A Retirement Financial Advisor Focuses on Wealth Preservation.
There are two distinct phases of your financial life. The first is the accumulation phase, when you invest as much money as possible for retirement and then hold on to those investments for the long term no matter what the stock market does. The second is the distribution phase, which starts at retirement, when you start pulling money out of your investments to pay your bills, hoping that your money doesn’t run out someday.
A good retirement financial advisor will help you create a distribution plan for the second phase, one which helps focus on preserving your accumulated wealth throughout retirement. At Decker Retirement Planning, Inc., we run the numbers and do the hard math to help ensure your money will last as long as you do.
Unfortunately, there are a lot of so-called financial advisors out there that don’t do this, but instead rely on outdated and discredited theories which don’t add up—literally. These advisors are usually bankers or brokers.
Why the Banker/Broker Model Doesn’t Work.
We believe there are many reasons the banker/broker model just doesn’t stand up to scrutiny when it comes to retirement:
- The Pie Chart Allocation, or Accumulation Strategy
What works when you are in your 20s, 30s, or 40s does not work when you are headed toward retirement, yet the banker/broker pie approach is exactly the same in both the accumulation and distribution phases of your financial life. The breakout ratios of the pie chart just change between stocks and bonds as you get older, while all of the investments remain subject to market risk. Keeping your investments in the stock market means bankers and brokers can still make money on your money.
- The “Four Percent Rule”
We believe the biggest problem with the banker/broker model is that it relies on the discredited four percent rule. In our opinion, this rule is responsible for destroying more people’s retirements than any other financial strategy out there. It’s a mathematical disaster.
The four percent rule basically says that since stocks have averaged around 8.5% for the last 100 years, and bonds have averaged around 4.5% for the last 37 years, you should be set for the rest of your life if you just withdraw 4% out of your portfolio every year.
While that may work as long as markets are trending higher, the reality is that markets don’t trend, they cycle in 18-year increments. (Click this link to see the actual data compiled by Guggenheim Investments: 18 Year Market Cycles.) By the way, this indicates that we’re due for another major correction in the markets, and when that happens, it will complete the cycle for 18 years and we’ll be at or near very flat returns for the next 18 years.
If the stock market data itself weren’t convincing enough, the guy who invented the four percent rule, William Bengen, refuted it in 2009–after millions of retirees were wiped out in 2008 and had to go back to work. Bengen now says that the four percent rule does not work when interest rates are this low. Yet bankers and brokers still use this rule.
- The “Rule of 100”
Speaking of low interest rates, the next problem that we have when it comes to the banker/broker financial model is something called the rule of 100. This rule says that if you’re 65 years old, you should have 65% of your investable assets in bonds or bond funds. If you’re 70, it should be 70%, if you’re 80, it should be 80%, and so on.
Bonds/bond funds are somehow considered “safe” investments suitable for retirees. But the actual numbers tell a much different story.
With interest rates at or near all-time record lows, following the rule of 100 means that two-thirds to three-quarters of your portfolio is earning next to nothing. Right now, the 10-year Treasury is around 2.1%. There’s only been one time in the history of our country where the 10-year Treasury yield went below two percent, and we’re almost there now! This strategy makes no sense.
But there’s a bigger issue, which is called interest rate risk—the risk that interest rates could go up. And what happens when interest rates go up? That’s right, bonds go down. Which means that the rule of 100 could cause you to lose serious principal from your supposedly-safe bond allocation.
In 1994, the 10-year Treasury went up from six to eight percent in one year. According to Morningstar, the bond funds that year lost an average of 20%. In 1999, the 10-year Treasury went from four to six percent. According to Morningstar, the average bond fund lost 17%. If we go from where we are right now, at 2.1%, back up to just 4% where we were a couple years ago, that would be a hit to principal of almost 20% on what bankers and brokers are telling you is your safe money.
- Risky Investments
As you can see from the rule of 100, in reality, even bond funds keep your money at risk. But bankers and brokers go further than this to sell a few other types of investments which we do not advise anyone to invest in, and never recommend as a retirement financial advisor, such as:
a. Non-Traded REITs (Real Estate Investment Trusts).
A non-traded REIT pays the broker or banker 12% commission, which is invisible on the statements you get each month. But you actually pay that money out of your principal. In addition to this hidden commission, it’s important for retirees to remember that real estate is cyclical, and was down 70% in 2008. Non-traded REITs don’t offer any liquidity, they are a long-term investment, which is also inadvisable for a retiree.
b. Variable Annuities.
A variable annuity pays the banker/broker approximately 8% commission right up front, plus it pays three layers of fees every year as long as you own it—to the banker/broker, the insurance company, and the mutual fund company. You’re looking at ongoing yearly fees that could add up to 5-7% before you make anything.
c. C-Share Mutual Funds.
C-share mutual funds are so toxic that Schwab, Vanguard, Fidelity, and TD Ameritrade will not allow them to be transferred into their system. The reason why is their hidden fees. Even if you specifically ask your banker or broker for a mutual fund with no front-end or back-end loads or fees (which is a smart thing to do), they get paid a commission of around 1% on a C-share mutual fund which is not disclosed and does not show up on your statements. This commission is in addition to the mutual fund’s charge of 1% for domestic funds, or even higher fees for international and emerging market funds, sometimes up to 2%.
Brian Decker: “We have a major problem with the banker/broker model that uses the Rule of 100, keeps all of your money at risk and tells you to ride out the stock market. This, in our opinion, is financial malpractice.”
The Importance of Working with a Fiduciary in Retirement.
Why in the world would a banker or broker make such reckless recommendations to a person facing retirement? Because they are not fiduciaries. A fiduciary is required by state law to put their client’s best interests before their company’s best interests.
There’s a three-fold test to find out if your retirement financial advisor is a fiduciary—all are required.
- They are independent.
Being independent of any particular carrier or company’s products is critical to putting a client’s best interests first, as is having access to a large universe of financial instruments. This is common sense when you think about it. As an example, if a broker or banker works for Big Bank A, then they are going to sell you Big Bank A funds, regardless of how those funds perform or how much their fees or commissions are. They can’t try to find you the best deal, because they are not set up to do that.
- They are Series 65 licensed.
The Series 65 license means that when it comes to securities, the advisor is fee-based only. The fees charged by a Series 65 advisor on investments have to be above board and fully transparent to the client. A Series 65 fiduciary like Decker Retirement Planning, Inc., can’t hide any fees or commissions, which is the opposite of bankers and brokers, who are Series 7 licensed.
- Their corporate structure is an RIA (Registered Investment Advisory).
As a true fiduciary, an RIA has regular audits from the state to help ensure that the recommendations made to clients are suitable, and that client portfolios meet parameters based on their profile and time horizon. This kind of scheduled oversight is not required of other types of firms.
Why You Need a Retirement Distribution Plan.
The number one fear that retirees have is running out of money. People want to know how much money they will need to retire, when they can retire, and how to handle their retirement money to make sure it doesn’t run out. That’s where the retirement distribution plan comes in.
A fiduciary and retirement financial advisor like Decker Retirement Planning, Inc., has a methodical, mathematical approach. We build a customized retirement distribution plan–a spreadsheet that helps outline all your income sources, including rental real estate, Social Security, and all your assets. We total that up, and deduct the expected taxes. We then calculate your annual and monthly income up to age 100, including a 3% cost of living increase yearly, and compare that to your budget.
The distribution plan tells us a lot. We do the math to help find out when you can retire. Sometimes we find that clients can retire right away, which is great. And if not, we are able to help pinpoint what will be required and how long it will take to get there.
Listen to Decker Talk Radio to learn more about retirement. Or call us at 855-425-4566 to set up a personal consultation.
Decker Retirement Planning Inc. has three offices for your convenience:
Decker Retirement Planning in Kirkland, Washington
Decker Retirement Planning in Salt Lake City, Utah
Decker Retirement Planning in Seattle, Washington
