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 wrap up the discussion on potential problems in retirement and how to avoid them. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Hello, hello and greetings everyone. This is Mike Decker and Brian Decker on Decker Talk Radio’s Protect Your Retirement, we’re broadcasting out of the greater Seattle area, KVI 570 AM radio and also in the Greater Salt Like area, KNRS 105.9 FM, or simulcasted on 570 AM radio. We’re excited to have you today. Brian Decker’s with us, he is a licensed fiduciary retirement planner. And Brian, we got some great content to wrap up from last week, but before we get started can you give us a little market note of what’s going on with the markets right now?
BRIAN: Yeah, right now there’s something called seasonality that’s going on in the stock market. Did you know Mike, that and Decker Talk Radio listeners, if you put 10,000 dollars into the S&P… oh no, May 01, and took the… and sold it November 01, so breaking the whole 12 month period into six months.
MIKE: Mm-hmm.
BRIAN: From May 01 to November 01 of every year, you did that from 1950 to present. Do you know that your 10,000 dollars hasn’t changed? I think it’s actually lost money.
BRIAN: If you invest…
MIKE: What? That’s…
BRIAN: Yes. This is called seasonality. If you invest 10,000 dollars November 01 and sold it May 01, your 10,000 is worth over 80,000 dollars. So the majority of the gain in a given year is in the months of November 01 to May 01. Now right now I’m looking at a chart, I wish I could put up for people, the months of August, around mid-August to late October is the worst drawdown.
BRIAN: The worst typical seasonal drop in the stock market. Do you know why that is, Mike?
MIKE: I honestly don’t.
BRIAN: Okay.
MIKE: Please, do tell.
BRIAN: And the reason is because the earnings come in from people that are vacationing and are doing things differently, and so the earnings typically drop when they’re reported from uh, late second quarter, early third quarter. Okay so seasonal patterns means that even if we’re in a bull market or a bear market, the typical trend in the market from mid-August to late October is down.
BRIAN: So we want to make sure that if history repeats you know, and this is, we’re talking a Wall Street Journal chart here that goes back many decades. So I wanted to make sure that Decker Talk Radio listeners knew about that and also wanted to give you some background on a couple other things. The S&P 500 when it’s valued, whether it’s price earnings ratios, price to sales, price to book, the valuation even using cyclically adjusted price to earnings ratios, which is called CAPE.
BRIAN: Valuation of the current market has only been higher one time. And it’s currently on par with the levels of 1929, right before the Great Depression. 1999 was the only time that the markets were valued higher than they are right now, ever. Ever, ever. And the reason is because artificially low interest rates from our central banks and the federal reserve have bumped up the valuation because to get any rate of return, what are you going to do? CDs, treasuries, corporates, agencies, municipal bonds, and bond funds are not returning much of anything.
BRIAN: So a lot of people are going into real estate, they’re going into the stock market to try to get some kind of a rate of return. So low interest rates have produced very high valuations in both the stock market and also in real estate, those are two bubbles that are happening in the markets right now. By the way, the other two bubbles and Mike, we’ve mentioned this on the radio as a warning to Decker Talk Radio listeners, there’s four bubbles. There was one bubble that burst in 2000, ’01 and ’02, that was the tech bubble that cost people 50 percent of their portfolio.
BRIAN: When the tech bubble burst. When the mortgage bubble burst in 2008, that was the Great Recession and that cost people about 50 percent from October of ’07 to March of ’09. That was over 50 percent.
MIKE: Mm-hmm.
BRIAN: Do you know Mike, right now and we’ve warned people about this, there’s four bubbles. We just talked about the bubble in the stock market, we talked about the bubble in real estate. There’s a bubble in individual debt, so this is automobile debt, it’s student loan debt, and it’s credit card debt. Never been higher. Never in financially recorded history on this subject have we had higher per capita debt in those areas.
BRIAN: And then the last bubble that we have has to do with country debt. When interest rates are kept artificially low, the G7 nations, all of them have more than 100 percent of their GDP in debt, we’re in uncharted territory, we’ve never had that happen before. So we’ve had one bubble burst to bring the markets down 50 percent before. Right now we have four bubbles that have inflated due to artificially low interest rates.
BRIAN: What’s interesting is there’s two things that will cause the markets to go up. One is declining interest rates, and second is rising earnings. Well interest rates are at or near all-time record lows and can’t go much lower. So the tailwinds of the past I’m going to talk about are about to go to headwinds. Because I’m going to skip around in my notes here. Well actually I’ll stay on track and talk about earnings for a second.
BRIAN: Total domestic corporate profits have grown at an annualized rate of 0.01 I’m sorry, 0.1 percent over the last five years. Let me say that differently. Corporate profits haven’t grown much at all over the last five years. In the prior five year period they grew at almost eight percent, 7.95. So over the past 10 years, S&P 500 corporations are at or near record highs and in the last five years you don’t have corporate earnings supporting that.
BRIAN: And you have interest rates that [CLEARS THROAT] are probably not going to go much lower and that at 8.6 trillion corporate debt levels are 30 percent higher today than they were in their prior peak, September 2008. And then there’s a 45.3 percent is the ratio of corporate debt to GDP, which has never been higher. So we have a debt issue, we have a stock market bubble, and we have a real estate bubble.
BRIAN: US corporations are simultaneously more indebted and less profitable and more highly valued than they’ve been in a long time, and furthermore they’re intentionally making themselves more leverage by distributing cash as dividends and buyback shares instead of saving or investing that cash and investors can’t buy their shares fast enough. Maybe this will end well but it’s hard to imagine how. Another interesting fact is the diverging Dow, so the Dow Industrial continues to hit all-time highs while it’s brother index the Dow Transportations are falling. The transports are down six percent since mid-July.
BRIAN: So you don’t have, that’s another canary in the coal mine that we look at ‘cause transports are a very good indicator of economic health in the country. So if the transports not supporting the Dow Jones new highs for the last, what is it? Two weeks, that’s a divergence that can threaten the markets continue seeing strength. The last point, I mentioned that there’s two reasons that the markets can go up, stay up, and be sustained. One is declining interest rates, that is about to switch from a tailwind to a headwind.
BRIAN: The central banks around the world have announced that they’re going to stop this stimulus and start buying back their shares. There’s a term for this and darn it, it escapes me right now. But so we want at Decker Retirement, at Decker Talk Radio we want to make sure that clients, that you Decker Talk Radio listeners have some kind of downside protection in place because we’re about to after nine years of stimulus, we’re about to take the patient off the medication.
BRIAN: And when a normal recovery is GDP returns of over two, three percent we haven’t had one year where we’ve had over three percent GDP yet. So we have a very, it’s the weakest recovery ever on record for the United States of America. And so now we have markets usually cycle every seven or eight years, we’re in year nine, we’re in seasonality point where the markets usually turn down for the next 90 days, and we have record high valuations and we have the central banks ready to go from less stimulus to actually buying back their debt.
BRIAN: So Mike, I wish I could be less of a downer, but I hope that people have downside protection in place for their stocks.
MIKE: Well Brian, I want to stop you there, you don’t necessarily need to be a downer if you’re aware and you know how to take on the headwinds, which is a big part of what this show is, educating people on how to take on these headwinds and still help protect your retirement. Then you shouldn’t be depressed or really just being scared, right?
MIKE: This is all about just the right way to plan.
BRIAN: Right.
MIKE: I mean, wouldn’t you agree?
BRIAN: I agree. So Mike, at this point we will just finish up what we started last week, which is the list of potential problems in retirement. In fact it’s taken three weeks for us to finish this list, we started this three weeks ago, do you remember?
MIKE: Mm-hmm. [LAUGH] Yeah.
BRIAN: Okay, so let’s dive right in. We’ve talked about things, and by the way, people can dial us up and listen to past podcasts that are listed on our website at DeckerRetirementPlanning.com and we’ve covered very important points about inflation, stock market crash, death of a spouse.
BRIAN: We’ve talked about long term care, we’ve talked about dynasty trust, Roth conversions for tax minimization. Okay now we’re going to talk about the difference in a financial plan between drawing your income from principle guaranteed accounts, versus fluctuating accounts. 95 percent of you out there follow the banker/broker model and you will follow the advice where you have all of your money at risk in an asset allocation pie chart.
BRIAN: Your advisor gave you a risk questionnaire which once you filled out and submitted, it spit out a diversified asset allocation recommendation to show you diversification into large cap, mid cap, small cap growth, value, international, emerging markets, stock, funds. And then you also have your bond components. You might have gold and silver and you probably have some cash. All your money except for the cash is at risk fluctuating money. When you, this is a fact, this is a mathematical fact. When you pull money out of a fluctuating account, when you’re in retirement you’re committing financial suicide.
BRIAN: Because when markets trend higher and you’re pulling money out of it, you’re compromising the gains and when the markets go down and you’re drawing money out, you’re accentuating the losses. Bankers and brokers use what’s called the four percent rule to pull money out of your accounts once you’re retired. So let’s give you the background of the four percent rule. In fact I’ll define it right now. I will tell you my opinion on this.
BRIAN: The four percent rule is the most destructive, toxic piece of financial advice ever used in financial planning and retirement planning specifically. Here’s how it works. Four percent rule says that stocks have averaged around eight and a half percent return for the last hundred years. That’s true. Bonds have averaged around 37 percent. I’m sorry, bonds have averaged around four and a half percent return for the last 37 years and that’s also true.
BRIAN: So let’s be really conservative and just draw four percent from your assets for the rest of your life and you should be fine. The problem with that is that it works beautifully when the markets go up. It doesn’t work beautifully when the markets are in a flat market cycle. Stocks don’t trend, Decker Retirement Planning listeners know this. Stocks don’t trend, they cycle. So in the last hundred years the markets cycle in approximately 18 year cycles.
BRIAN: 1946 to ’64 was a nice bull market. ’64 to ’82, the markets chopped flat. ’82 to 2000, biggest bull market we’ve ever had. Since January 01 of 2000, the markets have been relatively flat. Instead of eight and a half percent returns, the returns have been half that. And by the way, January 01 of 2000 to 12/31/10 is the lost decade, the worst 10 year period ever recorded in stock market performance terms. Worse than the Great Depression in the 1930s.
BRIAN: So in the last 16 years you have a flat market cycle. So the four percent rule let’s use any flat market cycle, we usually use the most recent one. Let’s have you retire, Decker Talk Radio listeners, let’s assume that you retire with four million dollars January 01 of 2000. That’s the good news. The bad news is markets go into a decline, you lose 50 percent in 2000, ’01, and ’02, but you’ve lost worse than that because in 2000, ’01, and ’02 you’re pulling four percent a year. We’re going to show you mathematically how the four percent rule works.
BRIAN: You start 2003 down 62 percent but the good news is the markets are doubling from ’03 to ’07. But the bad news again is that you don’t get all that because you’re drawing four percent in ’03, ’04, ’05, ’06, ’07. And then you take the hit in ’08 of 37 percent plus four, and now you’re at a point, ladies and gentlemen, where you can no longer retire. Now in 2009 we saw this because the grey haired people that were going back to work, selling their home, move in with their kids, we saw them at the banks, we saw them at fast food restaurants, we saw them at Wal-Mart.
BRIAN: They had to go back to work and do Plan B because their retirement was destroyed by the four percent rule. In fact the guy who invented the four percent rule, his name is William Bengen, you can see his quotes on our website at DeckerRetirementPlanning.com. William Bengen came out in 2009 and said, “With interest rates this low, the four percent rule doesn’t work.” And yet what bothers me most, this gets my blood pressure up.
BRIAN: Even when in 2009 the creator of the four percent rule publicly discredit it, the bankers and brokers never missed a beat, they continued to recommend the four percent rule as your distribution strategy today. So we want to do a public service and make sure you know that the four percent rule is toxic and destructive for anyone pulling money out in retirement. We’ve talked about the history of it, we talked about what it is, and when mathematically you pull money out of a fluctuating account, you’re committing financial suicide. All of this should be logical, common sense, and surely it’s mathematical.
BRIAN: We hope Decker Talk Radio listeners that you don’t follow the four percent rule What we do in our planning is we use a spreadsheet that, imagine we show all your sources of income, we show your Social Security, we show your pensions if you have them, we show rental real estate if you have them, and we show the income that your portfolio can produce.
BRIAN: So income from assets, plus pension, plus real estate, plus Social Security, we add it up, minus taxes, gives annual and monthly income with a three percent COLA to age 100. The spreadsheet on the left side shows all your sources of income, adds it up, minus taxes, lets our clients know how much money they can spend. That’s priceless peace of mind because if you don’t do these mathematical calculations you can’t know how much you can spend and have it last for the rest of your life.
BRIAN: This is point number one. Point number two, Mike, is our clients are pulling income from principle guaranteed accounts. So when the markets crash every seven or eight years like they have historically for decades, our clients when the next 2008 hits won’t lose a dime in their emergency cash, bucket one, bucket two, or bucket three, which is 75 to 80 percent of their account.
BRIAN: 80 percent of their money, our clients at Decker Retirement Planning will not even feel it, they’re drawing income from principle guaranteed accounts. They have no interest rate risk, they have no credit risk, they have no economic risk, they have no stock market risk. So that allows them tremendous peace of mind both in knowing how much they can draw and knowing that they’re protected from the next 2008.
BRIAN: All right. So Mike, when it comes to making sure that our clients are drawing income from the right sources, we make sure that bucket one for example, I want to just illustrate.
BRIAN: Bucket one is responsible for income for the first five years. It’s drawn from a principle guaranteed account. Most of the time bucket one is just a money market account, and because we’re fiduciaries to our clients, we want to make sure that they’re getting the best rate for their principle guaranteed returns. So we have our clients, we help them setup accounts at Goldman Sachs, Capital One, Securian.
BRIAN: Other accounts that are yielding right now, money market accounts of 1.25 percent is approximately the best yield we can find right now. But we help our clients get that setup in bucket one. Buckets two and three are also there, principle guaranteed, they’re laddered in, and they provide income, bucket two grows for five years and pays income, monthly income for years six through 10. Bucket three grows for 10 years and pays income for years 11 through 20.
BRIAN: We’re going to talk today on the radio show about drawing income from a proper source. If you draw income from principle guaranteed accounts, you can have tremendous peace of mind so when the markets crash every seven or eight years, so let’s look at the history of these market crashes. I want to bring up these dates because we are now very much due so we have 2008, from October of ’07 to March of ’09, the markets lost 55 percent.
BRIAN: Seven years before that was 2001, twin towers went down, that was the middle of a three year bear market of over 50 percent. Seven years before that was 1994, Iraq had invaded Kuwait, interest rates spiked, the economy struggled and the markets struggled also. Seven years before that was 1987, Black Monday, October 19th. One day drop of 30 percent. Seven years before that was 1980.
BRIAN: The bear market from ’80 to ’02 with sky high interest rates was over 40 percent. Seven years before that was the ’73, ’74 bear market. That was a bear market of also a drop of over 40 percent. Seven years before that was the bear market of ’66, ’67. That was also a 40 plus percent drop in the market and it keeps going. So the markets bottomed in this latest cycle March of ’09. And have gone up over 100, oh actually over close to 200 percent since then. That was nine years ago.
BRIAN: We are now in new territory, we are in the longest period, we’re entering the 10th year of being in a market that has not yet, no we’re in year nine of a seven, eight year market cycle that has not yet rolled over. We talked earlier in the radio show about having four bubbles, not one, with real estate, with stock market, with consumer debt, with country debt. Four bubbles that are kept inflated because of artificially low interest rates.
BRIAN: When those interest rates start to go back up, we will see those bubbles if not burst, they’ll be significantly deflated. All right, we talked about taking income from the proper source. We also want to perform a public service here and tell you that any financial planner that puts your home, your residence in your plan with a reverse mortgage on it is not being acting as fiduciary to you.
BRIAN: In our opinion it is rarely ever in your best interest to put your home in your income plan and use it as a reverse mortgage. That’s our opinion. We keep your home separate, we view it as sacred. We keep it off the list, it’s just investible funds with retirement accounts, non-retirement accounts, qualified and non-qualified funds.
BRIAN: All right, the next item here is called interest rate risk. Interest rate risk is the risk on your bond funds of how much money that they will lose when interest rates go up. Interest rates are right now at or near all-time record lows. The 10 year treasury right now is around 2.2 percent. When interest rates are at or near all-time record lows, why would a banker or broker tell you to put your safe money in bonds or bond funds?
BRIAN: Now this is mathematical nonsense. And it’s also financial malpractice. I’m going to say the same things two different ways. When interest rates are at or near all-time record lows, interest rate risk is at or near all-time record highs. Interest rate risk is the amount of principle you lose on your bond funds when interest rates go up. So let’s give you some historical examples.
BRIAN: In 1994, 10 year treasury in one year went from six to eight percent in one year. According to Morningstar the average bond fund lost 20 percent that year. Then in 1999, the 10 year treasury rate went from four to six percent. According to Morningstar the average bond fund lost around 17 percent. If we go from where we are right now at around 2.2 percent back to just four percent, that’s a hit to principle of almost 20 percent on what your banker and broker is telling you is your safe money, when we want to tell you that that’s absolutely false.
BRIAN: When interest rates are this low, interest rate risk has rarely ever been higher. Just like two plus two is four, when interest rates go up, bond funds lose money. Now I’m not talking about laddered bonds or CDs, or municipal bonds, I am talking specifically about bond funds, F-U-N-D-S. Funds. Bond funds lose money when interest rates go up period, just like two plus two is four. And what is astounding to me is that people in our industry, financial planning industry.
BRIAN: Bankers and brokers will tell you to put your safe money in bond funds and will use something called the rule of 100, to tell them how much money you should put in your bond funds. The rule of 100 says that if you are 65 you should put 65 percent of your money in bonds or bond funds. If you’re 70, you should have 70 percent of your money in there. That also fails the common sense test because 70 percent of your money now is earning almost nothing and has incurring interest rate risk higher than ever before in our country’s history.
BRIAN: So we have major problems with how the bankers and brokers do their planning, particularly their retirement planning. They put their clients in tremendous risk, and this is mathematically provable. Mike, at this point we’re halfway through the show, I can’t believe it, we’ve only gone through a couple items here.
MIKE: [LAUGH]
BRIAN: There are some good options when it comes to interest rate risk, Decker Talk Radio listeners are probably saying, “Well, what do I do? If I can’t use CDs, treasuries, corporates, agencies, municipals.”
BRIAN: “All those fixed retirement, all those fixed debt vehicles are yielding too little, and bond funds are yielding very little too and they have tremendous interest rate risk. What can we do?”
BRIAN: And also on the tax free side, at over six percent which is like a CD, a taxable CD at eight and a half percent. These are things that people should know about, these are principle guaranteed accounts and they should be part of their financial planning.
MIKE: Absolutely. And Brian I just want to point out here, we can talk on the radio show, we can give you information, but when you come in there’s just a lot more information we can give you, you can see it, third-party verified, everything that’s going on that we’re talking about here.
MIKE: And you owe it to yourself and the lifetime you spent working and saving to have this information to make the best decisions for you, for your family, and to protect your retirement.
MIKE: All right, Brian I know we’ve got a lot more to cover, let’s just keep rocking and rolling with this information.
BRIAN: All right, the next item I want to talk about as potential problems in retirement is liquidity. Liquidity as we define is money that can be available next day savings, checking, no penalty. If all your money is liquid, that means it’s not working for you. If all your money is locked up, that’s equally silly. I will tell you that financial planners that are not fiduciaries, I want to warn you, we want to warn you of several people that are in the industry.
BRIAN: And they call themselves bankers, brokers, or financial planners. And they… well how does the saying go, Mike? When you’re a hammer everyone looks like a nail? Is that how the saying goes? Something like that?
MIKE: I don’t know, but that makes sense to me.
BRIAN: When people are selling annuities, and they lock you up in one or two annuities, that makes no sense to us. I’m a golfer and there’s 13 clubs in the bag. If you play golf the way that some of these financial planners do, and they put all your money in one or two annuities.
BRIAN: You’re not diversified, that’s like playing golf with a putter and a seven iron. It makes no sense. You’ve to have different clubs when you play golf for different situations and you should have a diversification of investments for different reasons. For example, for principle guaranteed accounts we have short term investments where we want to make sure that you’ve got income coming in for the first five years, those are short term investments.
BRIAN: Then there’s intermediate term or medium term investments for principle guaranteed accounts for years five through 10, totally different animal, totally different investment. And then the longer term accounts for years 11 through 20 are something again totally different. There’s tax free investments that are another category altogether. We want to recommend and make sure that when it comes to your diversification that and also you should have some risk money.
BRIAN: You should have some risk money in the stock market where you’re using things that keep up with the S&P when the markets go up and protect principle when the markets go down. We use two-sided models at Decker Retirement Planning and the models that we use in concert made money in 2008, they made money in 2000, ’01, ’02. They’ve made money every year in the last 16 and a half years.
BRIAN: So these models should be in your portfolio for your risk money and you should be drawing from principle guaranteed accounts. My point is that you should be diversified. And in that diversification you should have a liquidity score. Again, if all your money is liquid that means it’s not working for you, if all your money is locked up that’s equally silly. So what we target is around 30, 40 percent next day liquid, no penalty.
BRIAN: So we’ll add up the emergency cash that clients have, we’ll add up bucket one, we’ll add up the liquidity in buckets two and three and the risk account. And we’ll divide that into the total investible funds and we need to see 30, 40 percent or more in order to be comfortable. But liquidity is very important. Make sure Decker Talk Radio listeners that you don’t allow a banker or broker to say, “Hmm, let’s just put all your $800,000 in this.” I just shake my head, I can’t believe that people do that. Okay.
BRIAN: Next point is when do you want income to start? When we look at our financial planning spreadsheet, and we want to make sure that when you’re transitioning from your 1040 checks, or I’m sorry, your 1099 or W-2 checks from your employer and step right into the checks from your retirement savings, this is your social security, your pension, your rental real estate, and your income from assets. Those checks should be about the same or more.
BRIAN: It’s very difficult in retirement to go through a substantial drop because you’re used to spending your paychecks and if your paychecks don’t, if there’s a big drop then that’s a problem. So we want to make sure that you’re retiring into an income stream that’s commensurate with your spending for the last 15, 20 years. So that’s a check that we do and that’s a problem with a lot of people who believe that once they retire their spending’s going to go down. No, most of the time your spending goes up by about 20 percent.
BRIAN: The reason it goes up 20 percent approximately is because you’re at work and being at work you’re engaged and you’re busy, and you’re not spending money. When you’re retired and you have time, now you’re going to want to do things and doing things costs money. I’ve got an aside here Mike, I want to share with Decker Talk Radio listeners and it’s about retirement and making sure they celebrate that day.
BRIAN: This is going to be an aside from the potential problems in retirement, although it could qualify to be a potential problem in retirement. Do you know that, this is a tragic analogy, but some parents who have lost their children in the military and they’re missing in action, they don’t have that finality of seeing the funeral and so they have dreams and they still think and hold the possibility that their son or daughter is still alive. I’ve had clients that retired and celebrated their retirement with a party or some kind of event.
BRIAN: And they transitioned beautifully in retirement. I’ve had other clients that didn’t celebrate, didn’t have an event, didn’t have a milestone marker for their retirement and they have recurring panic dreams of waking up in a panic, in a cold sweat thinking that they are late for work. It’s really interesting, I didn’t go to my college graduation at the University of Washington, it was summer, I didn’t want to be sitting there with a cap and gown, I was water skiing about three miles away in Lake Washington.
BRIAN: And that made sense to me at the time. But because I didn’t celebrate that event, what happened was I have a recurring panic dream and it goes like this. And I wonder how many of you have this? I’m in the last quarter as a senior at University of Washington and I’ve got this one class that I need to graduate, I go to all my classes except this one I just blew off, I know the test is today, I know it’s at 10:30.
BRIAN: And it’s 10:15, I’ve never gone to that class, never took it seriously, I’m just going in to take the final to pass it, and I can’t remember where it is. And I run around campus, I can’t find it. Now I’m 15 minutes late, now I’m 30 minutes late, now I’m 45 minutes late. And now I know that I’m too late and I’ve missed it, and I panic and I’m in a cold sweat and I wake up in just a total panic. I have that recurring dream because I never celebrated my graduation from college, and marked with an event.
BRIAN: I’m just making the recommendation here that when you retire we hope that you have some kind of celebration that marks that milestone event and allows you to transition into retirement so you don’t have those panic dreams about going to work or missing work or being late for work. All right, when it comes to financial planning in retirement we do have a COLA, cost of living adjustment for our clients income.
BRIAN: When you retire at 65 and you live to age 100, that’s 35 years in retirement. That’s almost as long in retirement as you were in work. So with a three percent COLA what happens is, now you’ve got, I’m just going to make up a number. You start with, I don’t know, $7000 a month net of tax, and then in your nineties you’re getting $20,000 a month.
BRIAN: And people roll their eyes predictably at us and say, “Come on guys, can’t we have some more money pushed down to us here during our healthy travel years? And flatten out the COLA a little bit?” So we do that. Instead of a three percent COLA we flatten it to 1.7 because we want to push more money down to you to spend in your early retirement years because from 65 to 80 is when you’ve got your health and you should be hitting your bucket list and traveling as husband and wife.
BRIAN: And doing the things that you want to do. Once you hit 80, maybe not for everyone, but a lot of people health wise it makes it difficult to go out and enjoy and hit those bucket list items, it makes it much more difficult. You slow down quite a bit, so we compensate that in our planning by flattening the COLA and pushing more money up to you to spend during your healthy travel years.
BRIAN: Another problem in retirement is aggressive advisors that think that you don’t have a right to make decisions on your money. And when you call them with ideas, they push back. When you want do this or that, they push back. [LAUGH] We want to warn you that they’re not acting as fiduciary to you, number one, and number two we want to remind you that it’s your money. So when it comes to an aggressive advisor we hope that you shop around.
BRIAN: And please, please, please we hope that on the forefront is making sure that you’re dealing with a fiduciary. A fiduciary is someone who is required by law to put our client’s best interests before our company’s best interests. A banker is not a fiduciary. A broker is not a fiduciary. An insurance salesman is not a fiduciary. We are a fiduciary. Now with the new Elizabeth Warren DOL rules that came into place June of this year.
BRIAN: The bankers and brokers will not say that they’re fiduciaries. They are not. Let me give you a three-fold test so that you can find out if your banker or broker is a fiduciary. Number one, they have to be independent, and this is common sense. They have to be independent so that we, for example at Decker Retirement Planning, our planners in Seattle, Kirkland, and Salt Lake City are independent and we can offer any of the financial instruments and securities that are out there.
BRIAN: We have no one telling us what we can and cannot do. We can work with whatever is in the best interest for our clients. Not true at the banks and brokers, they have a limitation and they tell their bankers and brokers what they can and cannot work with. So number one, you’ve got to be independent and if you’re working with a big company you are not independent. Number two is you’ve got to be Series 65 licensed. Series 65 means that you’re fee only on securities.
BRIAN: Fee only means that you’re transparent and you can’t do the hiding of commissions that a Series 7 broker or banker can do to you. So for example a broker, this happens all the time. A broker will tell you that you should invest in a non-traded REIT, R-E-I-T, Real Estate Investment Trust. They’ll tell you how great it is and they’ll tell you that it’s a long-term investment. What they won’t tell you is they just got paid 12 percent commission on your principle.
BRIAN: And what they won’t tell you is that you can’t trade that for an undetermined amount of years. Is that being a fiduciary? Heck no. And they’ll tell you to invest in things also like variable annuities where they get paid eight percent commissions right up front. Or this is the worst of all in my opinion, they’ll tell you to invest in C as in Charlie, C-share mutual funds. C-Share mutual funds when you ask your advisor, your banker or broker if these are front-end loaded funds.
BRIAN: They’ll say, “Nope.” Are they backend loaded funds? “Nope.” What he won’t tell you is that they’re 12b-1, they’re C-share mutual funds that charge you one percent per year on top of the mutual funds charge of one percent a year. He won’t tell you that and so C-share funds are so toxic that they’re required to be sold before any transfers into Charles Schwab or TD Ameritrade, Fidelity. They don’t want C-share mutual funds in their system at all, they’re toxic, they’re horrible, they’re very much consumer unfriendly.
BRIAN: And deceptive in how they’re built up for the broker, but against the consumer. So these are things that can be done with a Series 7 license, which bankers and brokers have, but a Series 65 person like a fiduciary, like us, we cannot charge you any security commissions. We are fee based only. And the fees are all above board. All right, the last item, I told you there’s a three-fold check to see if your banker or broker or advisor is a fiduciary.
BRIAN: Number one, are they independent? Number two, they’ve got to be Series 65 licensed. Number three is their organization is setup as an RIA, a Registered Investment Advisory corp. And as an RIA that structure is required to be a fiduciary. You’re not associated with a broker dealer, you’re a standalone independent RIA, Registered Investment Advisory. If your advisor can’t answer yes to all three, they are not, N-O-T, they are not a fiduciary.
BRIAN: They’ll tell you that they are, and now you know how to determine if they’re legit or not. All right, want to talk about an emotional problem that people have in retirement, transitioning from scrimping, saving, being frugal and responsible and having a budget and saving, saving, saving for some day. Someday is retirement. And in retirement people have a hard time transitioning from saving for some day to actually spending what they’ve taken 40 years to save.
BRIAN: When people do that and we have to talk them through it, it just takes doing it and time for them to see that the money coming from Social Security is coming every month for the rest of their life. The money for the pension is coming every month for the rest of their life. The money from their rental real estate is coming every month for the rest of their life. And the money coming from their portfolio is coming every month for the rest of their life. These are your new paychecks. Is it irresponsible to spend that?
BRIAN: No, it’s not. Are you going to run out of money before you die? No, when you can see how much money you can draw, you’re not guessing anymore and you’re using math to show that you’re fine and you’re okay to spend X amount of money per month and per year. Because it’s after tax. All right, the last thing when it comes to potential problems in retirement is on financial statements a lot of people don’t know the critical important information that’s on your bank or broker’s statement.
BRIAN: For example, on page one you should check every month to see if you made or lost money for that month, and did you make or lose money for the year. Page one tells you account appreciation or depreciation for the month. It should take you less than five seconds to go right to page one and see where you stand, we hope you check that out. The second thing you should check on your statements is if you’re being charged commissions for all your transactions. And if you are then is your banker and broker churning your account? Are thy buying and selling excessively to generate unnecessary commissions that are not in your best interests at all.
BRIAN: The other thing when it comes to your financial statements is we want to make sure that if they’re charging you an overall wrap fee, W-R-A-P, a wrap fee account, what’s in the wrap fee? Do they have CDs in there? Are they charging you on your money market? Money that’s just sitting there? Are they charging you a management fee on mutual funds that also have a management fee? So you’re getting charged twice? And is the performance net of fee justify you using them?
BRIAN: Why wouldn’t you, okay, I just have to say it. Why wouldn’t you just use something, it’s called robo-investing, R-O-B-O. Robo-investing is available at Charles Schwab, at Fidelity, at E-Trade and almost all the discount brokers. Here’s how it works. You’re given a risk questionnaire and once you fill that out it gives you an asset allocation diversified pie chart recommendation.
BRIAN: But instead of mutual funds you’re buying ETFs, Exchange Traded Funds that don’t have any wrap fee, that don’t have any management fees from Fidelity or Vanguard or Schwab or E-Trade or TD, these discount brokerages will have you invested and diversified using the index ETFs, like the S&P SPY, the NASDAQ 100 Index QQQ. The Emerging Market Index EEM, the EAFA. Oh darn, UR for Europe.
BRIAN: They diversify you based on what you need, they automatically rebalance and there’s no management fee. When your banker or broker is under performing the indexes, number one, and charging you a management fee, number two. That makes no sense. If you insist on using the pie chart which we hope you don’t, we hope that you use our distribution plan. But if you’re using the pie chart and you insist on buy and hold, this information that I’m giving you right now can save you tens of thousands of dollars.
BRIAN: Because you give your banker or broker the heave ho, and you go to Fidelity, Vanguard, E-Trade, Schwab, or TD Ameritrade, ask for robo-investing, diversified yourself in indexes that are rebalanced on a regular basis. There’s no management fee. And the ETF fee is like four or five basis points. 0.04 percent. You minimize your fees, and you own the indexes for performance.
BRIAN: One last thing, gosh Mike, the program’s almost over. One last thing and this is a community service we want to tell you for Decker Retirement Planning, this is Decker Talk Radio. Decker Retirement Planning wants to point out one very important last thing on your statements, your monthly statements. If you own municipal bonds and you’re with a low interest rate environment you see any of your municipal bonds with a three, four, or five percent coupon drop below par, which is 100.00, there’s a major problem.
BRIAN: There’s only one reason in a low interest rate environment that a municipal bond with a coupon of three, four, or five percent will trade below 100.00 and that is only if the ability to pay back all the principle at maturity is being compromised and eroded. This is called credit risk. Credit risk is specific to municipal bonds and it’s indicated and red flagged in a huge way on your statement when you see bond price drop below par.
BRIAN: We’ve been telling clients this for years, for many, many years. Four years ago the bond prices of Puerto Rico dropped below par and we advise people when that happens to pick up the phone and sell it. Don’t call your banker, broker, or advisor because they’ll justify why they sold you the bond originally. They don’t want to lose face. If you do that and they talk you into holding it, you will have just committed, it will have cost you a lot of money. So we hope you pick up the phone and sell it. Four years ago like I was saying, Puerto Rican bonds started to drop below par.
BRIAN: And now the cows are out of the barn, you know that Puerto Rico’s broke and those bonds are trading at 20 cents on the dollar. Now remember, this is your safe money. When you see your statements every month we hope if you have municipal bonds you look down all your prices every month. And if you see any of your bond prices drop below par you pick up the phone and sell them. I will tell you right now there are areas of risk in the United States. Number one is the Northeast, New Jersey, Connecticut, New York. Those areas right now are having some municipalities drop below par.
BRIAN: Also you’ve got the state of Illinois that is at financial risk and all the municipalities, I hope that if you have any bonds in Illinois that you’re very carefully reviewing the price. Also the state of California. Many municipalities in California have bonds that are priced below par. We hope you pick up the phone and sell it. Mike, I can’t believe it, that’s the end of the show and we just barely finished, but we did finish the potential problems in retirement. It took us three weeks to do it.
MIKE: Well we’ve got about a minute 30 seconds left, if there’s any last things that you’d like to just to go over before we wrap things up.
BRIAN: Okay, well in the next radio show next week, we want to go through the answer of “Well, with interest rates this low, what can we do with our money? What are good potential options?” So we’ll look at literally all the different principle guaranteed options and we’ll define what principle guaranteed means to us, there’s three different types of guarantees out there. We’ll go through all of that. We’ll go through the current rates for CDs, treasuries, corporates, agencies, municipals, fixed annuities, savings accounts, personal pensions, life insurance, and equity indexed accounts and equity linked CDs.
BRIAN: We’ll cover all of that next week. We’ll give you the rates that they’re trading at, and the different options and we’ll make recommendations. It’ll be a very important show next week.
MIKE: Absolutely, so we’re excited to talk to you next week. KVI 570 Greater Seattle area or 105.9 KNRS FM Radio, 570 AM in the Greater Salt Lake area.
MIKE: Take care, this is Decker Talk Radio’s Protect Your Retirement, signing off.
