MIKE: Good morning and thank you for listening to Decker Talk Radio’s Protect Your Retirement. A radio program brought to you by Decker Retirement Planning. This week we’re talking about financial myths as well as the seven points of risk that you may have are you in your retirement plan. The comments on Decker Talk Radio are the opinion of Brian Decker and Mike Decker.
BRIAN: Yeah these are some interesting statistics. I want to just say with just a few days left in the first quarter of 2017 the S&P has gained 5.2 percent a year to date. The average first quarter gain in the index in the last 25 years -1992 through 2016- has been all we 1.6 percent. So where are way ahead of schedule.
BRIAN: Since the November election; if you go back to November 4th or actually November 8, 2016 that S&P is up 10.4 percent through Friday March 24th. That result extinct the index is 50 your average gain -1967 to 2016- average annual return of 10.2 percent. So, we’re pretty close to normal as far as the election bump.
BRIAN: Now I want to mention this next statistic for the retirees that own a portfolio of… and we’ve talked extensively about this. Mike, there’s a lot of people that in retirement buy a dividend portfolio which is heavily concentrated in oil and energy. So, what happens to the underlying investment when the price of oil declines from 12 two years ago, down to 50 where it is today?
BRIAN: Well, yeah, you’re getting a dividend income stream of six or seven percent but you have a 40 percent loss in your principle. So, it’s not a good thing. Now that price of oil has rebounded from the lows of last year around 30 dollars a barrel to as high as 50, where does it go from here. This next statistic is going to be very important. And by the way Decker Talk Radio listeners; if you have a portfolio of dividend portfolio for your income I hope that you come in and check us out.
BRIAN: Come into the Seattle office or come into the Carillon Point office in Kirkland. We’ll do a free review. What I’ll do is take the dividends that you’ve got and expose the risk of dividend cuts or default risks is what we call them. For no charge, we’ll have you in and I’ll take your portfolio one at a time and go through and see if the cost…
BRIAN: Let’s say that the dividend payout that you have is a dollar a share. Well that dividend is secure if the cash flow EBIDAT (Earnings Before Interest Depreciation and Taxes) is more than a dollar a share. I’ll show you. I’ll visually show you if you are okay on a default risk on your portfolio. But typically, when I see yields of more than six, seven percent your default risk is very high.
BRIAN: When I see eight, nine, ten percent and you’re sitting there boasting about these yields; I’ll show you why those yields are high. It’s because when I plug in your symbol I’ll see what the dividend per share is and then I’ll show you what the cash flow EBIDAT (Earnings Before Interest and Taxes and Depreciation)
BRIAN: And if it’s 80 cents a share and they’re paying a dollar dividend they’re borrowing to pay that full dividend. And the odds of a dividend cut are really, really high. And so, I want to just go through your portfolio and retirement and bring the default risk down of your cash flow so that you have all the information in front of you on how healthy the cash flow is in your retirement.
BRIAN: But here’s a statistic for you that have a dividend income portfolio and with a heavy concentration in energy. There were 404 operating oil rigs in the United States on land and offshore as of May 22, last year. Today there’s 809 operating oil rigs; that’s as of Friday March 24th. So, the number of working rigs has doubled.
BRIAN: Supply and demand… This is according to Baker Hughes, so if the supply and demand theory works, and by the way I think it’s a law of supply and demand in Econ 101. It says that if you raise the supply the price goes down. So, when you double the oil rigs; and oil rigs are there to produce more oil what’s going to happen to the price? The expectation should be that the price of oil goes down.
BRIAN: I want to… Mike I know this is early in the show. But any of you out there and Decker Talk Radio listeners that have an income portfolio where you’re getting dividend income into retirement; I hope you come in, we’ll sit down together, all take your portfolio through one of the time and show you what you’re default risk is on your portfolio. Mike, can we make that offer to, I don’t know 10.
MIKE: And would you say it’s… Good I want to be careful, but I don’t want to say antiquated but when interest rates were good, when the markets were different; this was kind of the standard procedure for people. But it’s not like that anymore right?
BRIAN: Well it’s very common, it’s been like this for decades, people are searching for yield, low risk and we want to help them accomplish the low risk yield but they need one more step in the transparency and that is to show the default risk you. And I can help them with that.
MIKE: Excellent, so we look forward to you calling in right now. And if you call and they’ll gather your information and then between Monday or Tuesday of the following week will be reaching out and get to know you, find a good time to have you come in and visit with us. So, we look forward to that time.
BRIAN: Now we’ve talked about this before. I just want to say that when it comes to retirement planning many times will have people that come in with the dividend portfolio and we want to point out that your broker, your banker is giving you have the story. Half the story goes like this; that 10-year treasury is called the Risk Free Rate. When you have the Risk Free Rate yielding around 2.4, call it 2.5 percent.
BRIAN: If you can get three percent that’s better than two and a half percent. And by golly if you can get five percent that’s better than three. And if you can seven that’s better than five and you know where this is going; seven is better than nine or I’m sorry, seven is better than five, nine is better than seven. Pretty soon 15 percent is better than nine and at some point, retirees will say, “Well that’s too risky.”
BRIAN: So, let’s dial this back. Now let’s give you the second half of what information you need to make a decision on your dividends producing portfolio; and that is your default risk. And by plugging in one at a time each one of these to show what the cash flow per share is before dividends, now you can see the whole picture so that you can make a decision.
BRIAN: So, for example; would you like 2.5 percent with no chance of default risk. Or would you like 3.5 percent with 15 percent default risk. Or would you like five percent with 25 percent default risk. Or would you like seven percent with 40 percent default risk. Or would you like nine or ten percent with a 50 percent default risk, etcetera.
BRIAN: Now you can make your decision. Banks and brokers don’t give you the other side. We need to give you the full picture so that you can make a decision eyes wide open on what you want your dividend portfolio to look like in retirement. All right, so let’s move on. Now this next piece Mike cracked me up.
BRIAN: On CNBC when asked on July 1 if there was a potential bubble developing in the US Real Estate Market that could cause a recession; at that time the Fed Chairman Ben Bernanke replied, “I guess I don’t buy the premise, it’s pretty unlikely possibility.” “We’ve never had declines in the housing price on a nationwide basis”.
MIKE: What? What?
BRIAN: Yeah, he said that. And then from his comment date uh, July 1, 05; from June 30, 07 to March 31, 11 the average price of a single-family home in the United States fell 21 percent according to the Federal Housing Finance Agency. I just want you to know something about the experts that you read about on Money Magazine or Forbes Fortune or watch on CNBC.
BRIAN: I just want to give you some background on what they do typically that taints the information that they send out there. Let me give you an example. Two major examples that state Wall Street Research and Opinions. One is let’s say that Mike you’re Coca Cola and I’m X, Y, Z Brokerage Firm.
BRIAN: Now normally, usually there has to be a Grand Canyon gap wall between corporate finance and stock market research because if there’s not there’s going to be tainted research. But I propose that there is tainted research commonly in Wall Street and Bank stock research. Here is how it works.
BRIAN: So, X, Y, Z Brokerage Firm or X, Y, Z bank uh, calls Coca Cola; you Mike and says, “Hey we’d love to handle your corporate finance, handle your equity, handle your bonds etcetera, which by the way we get millions and millions in fees by getting that account. And by the way Mike, Mr. Coca Cola we will have a buy recommendation on your stock if we have your account to help you unload as an insider whenever you need to.”
BRIAN: So, there’s two parts to the tainting of this stock research. One is, it’s no longer arm’s length, corporate finance and research are no longer arm’s length and divided by the typical Chinese wall that separates and should separate untainted stock research from a corporate finance relationship. That is sadly the rule, not the exception
BRIAN: So, that’s number one. The second example of the tainting of stock market information; and we’re going off of Chairman Bernanke’s denial of any bubble developing in U.S. Real Estate with his comments July 1, ’05 and CNBC. Let’s take another example where let’s say Mike, you and I are a hedge fund, we’ve got a huge position in XYZ stock.
BRIAN: WE need to unload it and yet it’s the liquidity; there’s only a certain amount of shares that trade each day. And so, we get on CNBC, we’re asked what stock we like the most, we say this one stock that we hate that we’re going to unload. WE pump up the stock and we dump it. It’s the pump and dump that is so unethical but is sadly so common on Wall Street.
BRIAN: So, when it comes to Wall Street research I just want you to know that I just gave two examples of how typically Wall Street research is tainted. Okay, I want to skip down to; this is 43 percent of American adults that have health insurance in force today have difficulty affording their deductible.
BRIAN: Now the discussion has been about how on the one hand Americans are covered but on the other hand the expense of the health care number one and the huge deductible number two is making it so that 43 percent of American adults that have health insurance can’t afford just their deductible.
BRIAN: Finally, I’ll end with this statistic on this piece and this is the tragic statistic right now in the United States for retired people. 63 percent of American Adults do not have 500 dollars in savings to cover an emergency expense. 63 percent of American adults don’t even have 500 dollars in savings.
MIKE: That’s pretty bad. That’s pretty… that’s a terrible situation to be in.
BRIAN: That is rough. Okay Mike…
MIKE: Oh, I can’t even imagine.
BRIAN: We just had a debacle of the Healthcare Reform Bill that was blocked in the House. The obstacles of Tax Reform are at least underscored, at least as great as those that block the Healthcare Bill. The stock market is up on Tax Reform and Healthcare Reform and Healthcare Reform just went down; the market hasn’t dropped much.
BRIAN: And then the post-election improvement and sentiment has outstripped the hard data. Let me tell you what that means. That means that expectations and optimism are still very high for things to get worked out. But the hard facts are coming in weaker than expected. For example; U.S. durable goods orders; they rose 1.7 percent month over month in February.
BRIAN: And let’s see, but the pick-up in the business CAPEX has not been as strong as the survey data suggested. So, let me give you another example. So, composite PMI fell to 53.2 percent in March from 54.1 percent in February which is a sign of weakening U.S. growth momentum. The hard data may not rebound as strongly as expected.
BRIAN: So, the risk for people that are holding stocks right now and the stock portion of their portfolio is that the optimism of investors in the market with the expectation of a recovering economy may not be backed up, or at least right now isn’t backed up by the hard data that’s been coming in. The pick-up in U.S. Inflation is showing signs of moderating.
BRIAN: That’s because of a weakening economy. One other thing before I jump into the bulk of the radio show. Right now, to show you how expensive the stock market is. Right now, the U.S. Market is trading on a gap adjusted basis of 25 times trailing earnings. And with earnings that have gone down S&P 500 gaps earnings per shares have risen by only nine percent over the past five years.
BRIAN: During which period the S&P has been up 78 percent. Let me say that again. This is… there’s two reasons that the stock market will go up. One is with earnings going up, the second with interest rates going down. Right now, we have interest rates going up and earnings going down and we are at or near market highs right now. So right now, gap adjusted earnings; we’re trading at 25 times trailing earnings on a price earnings ratio.
BRIAN: Gap earnings have risen only nine percent over the last five years during which the S&P was up 78 percent. Okay Mike, we take the other side of investment advice and try to throw the curtain back on what’s going on out there with bankers and brokers and try to offer a consumer protection service of telling you what’s real and what’s not.
BRIAN: What’s real news and what’s fake news. Mike, I’ve got an article…
MIKE: Fake news is such a buzzword right now. Do you know CNN just did a whole segment on Fake News.
BRIAN: Coming from CNN that’s funny.
MIKE: Yeah.
BRIAN: Okay, so five financial myths that you should ignore.
MIKE: Okay let’s dive right in. What’s number; let’s do all five first and then we can go and dive into each one.
BRIAN: Okay. Myth number one is that compound interest will make you rich. My number two is that if you just give up the little things in your life like the latte in the morning that you could invest that and be worth millions in retirement. Myth number three talks about the rule of 72; buying and holding in the stock market. Myth number four that the rule of 100 is a good gauge of how much to be invested in stocks and bonds.
BRIAN: And myth number five is that stocks always outperform bonds. So, let’s shoot them down.
MIKE: All right so first one is the compound interests. Now didn’t Einstein have something to say about this? I mean I want to give people the benefit of the doubt for these myths; they don’t just come out of nowhere; they come from somewhere. And about compounding interest and how it’s the seventh wonder of the world or something like that?
BRIAN: No, you’re exactly right Mike. Einstein is supposed to have said, if there’s seven wonders of the world; or how many wonders of the world; are there eight wonders of the world. If there’s seven wonders of the world the eighth wonder of the world is definitely compound interest. So, he said that, and that’s definitely true mathematically and factually. But it’s very cleverly used to show that if you lock into let’s say a zero-coupon bond that gives you six percent.
BRIAN: That six percent compounded is a fantastic return. But where are you going to get six percent in a bond these days. The 10-year treasury is at 2.4 percent. The 10 year CDs right now are yielding pretty close to 2.7. 10 year corporate bonds that are AAA, AA are a little over three percent.
BRIAN: When you start compounding low interest rate like that it’s kind of a snoozer as far as the total return. You’ve got to get your returns up to six, seven percent before there’s a wow factor in compound interest. And by the way, Mike, here’s another good reason to bring people in to see us. A lot of people have never heard of principal guaranteed accounts.
BRIAN: That in the last 15 years have averaged six and a half, seven percent. We had one principal guaranteed account that did over nine percent last year and most people have never heard of this. It’s called Equity Indexed Accounts or Equity Linked CDs. They come from banks, they come from insurance companies. And the average annual return for Principal Guaranteed is offering the highest returns out there.
BRIAN: Why haven’t you heard about them? Because banks and brokers are offered no security commissions on these. And so, because of that there’s no real incentive for them to tell you about them. So, we’re fiduciaries, we’re required by law to put your best interest before our company’s best interest. And so, Mike this is something that we should have people come in and learn about.
BRIAN: Because we are a proponent of having people have safe money but not a proponent of bonds or bond funds. Let me just say this Mike, sorry to take so long. But when it comes to bonds or bond funds you have a choice of CDs, treasuries, corporate, agencies, municipals where you’re locking in a fixed rate for a fixed period of time. Well when interest rates are at or near all-time record lows it’s not…
BRIAN: It’s typically not in your best interest to lock in rates when interest rates are this low. And worse than that are bond funds, because when interest rates start going up as they’ve already started to do; the 10-year treasury a year ago, was at one point something, now they’re at 2.4. Interest rates have been trending up for the trailing 12 months. Now people are losing money in their bond funds.
BRIAN: So, when bankers and brokers tell you to put your safe money in bond funds; that’s like a math teacher that tells you that two plus two is ten. It’s demonstrably false, it’s mathematically ridiculous. Because when interest rates go up you lose money on bond funds period. So, Mike, let’s have people come in and see the alternative that they can have to have their safe money to average six and a half, seven percent on their safe money.
BRIAN: And they’ve got to see this.
BRIAN: Yeah it is priceless Mike. They’re kind of frustrated that they’ve never heard of this before.
MIKE: Well I mean that makes sense. Shoot if someone wasn’t telling me something that was what I was looking for; that’s a very frustrating situation. So, let’s end that frustration and we’ll have you come in.
MIKE: I mean we put it all out there for you to educate you and to help you in your retirement planning; whether you are five years away, 10 years away or if you’re currently retired. It’s never too late to make adjustments to help protect your retirement.
BRIAN: Yeah, okay let’s get rid of myth number two really quick. People that tell you that you could give up your morning coffee and invest that two dollars and fifty cents and that’s going to make a difference in your retirement; let’s say that you invested two dollars and fifty cents a day for 30 years and that your rate of return was four percent. The difference that that money would make after 30 years at four percent is 1700 dollars.
BRIAN: What’s the economic satisfaction that you get from that morning coffee. By the way I’m not a coffee drinker, but I’m just saying that to deprive yourself of simple pleasures is not the way to receive fulfillment in retirement. And so, we just want to shoot that one down.
MIKE: Yeah that sounds miserable. Can you imagine 30 years of practical living with no enjoyment?
BRIAN: Yeah, so don’t go to the movies, don’t go out to dinner, don’t go out to lunch…
MIKE: Could we put this into perspective too. If you just worked one extra half year you could probably make up the difference.
BRIAN: That’s true.
MIKE: For 30 years of enjoyment.
BRIAN: Yeah, I’m big on enjoyment. Okay, myth number three is the rule of 72 in buying and holding your stocks.
MIKE: Now Brian, before we dive into this, just for the viewers that don’t know what rule of 72 is can you give a quick definition?
BRIAN: Yeah, the rule of 72 is, it determines how long an investment will take to double given a fixed rate. You’re just supposed to divide it by 72. Divide 72 by the annual rate of return. So, six percent divided by 72; it’ll take 12 years to double your money. Six into 72.
MIKE: It sounds like simple math, theoretical math, kind of like what we said with Einstein’s compounding interests. In theory, it might make sense but real world practicality; does it really hold up?
BRIAN: Yeah, it’s a mathematical fact. Here’s the problem; they use it to say that you should buy and hold your stocks. This is one thing that really makes me angry because not only is this devoid of common sense but people in retirement that got nailed in 2008 know that there’s no protection from the banker/broker model and they know that it’s just a matter of time before they get creamed in the stock market again and they’re not interested.
BRIAN: Let me tell you that we are proponents of buying and holding if you’re in your 20s, 30s and 40s and you’ve got more than 10 years left to retirement and you’ve got a paycheck coming in and you’re not drawing from your portfolio. But now let’s flip all of that. Now you’re over 50 years old, you’re within 10 years of retirement. You’ve built up a huge nest egg.
BRIAN: To take a 30 plus percent hit on that at over 55 years old delays your retirement; number one. Number two if you’re in retirement and you take a 30 plus percent hit and it takes you four years just to get your money back and you’re drawing on that portfolio during that period that your portfolio got hit; now you’re committing financial suicide and your banker and broker is telling you to do it.
BRIAN: And the reason that bankers and brokers tell you to keep your money at risk; all of it is because that’s how they get paid. Are they interested in you? I shouldn’t go there. I don’t want to attack…
MIKE: They probably are but they have to make their own living too. I mean they’re trying to do two things which creates kind of an impo… not an impossible situation but just a conflict of interest situation. You know they need to have food on their table. They might like you; they might care about you but, let’s say their buffet of options they can give you is very limited as in comparison to what a fiduciary would give you. Is that a good way to put it?
BRIAN: Right, that’s a good way to put it. And I don’t want to attack their person. But I was trained the same way they are. What I like to say is that when I had my knee operation just three or four weeks ago, I didn’t go to a dentist. Dentists are good people; they are doctors but they’re the wrong kind of doctor for my knee operation. I went to a knee doctor to get my knee done. I went to a specialist.
BRIAN: And we specialize in retirement at Decker Retirement Planning in Kirkland and Seattle; that’s what we do. That’s all we do.
MIKE: Plain and simple.
BRIAN: Yeah.
MIKE: And would you say Brian just to throw the benefit of the doubt there; Bankers and brokers, they do have their place. It’s just when you have a paycheck coming in and you’re working then they might fit a better need there as opposed to retirement planning when you need to create a paycheck from your assets. Is that fair to say?
BRIAN: Yeah, in your 20s, 30s and 40s go with the banker/broker it’s just not a big deal. But when you’re over 55 years old and you’re within five years of retirement if you’re dealing with a banker and broker and that model that they use which is called an accumulation model you will hurt yourself; you’ll delay your retirement. You’ll be guessing. You won’t know how much you can draw.
BRIAN: As a matter of fact, Mike, I’m going to go on a rant here to talk about how different our models are from the banker/broker model and they should be coming in to see… As soon as I finish this rant Mike, we should offer to have them come in and see side by side the pie chart; which is the banker/broker asset allocation plan side by side against our distribution plan.
BRIAN: Do imagine Decker Talk Radio listeners; the banker/broker model tells you to keep all your money at risk, to use the rule of 100 to tell you how much money you should have in bonds and bond funds. And by the way; what that means is if you’re 65 years old the rule of 100 says you should have 65 percent of your money in bonds or bond funds. That makes no sense because now you’ve got 65 percent of your money earning almost nothing with interest rates this low.
BRIAN: And then on top of that the rest of your money is at risk with a buy and hold strategy. So as markets go up you make money, when markets go down you lose money. So, let’s talk about how nonsensical this is. Because there were periods in the last 116 years where the markets didn’t make money for years, decades I mean. In 1901 the DOW…
BRIAN: Let’s see this is the S&P 500 hit 256. The S&P hit 256 again… I’m just looking at this chart, 1929. So, there’s 27 years, 28 years where your money on a buy and hold strategy did nothing.
BRIAN: Then from 1920 to… I’m going to eyeball this; 1958 there’s 29 years where there’s a second 29, 28-year period where buy and hold offered you no gain.
BRIAN: Then here’s another 29-year period from 1964 to 1983, 29 years’ markets were flat. And then from… I’m just eyeballing this. From year 2000 to the year 2014; there’s a 14-year period. I’m just pointing out here that you can’t afford to have a zero return when the markets don’t trend, they cycle.
BRIAN: And so, let’s talk about when it comes to safe money Mike, we’ve got to have people in and we’ve offered them to come in and see their safe money that is principal guaranteed that in the last 16 years has averaged six and a half, seven percent; number one. Number two; they’ve got to see a distribution plan where our clients can see mathematically how much money they can draw from their portfolio for the rest of their life.
BRIAN: With a COLA (Cost of Living Adjustment) for inflation and we draw income from principal guaranteed accounts. When the markets crash every seven or eight years it doesn’t destroy your retirement. And when it comes to your risk money we used two-sided models. These are computer driven, trend following models.
BRIAN: That when the markets trend higher they’re designed to make money. When the markets trend lower, they’re designed to make money. Two-sided strategies in a two-sided market as opposed to a one-sided strategy; buy and hold from the bankers and brokers in a two-sided market. The average annual return for the S&P for the last 16 years is around four and a half percent.
BRIAN: With two 50 percent drops factored into that 16-year period. With the models that we’re using; these models did not take those two 50 percent hits. They didn’t take the 50 percent in 2000. 01 and 02; they made money every year. They didn’t… and then when the markets doubled from 03 to 07 these models also doubled.
BRIAN: And then when the markets took the hit in 08; these models collectively made money. And then when the markets are up 150 percent from 09 to present these did too. And so instead… when you don’t take the hits of the market 100,000 invested in the S&P I said grew four and a half percent. 100,000 invested in these models for the last 16 years.
BRIAN: A Net of Fee return is over 900,000. Average annual return is 16 and a half percent. So, Mike, let’s have people come in and see on this next myth; the rule of 72 that we can use compounding to our advantage because we have the rates of return to do it both on the stock side and on the principal guaranteed side. But banks and brokers right now do not.
BRIAN: At Decker Retirement Planning, Mike, we want to show clients how a distribution plan works. How they can see… If they don’t do the math they’re just guessing on how much income they can draw from their portfolio. You need to know how much money you can draw from your portfolio. Number one, you need to draw it from a principal guaranteed source. Number two, so that you don’t get thrown out of retirement when the markets crash the next time.
BRIAN: And you have that priceless piece of mind that that’s not going to happen. And then number three; on your risk money that you don’t just take these hits every seven or eight years when the markets crash. You don’t have to take those hits anymore. All right.
MIKE: Mm-hmm. Great. I think we got rule of 100 next which we’ve kind of already talked about a little bit.
BRIAN: Yeah, I’ll just take 10 seconds on this. The rule of 100 makes no sense because it says that if you’re 65 years old you should put 65 percent of your money in bonds or bond funds. And it just keeps a huge amount of your money earning almost no interest which is not as bad as putting so much of your money at interest rate risk.
BRIAN: So, that when the markets go up you lose money. You lose money on what…
MIKE: Nice and simple.
BRIAN: Yeah you lose money on what banks and brokers say is your safe money. All right. On this last one…
MIKE: All right, let’s finish this up. So, stocks versus bonds. And historically people think that stocks outperform bonds. How do we dive into this Brian?
BRIAN: Yeah, I just want to say it’s not true, it’s a myth. It’s false information to say that stocks always outperform bonds. Let’s go back to the same chart. There’s a 29-year period of zero return from 1901 to 1929. There’s another 29-year period where stocks offered zero return from 1929 to 1958.
BRIAN: There’s another 23-year period from 1968, it actually goes farther there. 1968 to 1994… 1968, so there’s a 26-year period where there was zero return. And then there’s a 14-year period where stocks…
BRIAN: From 2000 to 2014 gave you a zero return. So, let me add this up. 14 plus 26 plus 29 plus 28; that’s 97… this is amazing. I’m just doing this right now. From 1900 to 2016.
BRIAN: There’s 116 years of growth. However, there’s 97 of those years where you had zero return. I want to just see what that percentage is. So, 83 percent of the time.
BRIAN: You had a risk 83 percent of the time of being in a period where after the market went down it took a long time to get back to even. So, from 1929 to 1958. From 1901 to 1928 and then from 2000 to 2014.
BRIAN: Anyhow it’s just dead wrong that you should buy and hold. It’s dead wrong that you should assume that stocks always outperform bonds. And we are a proponent at Decker Retirement Planning in Kirkland and Seattle we are a proponent of a balanced portfolio that’s diversified. But we use common sense in how we put things together. All right Mike…
MIKE: Well I just want to add real quick; its common sense without a conflict of interest because we’re not bound by some corporate or big brother telling us what we can and cannot sell. And being a fiduciary it opens up the options a lot more.
BRIAN: Yeah.
MIKE: Is that a more fair way to say it? I want to be, you know respectful of the hard-working people that are trying their best but may just have significant limitations on what they can offer. But all right everyone for the remaining of this show; this is exciting. We’ve got the seven risks that you may not be accounting for in your retirement plan. And I want to just tell a quick story as we dive into this. Brian, you this about me; I have a habit of getting into or signing up for events that I’m probably not prepared for.
MIKE: And true story; so, I had a friend that said I needed… He said, “Hey I’m doing a triathlon, you should join me.” I said, “Great”. So, I signed up and then I forgot to train. But I didn’t want to back down; the day came and so I did it. And to make a long story short; when I dove into the water, the first event of it is swimming; the wet suit I was using was too tight. I had unzipped it to continue to breath and it created an incredible drag when I was swimming. It was exhausting.
MIKE: When I got out of the water, I didn’t prepare for the…
BRIAN: Oh, wait a second, wait a second; I’ve got to visualize this. You were swimming with an unzipped wet suit?
MIKE: Yes, it was ridiculous, because I hadn’t prepared.
BRIAN: That’s like having a bowling ball attached to your feet.
MIKE: That’s what it felt like. I had to backstroke almost the entire time that I was swimming. The lifeguards are saying, “Hey you good?” I said, “Yeah, I’m just here to complete it.” And it was humiliating. And then for those that don’t know when you end swimming and start to run to your bike your body has a really hard time adjusting to that. And so, I came out of the water and almost passed out and fell over because it’s just different muscles.
BRIAN: Yeah you can hardly walk.
MIKE: And then I got on my bike which I was comfortable on and I was passing people left and right and then I got to running. And again, I hadn’t trained and so I was barely keeping up. I did it when I was 27 years old. And I could barely keep up with this very athletic fit woman, but I was 28 and I felt like I was fit. She was 72 and I could see she was diabetic because she had her pace maker and she destroyed me.
MIKE: I could not keep up with her. Now, this isn’t the only time I’ve done this. I also did it for a half marathon that my sister asked me to run with her and I forgot to train. And I also did it for a Spartan race my brother wanted me to do and that was very, very difficult. The reason why I’m telling this story though isn’t to make fun of myself but is to say many retirees when they get to retirement they have the best intentions and then they forget to plan accordingly.
MIKE: They think that what they did in their 20s, 30s, and 40s will work. It… well I can’t say it will not but retirement planning is so different that if you don’t change your perspective and change how you do things you have a very good chance of destroying your retirement like many did in 2008. Or 2000, 2001, 2002 when the markets had a 50 percent crash. So, we are going to go through very quickly at the end of this show the seven risks that you might not be accounting for.
MIKE: And as a quick sneak peek we’re also going to be releasing this as an e-book in a few weeks for those that want to go to our website at DeckerRetirementPlanning.com. We just are constantly trying to put up articles to educate you. But Brian let’s go through this list; we’ve only got a couple seconds on each one because there are seven of them. But we want to touch base on each of these. The first one is interest rate risk; we covered this. But Brian are interest rates good right now?
BRIAN: Interest rates are low, expected to higher. There’s something that we show in the seminar. And by the way, Mike, we should point out that we at Decker Talk Radio and Decker Retirement Planning in Kirkland Seattle offer on a regular basis seminars at Daniels in Seattle and Ruth’s Chris in Bellevue. And in the seminar, we have a slide that shows a relationship between the monetary base and the money supply.
BRIAN: This is what the Fed prints and puts in circulation. And the other one is, it reflects interest rates. And from 1960 to 1975, the Fed printed what used to be a lot of money. And although not at first interest rates… and you’ve seen this, Mike, interest rates kind of wobbled around for a while and then they took off and shot up.
BRIAN: And it took Paul Volcker; the cigar smoking Sen…
MIKE: The cigar.
BRIAN: Yep, he had to step in and get things back under control. Which he did and interest rates and inflation along with the monetary base and the money supply have been in line until 2008. And then you have that hockey stick spike in the monetary base that we call TAR QE1, QE2 and there was a huge spike in rates. And interest rate since then have kind of waffled around and stayed low.
BRIAN: And have not gone up yet except for in the last year. They’re starting to go up. We expect because of that chart that they will continue to go higher. And so, anyone of you; Decker Talk Radio listeners that have a banker and broker telling you to put your money in bond funds, you will lose money as interest rates continue to climb. We expect interest rates to continue to climb and so your interest rate risk is with anyone who holds bond funds in retirement.
BRIAN: There are options to bond funds in retirement. And we want to make sure that you know about it and see what your options are.
MIKE: And at the end of our list of seven points we’re going to send one last offer to go through our seven-risk point checklist you to go over and check your portfolio. And also, give you some options to avoid some of these risks. The second one Brian is credit risk. Now what have you got to say about credit risk in today’s retirement planning techniques.
BRIAN: Oh, I just want to say that credit risk is something that applies specifically to municipal bond holders. And credit risk is the risk of you not getting your principal back because of problems with the municipality. Right now, there’s 49 out of 50 states that cannot possibly pay back their pension obligations that they’ve taken on.
BRIAN: And the one exception is North Dakota. North Dakota seems to be fine. But all the other states have taken on pension obligations that include municipalities. By the way, we’re not saying that all municipal bonds are going broke; but we are saying that there’s a day of reckoning that’s coming for anybody who owns municipal bonds. They will have to go through a reorganization where all of this debt is repriced.
BRIAN: And we don’t want our clients to go through that. So, we tell our clients to stay the heck away from tax free municipal bonds because of credit risk and because of low interest rates. But we do offer as a public service an opportunity to make sure that you minimize your credit risk by just looking at your statements every month. And if you see that your price for your municipal bond drops below par; 100.00.
BRIAN: There’s only one reason that your bond will drop below par in price in a low interest rate environment like we have today. There’s only one reason; and that is that the expectation out there for that bond to pay all of its principal back at maturity is going down. Any bond with a three, four or five percent coupon is expected to be trading around… if the maturities are more than four or five years out 109, 110.
BRIAN: And if it’s dropped below par there’s problems with the bond. You should pick up the phone and you should just sell it. Four years ago, we saw Puerto Rican bonds starting to drop below par. Now as you know Puerto Rico is broke and those bonds are trading at 30 cents on the dollar. So, we’ve been right on this. We hope that you follow that advice and you watch your bond prices for your municipal bond portfolio and you just pick up the phone and sell it.
BRIAN: If you talk to your broker, your broker who sold you the bonds will tell you that no, everything’s fine, everything’s great. It’s not. The price is telling you that there is a problem.
MIKE: Yep, plain and simple. The next one is stock market risk. So, Brian, I mean we can speculate if the stock’s going to keep going up, if they’re going to go down, but historically speaking isn’t there some seven or eight-year stock market cycle that people should be aware of?
BRIAN: Every seven or eight years Mike, for decades; the market gets nailed. So, 2008 and was the last hit. That was a 50 percent drop from October ’07 to March ’09; that was a 50 percent hit. Seven years before ’08 was 2001. Twin Towers went down; middle of a three-year 50 percent drop in the market. Seven years before that was 1994. Iraq had invaded Kuwait. Interests rates were going up.
BRIAN: The economy stalled, stock market struggled. Seven years before that was 1987; Black Monday (October 19th), 30 percent drop in the markets in one day. Seven years before that’s 1980. From 1980 to 82 sky high interest rates, economic recession and a stock market that lost over 40 percent. Seven years before that was 73-74, bear market; 44 percent drop.
BRIAN: Seven years before that was 66-67 Bear market which was over a 40 percent drop and it keeps going. So, the market bottomed March of 2009. Seven years plus that is 16; we are due. We’re due for this…
MIKE: We are due.
BRIAN: Yeah, nobody knows if and when but we just want to point out at Decker Retirement Planning that we’re ready. Our clients are ready for a market decline. It will not cause any of our clients to leave retirement. In fact, it won’t even cause our clients to have to change their travel plans. We put our plans together so that when the markets take this hit that they don’t have any hits on their principal guaranteed accounts.
BRIAN: Which is about 75 percent of their portfolio which they’re drawing their income from. And the 25 percent which does have risk, we have a two-sided strategy in a two-sided market. Where in 2008 these models made money. 2001 and 02 they made money. And from 03 to 07 when the markets doubled, they doubled too. And from 09 to present when the markets are up 150 percent, they’re up more than that.
MIKE: Mm-hmm, and we would love to talk more about that but gets your pens ready, in two minutes we’re going to… actually in one minute we’re going to be extending an offer for you to come in and learn more about how that specifically applies to you and how you could sail through these different market crashes unaffected. So, Brian we’ve got to keep going here, we’ve got one minute left to cover the last ones. So, I’m just going to breeze through these. Uh, long-term care risk, which is, and correct me if I’m wrong.
MIKE: But when a spouse’s health declines in some way, shape or form and bankrupts you or could bankrupt you correct.
BRIAN: That’s right. And so…
MIKE: Well there’s al… go ahead.
BRIAN: Well actually we should probably summarize these to get through them. Do you want to just summarize them Mike, and then we can pick them up again in the next show?
MIKE: We’ve got one minute left, so we might need to pick this up in the next show. But also, you can go to our website; www.DeckerRetirementPlanning.com. We have written extensively on these. But long term care is a big one. Liability risks; cars are getting more expensive, accidents happen and that’s just one of the many things that people could try and sue you for. So how do you protect yourself from that liability of just it almost seems like everyday life.
MIKE: Spousal risk; and this one we won’t have time to talk about today but this is another important one. Death or divorce can significantly affect your retirement plans. And then the last one is liquidity risk which to be frank is when bankers or brokers give you ridiculous investment advice to lock up your funds. Like for example non-traded REETs. We just want to wave the red flag and say please, please, please be aware that that may not be the best thing to be doing in retirement.
MIKE: And until then, we’ll talk to you next week. Take care everyone.
