offer on each one of these. But if someone wanted to come in I’d be happy to look at their bond portfolio and review it. I did that just last week for a client that was catching a plane to Japan and she wanted me to review her portfolio. And we went one at a time down the portfolio to make sure that her bonds were safe.
BRIAN: And to her credit and by the way, her banker or brokers credit; she had a high quality municipal bond portfolio. Still we wouldn’t recommend that you have that portfolio because she’s not getting paid anything. And by the way; right after she bought the portfolio with the banker she experienced in her bond portfolio a significant loss of principal on her bonds. She asked me how that could happen so quickly.
BRIAN: I said it’s because commissions. The banker or broker was charged about two percent commission so the bond prices immediately reflected that drop. And she saw that drop in her portfolio. So anyhow we’re going to go into stock market risk. But if anyone wants to come in to see me and we can talk about credit risk and go over your municipal bond portfolio, Mike who would they call?
MIKE: Yeah, well on our website just reach out to us that way if you want to talk specifically about that. We’ve got a lot of information about bonds and bond funds as well. You’re more than welcome to call and one our… keep listening and in one of our next offers you’ll be able to call at that point. But I do want to refer people also to our website; www.DeckerRetirementPlanning.com as there’s a lot of great information and call us. I mean we are happy to sit down and talk with you. It’s at no cost to you. Our bottom line is to help people protect their retirement. We just want to help people and we want to make sure people are making good decisions.
MIKE: As a fiduciary as well as… we just we care. We’d love to talk about your portfolio and your plans and what your goals are. It’s just it’s a great time. We really love what we do. So, well let’s keep going; the stock market Brian; the stock market risk.
BRIAN: Yeah let’s talk about that.
MIKE: This is a big one. As the stock market it just seems to keep going up. It just seems to keep doing awesome.
BRIAN: Right.
MIKE: As of late. And so what’s really happening from our perspective?
BRIAN: Stock market risk in my opinion is the number one destroyer of people’s retirement. I can’t tell you how many times; here we have up in the Seattle area; we have Boeing, Costco, Amazon, Starbucks, Microsoft; many of the major companies whose executives we have as clients. And at Decker Retirement Planning, when these people are within five years of retirement and the stock market goes down 30 or 40 percent they can no longer retire; they have to push that out.
BRIAN: Or if they are retired and they take a 30 or 40 percent hit of their investible assets and they draw income from that on top of that; those people can no longer stay retired. And so we want to warn people that stock market risk even above inflation is the number one destroyer of people’s retirement. Every seven or eight years the stock market takes a major hit. And at Decker Retirement Planning we have tools that we use to minimize stock market risk. And we’ll talk about that in a second.
BRIAN: I want to give you some dates here. Every seven or eight years the market takes a major 30 plus percent market drop. So 2008 unmistakable. From October of ’07 to March of ’09; that was a 55 percent drop. Seven years before that was 2001; middle of a three-year bear market; 50 percent drop. Seven years before ’01 was 1994; Iraq had invaded Kuwait; interest rates went up, the economy was in recession, the stock market struggled.
BRIAN: Seven years before that was 1987; Black Monday, October 19th. That was a 30 percent drop in one day. Seven years before that was 1980. From ’80 to ’82 was a great recession. The stock market lost over 40 percent in two years. Seven years before that was the 1973-74 bear market; 44 percent drop. Seven years before that was ’66-’67 bear market. At Decker Retirement Planning we want to point out that this has been going on a long time.
BRIAN: It goes on even before that; so every seven or eight years the markets take a major hit. Now the markets bottomed in March of ’09 and we’ve gone up around 160 percent since March of ’09. And the expectation is that we just continue to go higher. We don’t want to ignore that right now we are in the second longest expansion; year nine of a seven, eight-year typical market cycle.
BRIAN: So what that means is, the longest market expansion ever is 10 years, ever. So we’re in year nine. Decker Talk Radio listeners, I hope that if you’re expecting the markets to continue to go higher, I hope you put yourself in a win-win situation so if the market goes higher you benefit, but if the markets go lower you don’t take that 30 plus percent hit. And how can you possibly do that?
BRIAN: Let me describe a distribution plan. By the way an asset allocation plan which is a pie chart is where the banker or broker has all your money at risk, tells you to do a buy and hold strategy where you take that full hit in the stock market. It takes you four years to get back to even; you’re drawing money from that portfolio. So you are committing financial suicide by following that banker/broker model. By the way again, these people aren’t bad people; they’re just not trained to deal with people in retirement.
BRIAN: That accumulation strategy is fine in your 20s, 30s, and 40s because that’s when you’re getting a paycheck and you can ride out the market hits. You can’t do that when you’re over 55 years old. You’ve got to stop playing that accumulation game and switch over to a distribution plan. In distribution planning, we have the first five, 10, 15, 20 years of income coming to our clients from principal guaranteed accounts that have averaged six, seven percent in the last 15 years.
BRIAN: When those clients are receiving income from principal guaranteed accounts it means that the markets that crash every seven or eight years have no, no influence on our clients’ income. None, zero, nada; no principal is lost and our clients that did the planning sailed through 2008 unaffected, unaffected. Who can say that?
BRIAN: Try to find any banker or broker or financial planner that didn’t get creamed in 2008. At Decker Retirement Planning we didn’t. The people who did the planning didn’t even have to… they didn’t have to sell their home, move in with the kids. They didn’t have to go back to work. They didn’t even have to change their vacation plans. This is priceless piece of mind because of how we invest your income for the first 20 years of retirement. Now our clients; most of them all have stock market exposure.
BRIAN: And when it comes to stock market exposure we get it, you’ve got kind of a quandary that you’ve got to deal with in retirement. In the one hand you can’t deal… You can’t solve everything with CDs at one or two percent; we get that. But at the same time you cannot, you cannot take another hit like 2008. So at Decker Retirement Planning what we do is we use a two-sided model approach.
BRIAN: Because we are independent that allows us to work with the best money managers in mutual funds. And a few times a year I personally go to the two largest data bases in the world; one, Morning Star for mutual funds, and the other, the Wilshire database for money managers. And I just want to know who is beating the six managers that we have currently in place. And every time I do this search I get around 60 or 70 that are legitimately beating the managers that we have.
BRIAN: But they fall into four categories; number one, yes, they’re beating us but they’re closed to new investors; can’t work with that. Number two; yes, they’re beating us but they are hedge funds and we won’t work with a hedge fund. We won’t put your retirement money with a hedge fund because of the volatility of the typical hedge fund. Number three; and this is the biggest category. Yes, they’re beating us but their per account minimum is three or four million dollars; we can’t diversify that.
BRIAN: And number four is high beta funds. So mathematically the Bruce fund and CGM Focus; two mutual funds deserve statistically mathematically to be in our platform. We can’t use them because in 2008 they both lost over 40 percent. So what we are left with is statistically mathematically; these are the best mutual funds out there that do two things. Number one, they keep up with the S&P when the markets go up and they protect principal when the markets go down.
BRIAN: Two-sided risk strategy. By the way, I just want to point out at Decker Retirement Planning it makes no sense to us, there’s no sense to have a one-sided strategy in a two-sided market. The bankers and brokers will tell you to buy and hold and ride it up and ride it all the way down and continue to draw money. And you are committing financial suicide by listening to them and following that advice in our opinion.
BRIAN: A two-sided strategy did the following. And by the way January 1, 2000 at 12:31:10 that 10-year period is the worst decade. It’s called the Lost Decade. But it’s the worst 10-year period based on S&P stock market performance in the history of our countries stock markets. Worse than the great depression in the 30s, 1930s. So in 2001 and ’02 how did these managers do when most people lost 50 percent?
BRIAN: Well one mutual fund that we’ve been using made 40 percent during that period and the other made a little over 30 percent during that period but they didn’t lose money. And then from ’03 to ’07 when the markets doubled so did these managers. And then when the markets took that major hit from October of ‘07 to March of ’09 the six models collectively made money and then from ’09 to present when the markets are up over 160 percent these models tracked with that on the upside.
BRIAN: Now at some point the markets going to roll over again. At some point the markets going to take this hit, this next hit; are you ready. Are you going to seriously follow the banker and brokers advice and take another hit unnecessarily because strategies have been available for decades that allow you to protect the downside with your risk money?
BRIAN: So we are a proponent of using a two-sided strategy in a two-sided market. And we significantly lower the risk to your portfolio by using a two-sided strategy in a two-sided market. Not a one-sided strategy in a two-sided market. The bankers and brokers don’t have a strategy for protecting risk money when the markets go down. They tell you to just ride it out; buy and hold.
BRIAN: So Mike, let’s make an offer. I’m going to throw out some numbers here and after that have people come in. 100,000 dollars invested in the S&P 500 with dividends reinvested grows to the end of 2016; last year a little over 220,000 dollars. And by the way, 85 percent of money managers and mutual funds underperform the S&P every year. So not many people have beat that. 100,000 in 16 years grows to over 220,000 dollars.
BRIAN: 100,000 invested in our models, net of fees grossed over 900,000. Average annual return is 16 and a half percent net of fees. This is something you’ve got to see. Decker Retirement Planning in Kirkland and Seattle; we’d love to have you come in. We’ll show you the details on these models. You no longer have to use the antiquated, prehistoric; ridiculously… they don’t make any sense, strategies of bankers and brokers.
BRIAN: All right, number four Mike here is long-term care, not long-term risk. Long-term care risk.
MIKE: Long-term care risk, exactly. And this is an important one. Long-term care Brian, isn’t the long-term care policies aren’t they a bit, I don’t know if this is the right term, but outdated. People are just living too long and so the premiums are just not… they don’t make much sense, is that a good way to put it?
BRIAN: A lot of insurance companies are getting out of the long-term care business because it’s not profitable the way the models are set up. So let’s talk about this; the long-term care risk in retirement is the risk that one spouse bankrupts another spouse because of their medical costs. So to minimize or eliminate this risk you’ve got six options. One the most… probably the most popular. And by the way I want to step back and talk about statistics that we don’t like.
BRIAN: Again we’re fiduciaries to our clients. The long-term care industry will tell you that 70 percent of Americans will spend time in a long-term care facility. We don’t like that statistic because it’s skewed because they’re’ using even one day of hospice. So if you strip out 30 days or less of hospice, now the numbers actually flip. 70 percent of Americans don’t spend time in a long-term care facility. We die of heart attack, stroke, car accident; whatever it is, we just die.
BRIAN: Die at home or whatever. But of this 30 percent that do go to a long-term care facility around half of those are there nine months or less. But for this illustration let’s talk about a worst-case scenario. So at Decker Retirement Planning let’s say, because we try to be mathematical in our approach. Let’s say that you’ve got a healthy body and Alzheimer’s. That’s the worst-case scenario when it comes to long-term care.
BRIAN: So let’s walk through that situation, and sadly Decker Talk Radio listeners, several of you, many of you have experienced what I’m going to tell you. The first third of the journey is when one spouse takes care of the other spouse, there’s no cost, there’s an emotional drain, there’s no cost because one spouse is taking care of the other for the first third of this journey. The second third is where it’s gone beyond his or her capacity and strength and so they hire in-home care.
BRIAN: In-home care is where they receive around usually a few thousand dollars a month for this cost. But as the care increases the cost increases too until we have to transition to the third and final stage of this journey with a healthy body and Alzheimer’s, and that is where the spouse needs 24/7 care for his or her benefit. And now you’re talking 10,000 a month.
BRIAN: But sadly tragically in this last third of the journey typically they’re not there for years. It’s maybe 18 months or so. So, at 10,000 a month times 18, let’s bump it up to 20, 24 months. Do you have 250,000 dollars of your own money to finance your long-term care risk? Most people do.
BRIAN: In fact at Decker Retirement Planning in Kirkland and Seattle we build into the plan so that our clients can self-finance this risk with the extra money that we have set away in one of three places. One is the equity in their home; now we don’t use that in planning but it’s a backup if needed. Most people have that extra 250,000 to self-finance that risk themselves. Number two in the equity portion of their portfolio, average annual returns net of fees I mentioned is 16 and a half percent.
BRIAN: We plan with six so there very quickly becomes and builds up an extra, an excess that can be used to self-finance the long-term care risk. And number three, we also have another bucket; principal guaranteed account that is liquid and is available to build up and produce extra money to help self-finance a person’s long-term care risk.
BRIAN: Now we as fiduciaries can sell, at Decker Retirement Planning we can sell long-term care insurance. I’m proud to say that most all the times we have not done that. We have recommended that people self-finance, the couples that have come to see us. Now as a single person; does a single person have long-term care risk? Well with the definition we use, no because they have no spouse to bankrupt them. But they do want to use their assets to finance their long-term care expenses.
BRIAN: They don’t want to go from the Hilton to Motel 6 when it comes to their expenses. And by the way if a single spouse goes into long-term care facility there is no spouse to take them through the one-third, one-third, one-third. And so they check in and are there much longer than the situation that I described first. At Decker Retirement Planning we want to make sure that all the options are on the table. We’ve just discussed how frequently we recommend people self-finance.
BRIAN: But if you’re going to do long-term care, by far the number one most popular long-term care solution is called traditional long-term care. Traditional long-term care is when you pay five or six hundred dollars per month per person for a benefit of around 400,000; three or four hundred thousand dollars in long-term care. And once you spend that money it’s gone and your long-term care policy is gone.
BRIAN: But you’ve got three or four hundred thousand dollars in benefit. Now we plan around it. If you have it we plan around and we have you keep it. But we want to make sure you know that’s what coming is called the letter. The letter Decker Talk Radio listeners is where you get a letter from the insurance company informing that your “Guaranteed Level Premiums” have just gone up 60 percent. We don’t want you to panic because if you panic and do what typically people do; and that is you cancel your policy because you can’t benefit from that.
BRIAN: Who benefits from you cancelling your policy? Well of course the insurance company does because now they have no risk and have kept a steady trail of years of premium that have come in and now they have no risk in payout. Or what you do typically is you’ll cut your benefit in half; so now the insurance company also wins because now for half, they get the same income for half the risk.
BRIAN: So we want to make sure that you know that letter is coming. Traditional long-term care will give you that rate hike in your late 60s, early 70s typically is when it comes. And some people insist that that’s not going to happen because they called their premiums guaranteed level premiums. I want you to understand that that doesn’t mean that your premiums won’t be going up. You can take it to the bank there’s a good chance that they will in your late 60s, early 70s.
BRIAN: So as long as you know that that rate hikes coming we’re fine with keeping it and planning around it. So that’s the second option is traditional long-term care. The third option is where an insurance guy gets a hold of you and says, “You know if you get hit by a bus or you die in your sleep you don’t get any benefit from your long-term care because you never went into a facility.” And he or she is right. So what they say is what you should do is that 400,000 benefit use it as a whole life death benefit with a long-term care rider.
BRIAN: Now you’re going to use that 400,000 either way. And on the chalkboard, it is brilliant. The problem is it’s very expensive. Its 1000 dollars a month per person for life and a lot of people are priced out of that option. The forth option has to do with probably our favorite way of solving this if we have to put in place a long-term care policy. Its called asset based long-term care.
BRIAN: And with asset-based long-term care you’ve got an account that you build up to around 100,000. So you contribute 10,000 per year per spouse, build it up to 100,000. And then if you… not if, when you die you get a two X death benefit. If you go into a facility you get around a four X, four times whatever the balance is long-term care benefit.
BRIAN: This is something that is a viable option. We like the flexibility of the plan because it’s a liquid account. If you change your mind you can pull all the money out. But the problem is a lot of retired people can’t afford to put in 10,000 per spouse per year for 10 years to fund this option. In fact, I’ll just make the point here, that the people who need long-term care can’t afford it. And the people who don’t need long-term care can afford it.
BRIAN: That’s the tragedy of how long-term care is set up. The fifth option is a Safe Harbor Trust. This is a great idea years and years ago where when you have a spouse that was diagnosed with long-term Alzheimer’s, dementia, you would move all of your assets to a Safe Harbor Trust, protect those assets, put your spouse on Medicaid and have the taxpayer pay for your long-term care.
BRIAN: And then after the spouse passed away then you would have all your assets protected come back to you. Two problems with this; the IRS got wise to what was going on. They put in a five-year claw back provision, meaning that if you’re diagnosed within five years you cannot hide assets in a Safe Harbor Trust. They’re clawed back and you are responsible for your own expenses, not the taxpayer. Second, I just want you to know how unsafe and illogical the premise is for a Safe Harbor Trust.
BRIAN: You’re giving a sibling; a brother or sister or close friend your assets, arms length. So they can wake up one day and say, “Hey James, John, Mike, Sally, whoever you are, those assets you gave me are fantastic, I’ve decided to keep them.” So, we don’t like the risk. We don’t recommend the Safe Harbor Trust. And finally, sadly, tragically, for the people who need long-term care, the most popular strategy is simply divorce.
BRIAN: The one spouse will divorce the other to protect his or her assets over that period of time while the other spouse goes through this horrible journey with Alzheimer’s or dementia. So those are the six different options for long-term care. At Decker Retirement Planning if you’ve got a situation come in and see us, we can talk more about it. But I think we’ve kind of covered that.
MIKE: Great, let’s… we have only got about 10 minutes left in the show so we’ve got to keep going for the last thee Brian if that’s okay. And then we’ll extend another offer for the callers that have not been able to call in yet to get those 10 calls. We’ve got liability risk, spousal risk, which you kind of tou… well no we didn’t touch on spousal risk at all. And then liquidity. Do you think we have enough time to wrap these up?
BRIAN: Yeah, I can bang these out in 10 minutes. Okay liability risk is the risk that when you drive into a parking lot at the shopping center, you bump someone in their car, they grab their neck, they have these soft tissue injuries. They look in the rear-view mirror, see your Mercedes or BMW and they are going to sue you. They have a blank check and they are going to sue you. So a very simple protection from liability risk is called… it’s a rider on your home owners insurance that’s called an umbrella policy.
BRIAN: We recommend that people have a million dollars’ umbrella policy, it cost you five hundred, six hundred dollars a year. It’s a very simple way to offset your liability risk. Next is spousal risk. Spousal risk comes in two different areas; divorce and death. Let’s say that you’ve got a spouse that has a 90,000 pension that has no survivability, meaning that when that spouse dies that 90,000 plus their social security dies with him or her.
BRIAN: That puts the other spouse at significant financial risk and should have life insurance in place to protect that income stream. That is a no-brainer. The second risk has to do with divorce. And separate property from an inheritance is one option using the community property agreement, when you receive an inheritance that you don’t want to comingle with your spouse you can keep that as separate property by using an account.
BRIAN: And individual account that’s never comingled with your spouse. Also, when it comes to divorce risk you can send money down to your grandchildren and their children and their children using what’s called a dynasty trust. A dynasty trust is per sterpes; meaning bloodline only. And you’re able to make gifts on your death. So you’re controlling money in your life.
BRIAN: You’re funding this dynasty trust when you die, and you can have a portion of funds where a percentage of the trust are able to pay usually college expenses, tuition and books for many, many, many generations. This is a spectacular way for you to avoid the generation skipping tax of 48 percent by trying to reach out and hand funds down to your grandkids. So at Decker Retirement Planning we use these tools to minimize spousal risks for divorce or death.
BRIAN: Last thing is liquidity. And Mike I’m going fast enough that I think we’ll have time to talk about taxes a little bit. So I’m going to throw that in there too.
MIKE: Excellent.
BRIAN: Liquidity, we define liquidity as money that can be in your savings/checking account next day, no penalty. If all your money is liquid that makes no sense. That means it’s not working for you. But if all your money is locked up that’s equally silly. So we try to target around 30, 40 percent liquidity so that your money can be both working for you and also be liquid.
BRIAN: So when it comes to distribution planning we always carve out some money for emergency cash. That’s money that doesn’t have to earn much money but its focus, its function; its principle purpose is to be there as grab cash money that’s available. That’s very important to have emergency cash as part of your retirement plan, number one. Number two; the income that we ladder in clients’ portfolio in buckets one, two and three and the risk accounts should add up to where there’s 30 or 40 percent of that money in total that’s next day liquid, no penalty.
BRIAN: Now as the most ill liquid time in the distribution planning that we do is in year one. Every year that goes by and ticks off our clients become more and more liquid. So we start with 30 or 40 percent and we build from there. Liquidity is very important. Okay Mike, let’s talk about taxes for what five minutes, four minutes.
MIKE: We got, let’s do four minutes and then we’ll wrap up, three to four minutes.
BRIAN: All right. When it comes to taxes we at Decker Retirement Planning are proponents of minimizing taxes in every category except for one. We want to minimize on lines eight and nine your taxes on your interest and dividends. Many times, you’ve got reinvested dividends and capital gains. And so at the end of the year you’ve got 10 or 15,000 in this category where you’re paying four or five thousand in taxes unnecessarily.
BRIAN: It’s an inefficiency we fix by having those funds moved over to an IRA or something where you’re not 1099’d and have those funds taxed. The second part here is going to be by far the number one tax savings strategy in your lifetime and it has to do with the IRA to Roth conversion. So a lot of people can see that when we fund the risk account in our distribution planning where they have the stock market risk, but they have significant growth.
BRIAN: If we took an IRA and we grew it from 300,000 to 1.5 million over 20 years a lot of people would say I’d be very happy with that. But now when it comes to taxes you really wouldn’t be because now in your mid-80s with required minimum distributions you’re in the top tax bracket for the rest of your life and you’re not happy with us because you could’ve paid tax on the 300,000. Now you’re paying tax on 1.5 million.
BRIAN: So what we do is over five to seven years the risk bucket is where we convert your IRA to a Roth; not all at once but carefully so we don’t bump your bracket. We have a focused strategy on converting that money from an IRA to a Roth. We don’t do it in buckets one, two or three, just in the risk account because that’s where the growth is and that’s where you’re taking the money 20 years or later. It’s the long-term account. But it’s a golden account because a Roth account can grow tax free.
BRIAN: It can distribute income back to you tax free. And it can also pass to your beneficiary’s tax free. For our high net worth clients, when it comes to taking your income there’s other ways to draw your income that can reduce taxes. For example; family limited partnerships, Nevada corporations or foundations are three different ways that we can significantly reduce the taxes on your income.
BRIAN: Now I mentioned that all the different ways that we minimize your taxes in strategy and retirement. It is comprehensive. And Mike, I’ve run out of time. There’s one way that we don’t minimize your taxes on purpose and that has to do… Mike I’ve run out of time. We’ll carry this over.
MIKE: Okay. Well stay tuned for next week where we’ll talk more about taxes as I guess it’s more appropriate as tax season is about wrapping up anyway. But we’ll talk about taxes and how it affects your retirement plan. And a big goal here just to repeat; you don’t want the tax tail to wag the dog, like Brian said earlier. So we’ll talk very openly about how we do this.
MIKE: And until next week, take care.
