MIKE: This week we’re talking about the four horsemen. Not of the apocalypse, but in retirement.
BRIAN: This is a great topic for people in retirement to talk about things that could hurt you in retirement, and we’ll talk about how we handle things and recommendations that we have to overcome the problems that we’re going to bring up.
BRIAN: All right, well, let’s go in-let’s get into it. The article talks about how well the-one of the statistics, I’ll start with that. 55 percent of baby boomers have saved enough money for retirement. 59 percent of boomers say that social security will be their major source of retirement income. Health care costs consume 33 percent of income amongst boomers currently 60 and over.
BRIAN: Economic satisfaction has fallen from 76 percent in 2011 to 43 percent in 2016. One in three Americans have zero saved for retirement. Women are less prepared for retirement then men. That strikes me as odd. 28 percent of Americans over 55 have no retirement savings. So, I want to talk about the four problems that’s exacerbating and behind some of these statistics.
BRIAN: The first has to do with longevity. According to the social security administration, a male aged 65 today can expect to live on average until age 84.3. A woman aged 65 today can expect to live on average until age 86.6. Out of every four 65 year old today, oh I’m sorry, one out of every four 65 year old today will live past age 90, and one out of 10 65 year old will past live past the age of 95.
BRIAN: So the good news is, most Americans are living longer and living healthier lifestyles. So, that’s the good news. The good news is, just like you can grow lettuce in your backyard, the doctors are using stem cells to grow liver, kidneys, lungs, and other vital organs so that just like you bring your car in for a new radiator, you bring the human species in for a new whatever.
MIKE: It sounds like George Orwen’s worst nightmare.
BRIAN: Yeah, well the point is, the good news is there’s great quality of life ahead. The good news is with biotech breakthroughs that we will be living longer. But there is a problem. The problem is that longer lifespans means that portfolio stress is going to be exacerbated. Your assets have to live-have to pay you longer, because you’re living longer.
BRIAN: So, lifetime-longer lifetimes means portfolio assets will have to cover a much longer period of time and also raise the risk that one or both spouses could end up in a long-term care facility. Which could deplete asset portfolios rapidly. Now Mike, last time we talked about long-term care. We spent 15 minutes on the five different choices that people have on long-term care. How can they dial that up, because that’s important.
BRIAN: Okay good, so one of the greatest worries among retirees is the risk of outliving their savings or spending too much. By the way, before 2008, the number one fear in the United States was public speaking, number one, number two, the fear of going to war, number three, the fear of death. Now, since 2008, the number one fear of people over 50 years old is running out of money before you die. Roughly one in five individuals age 85 and older who died between the years of 2010 and 2012, one in five of those people had no assets other than a home.
BRIAN: One in six died broke, one in ten died with an average debt of six thousand dollars. So longer and healthier lifestyles are a good thing, but the problem is having the assets continue to pay out. So, there’s close to 76 million baby boomers born between 1946 and 1964. They are alive today, representing 28 percent of the United States population. Starting in 2011, an estimated 10 thousand boomers are going to retire every day.
BRIAN: And that trend will continue for at least another ten years. They represent the largest retirement contingent in US history, and that places the strains on both social security and Medicare. If current laws generally remain unchanged, the United States government deficit will increase nearly every year for the next decade according to CBO congressional budget office. And rise to the highest average level in the last 50 years. The reason is growth in federal revenues will be outpaced by spending, in particular for social security, Medicare, and the interest payments on government debt.
BRIAN: Unlike our parent’s generation, who had guaranteed pension and social security, boomers are less fortunate, most have not defined payment pensions, they have defined contribution pensions. So, there’s no set guarantees for salary replacement. Put I want to talk about the problem of longevity and how we handle it. We have-our solution to the longevity issues is something called the distribution planning that we do.
BRIAN: We take the assets that you have and we put them in the top right corner of a spreadsheet. We list your age, we list all the sources of income, and then we have your sources of income paying out each year, like social security, we show your pension, we show rental real estate, we show income from your portfolio, and we total all of these up, minus taxes and we have an annual and monthly income with a cola, we usually put around three percent cola to age 100.
BRIAN: To make sure that you’ve got the funds there. And we don’t, keyword don’t, do not put your home in the plan. So, let’s say that you live to age 105, or 110. Mike, do you think that’s going to happen to you?
MIKE: I-yeah. I absolutely think I’m going to live that long.
BRIAN: Okay. I think your generation will. So, we do the planning for this generation that’s 55 and older. We responsibly plan to age 100. And if you live longer, then we have wisely reserved assets that have you live-this is backup number one.
BRIAN: Is we plan to age 100, number one, number two, we don’t have your home in there, so we make sure that you’ve got an asset to see you through the final stages of your life and number three, we’re ultra conservative on the growth rates of your portfolio. For example, the principled guaranteed accounts, that have actually done-have averaged around six and a half, seven percent. We show them at three and four percent.
BRIAN: And the risk funds that have actually done 16 percent, we show them averaging around six percent. So, if our clients do live beyond age 100, Decker Retirement Planning clients are ready for that, prepared for that, and are not hurt by longevity. Mike, this is a good point, I know we’re early in the program, but, let’s do an offer for-to have people come in and see the distribution plan that does several things. Number one, instead of your banker and broker having all of your money at risk, the distribution plan that we use is specific for retirement.
BRIAN: The distribution plan that we use is specific for retirement. So, in your 20’s, 30’s, and 40’s, it’s fine to have all your money at risk, because you’ve got a paycheck coming in. But once you’re over 50, 55 years old, if you stay with that plan and keep all your money at risk, you are going to hurt yourself. It’s just a matter of time before when the markets crash, which they do every seven or eight years. You’re going to lose 25, 30 percent, take four years to get back to even, and draw income during that period, and draw down your assets in a way that you can no longer stay retired.
BRIAN: You’ll have to downsize, sell your home. We saw all of this in 2008. So, the number one is we pair back the risk that our clients are taking, to instead of having all of their money at risk, typically our clients have about 25. Maybe 30 percent of their money at risk. Number one. Much less risk. Number two, our clients can see how much income they can draw for the rest of their life. We can see, mathematically how much you can draw for the rest of your life. And by the way, Decker Talk Radio listeners, if you haven’t done these calculations, you’re guessing. Let us run the calculations, we’ll do it for free.
MIKE: Can I retire? And if so, how much can I draw? That’s critical to knowing how your retirement planning could work.
BRIAN: Okay, good. So on longevity, shame on your banker or broker if they’re using the four percent rule to distribute your assets when you’re over age 55. I just want to do a shout out on this, this a discredited strategy. Bankers and brokers that use the four percent rule, I just want to get your attention Decker Talk Radio listeners.
BRIAN: In my opinion, this is the most destructive, caustic, strategy out there that’s destroyed more people’s retirement than any other strategy out there. Here’s how it works. Says that when you’re over-gosh, over the last hundred years, stocks have averaged around eight and a half percent. That’s true, bonds have averaged around four and a half percent for the last 36 years. That’s true, too. 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.
BRIAN: The problem with that strategy is it works beautiful when the markets are going up, when markets are going down, not only doesn’t it work, it actually destroys your retirement. Let me give you some mathematical proof. Let’s say that we retire you January one of the beginning of the latest flat market cycle, which started January 1 of 200. So, the good news is, you Decker Talk Radio listeners you get to retire, you’ve got four million dollars, and you’re done. The bad news is, 2001 and 02, the tech bubble burst, the S&P is down 50 percent.
BRIAN: But you’re down more than that, because you’re drawing four percent a year. Four, four, and four, you’re down 62 percent going into 2003. The good news, the stock market doubles from 03 to 07. But you don’t get all that, because every year, for 03, 04, 05, 06, 07, all five years, you’re drawing four percent from those years, and then you take the hit. The 37 percent hit of 2008, plus four percent and you are done. You can no longer retire, you’ve got to sell your home, move in with the kids.
BRIAN: You’ve got to go to plan B because your banker and broker used a strategy that destroyed your retirement. In fact, the guy who created this strategy, William Bangin, if you go to our website you’ll see his quote, that he doesn’t use it. Because he found that it was dangerous in a low interest rate environment. It does not work. He rebuts it, and yet the bankers and brokers still use it today. So a discredited strategy by its creator is what the bankers and brokers will use to distribute your income in retirement.
BRIAN: We hope that you call us, come in, and see how mathematically the approach that we have makes common sense. To have you drawing income from principal guaranteed accounts. This is common sense. If you draw income from a fluctuating account, you compromise the gains when the markets go up, you accentuate the losses when the markets go down, and you are committing financial suicide, and your banker and broker who’s telling you to do this, is committing financial malpractice.
BRIAN: We’re speaking harshly and directly because we want to warn you that what’s out there not only is it not common sense, but it will hurt you. It will hurt you in retirement. All right, let’s get to the second horseman that’s out there that are hurting people in retirement. It has to do with high medical costs. So, when we talk about inflation being low for the last several years it depends on what statistic in inflation you’re talking about. It cracks me up that government statistics exclude the things that are most important.
BRIAN: Food and energy. Well the CPI minus food and energy, now you’ve gutted it. But medical costs and probably medical healthcare costs and also university costs have some of the highest inflation rates above everything else I’ve seen. No other category has inflation like medical and healthcare costs, and also tuition, university costs.
BRIAN: So let’s talk about medical costs for retirees. Next to taxes, healthcare costs can be one of the biggest expenses in retirement. The reality is medical-Medicare covers a lot less than most individuals plan for their retirement. Longevity adds to those costs, meaning that you’ll be paying high health care and medical care costs for a longer period. Now I want to do a quick aside here.
BRIAN: A lot of Decker Talk Radio listeners, you’re turning 65 or you’re almost 65 and you’re wondering what do I do when it comes to my Medicare supplemental options? I want to give you some background of our company. We use to hire out a specialist for-to handle the client questions to guide people in our company regarding medical-Medicare supplemental options choices to find out what’s best for them.
BRIAN: That didn’t work out so well. The guy tried to sell our clients a whole bunch of insurance that they didn’t need. So, we switched to an in-house person that became the expert. But we’ve discovered something even better. Something much, much better, and that is, if you go to YouTube, believe it or not, YouTube, the top two, not on the right hand side of YouTube but type in-under YouTube search, type in Medicare supplemental choices. And you will have on number one and number two, the highest viewed talks, discussions. And take time…
BRIAN: And take time, go through those, you can play them back several times, you can stop, rewind, it is spectacular for anyone who hasn’t used YouTube for Medicare supplemental choices, we hope that you do. It is spectacular. Okay, back to Medicare-medical cost. According to a Fidelity study, the average married couple will spend 260 thousand dollars for medical expenses throughout their retirement. These are out of pocket expenses, and they include Medicare premiums, medi-gap insurance, co-payments, deductibles, drug and other medical expenses from dental to vision care.
BRIAN: The major costs do not include the cost of chronic illness or the major events like dementia or Alzheimer’s, which can often require long-term private care and run as high as around 10 thousand dollars a month. So here Mike, even though we covered it last time, I feel like we’ve got to cover long-term care again in detail, because we’ve got to go through the options. The cost of healthcare expenses in retirement can be formidable, but they can be mitigated through careful planning.
BRIAN: So let’s talk about long-term care for a second. Long-term care is insuring against the risk of one spouse bankrupting the other spouse. And we have some issues with a statistic that’s out there by the long-term care industry that says that 70 percent of Americans will spend time in a long-term care facility. When they count even one day in hospice, it really bothers me, so if you strip out 30 days or less of hospice, hospice care, now the statistic actually flips.
BRIAN: Now 70 percent of Americans we just die. We have a heart attack, we have a stroke, we have car accidents, whatever, we just die. 30 percent that do go into a long-term care facility, are there 9-half of those are there nine months or less, and those that are there longer are usually-well, let me say this way. We hope for the best but plan for the worst. So let’s talk about w worst case scenario. And that is taking a healthy body and now you’ve got a diagnosis of Alzheimer’s and dementia.
BRIAN: Now you’ve got a three part journey that is heart wrenching. And what I’m going to describe now, Decker Talk Radio listeners, you’ve heard this, you’ve seen it, you’ve heard about this, so I’m going to tell you what you already know. Number one, the first third of this journey, if they’ve got a married spouse, the spouse has the burden, and the spouse has-is caring for the other spouse for the first third of this journey.
BRIAN: It’s exhausting, mentally and physically, but at some point, the spouse cannot give the care that’s demanded. At which point we go into the second phase or the second third of this journey, and that is, that now, the patient, the spouse, that’s caring that’s caring for the spouse with dementia and Alzheimer’s needs help, and so he or she will call in-home care. It’s not 10 thousand dollars a month. It starts at a few thousand dollars and goes up as you need more and more care.
BRIAN: At some point, you get to a point where you need full-time care. When your spouse is dressing up for meetings and wandering out at two in the morning for boardroom meetings, at that point, he or she is endangering themselves, and they’ve got to have a 24 hour care, now we are talking for this last third of the journey, we are talking 10 thousand dollars a month. And at this point, we’re no longer talking many years, typically it’s 18 to 24 months.
BRIAN: So do you have 180 thousand to 250 thousand dollars? Most people have that. And we plan for it, either in one of five different ways. One of six different ways. You’ve got six different choices for the outlay on this journey. Number one, we try to self-finance. See if there’s-if the option for self-financing in your income plan. We look for two areas for those funds.
BRIAN: One is the risk money, when we go down 15, 20 years. We purposely build in extra money for inflation protection and also for long-term care. We purposely build that into our planning at Decker Retirement in Kirkland and Seattle. We purposely do that, and we also make sure that your home-your residence, has the equity in the home that in a worst case scenario, if you needed to, you could draw to help pay for and self-finance a long-term care expenses.
BRIAN: So that’s option number one. Is to self-finance. The second option is to do the by far the most popular option for mitigating long-term care risk, and that is called traditional long-term care. In this option you have 500 dollars, 600 dollars a month for about a three or four hundred thousand benefit. And they call this a guaranteed level premium, which it’s not. We want to warn you of that. So, if you have it, keep it, we’ll plan around it, but if you don’t have it, we want to tell you that this is a bait and switch by the long-term care insurance companies.
BRIAN: They call this your 500 or 600 dollar a month guaranteed level is anything but. When you get into your late 60’s early 70’s you get the quote unquote letter. The letter tells you that now your five and 600 dollars a month premium per person has just been raised by 60 percent. Why 60 percent? Because that’s the maximum that the insurance commissioner will allow you to hike the rate, the premium, and it’s granted for a group that’s moving through.
BRIAN: Now that you’ve entered your high risk years, that rate increase is granted and typically, a person will panic, cancel their insurance and the long-term care insurance company is now just benefited because they keep all those years of premium and they have no risk. You’ve cancelled. Or, you panic and you cut your benefit in half to keep the premium at the same. Now, they’re getting paid the same revenue for half the risk. Either way the insurance company wins, and you have cut your benefit in half or you’ve cut it out altogether.
BRIAN: So we want you to know that this letter is coming so that you don’t panic, and that the planning we do plans for those rate hikes in your budget for the income that we do. For the income planning we do. So, that’s option number two. Option number three is where an insurance guy gets a hold of you and says, geez, if you get hit by a bus or you have a heart attack and die, you don’t get any benefit from your long-term care. You have no death benefit, you only benefit if you go into a facility. And he or she is right. So, they’ll say, tell you what we’re going to do.
BRIAN: We’re going to get a whole life policy, put this together with a long-term care rider, for 400 thousand dollars, now you get that 400 thousand no matter what. When you die or you can use some of it or all of it in long-term care facility. Now you’re going to use all of that money. On the chalkboard, it looks fantastic. In reality, it’s very expensive. It’s very expensive. So, it’s about a thousand dollars a month, per person for life. So, that is the drawback. Yes, it’s an option, it’s option number three out of the six options, but we want to warn you it’s very expensive.
BRIAN: Option number four is typically what we use if we’re going to recommend long-term care coverage and that is, it’s called asset based long-term care. Asset based long-term care works like this. You save up 10 thousand dollars a year for ten years, and you put it in this account that if you were to die, it pays a two X, two times whatever the balance is, in death benefit, and it pays approximately three to four X times whatever the balance is in long-term care benefit.
BRIAN: The good news is that it’s totally liquid and flexible, you can pull your money out if you’ve changed your mind. We like all that. The bad news is, it’s very difficult for some people to put away 10 thousand dollars per year per person for 10 years to fund the account. Sad truth on long-term care is that the people that need it can’t afford it. And the people that can afford it don’t need it. That’s option number four. Option number five is something called safe harbor trust. This is where you move all your assets to a sibling or a dear friend.
BRIAN: Where in title and arm’s length, they literally have all control of all your assets, you’ve moved them out, so that when your spouse is diagnosed with Alzheimer’s there’s no assets and Medicaid kicks in, and then you can pull you assets back after the passing of your spouse and you’ve protected your assets. Well the IRS got wise to this and they put in a claw back provision that says if there’s a diagnosis within five years of you moving assets out of your estate, there’s a claw back provision that pulls all that money back.
BRIAN: And, but the bigger problem is common sense. Your sibling can wake up one day and say you know, I really like these assets. I think I’m going to keep them. Because legally they can, they’re in their name. The sixth option is the saddest. This is the most tragic and that is for people who can’t afford it, they will just divorce to protect the assets, they’ll just divorce. And try to protect the assets to fund the rest of the life for the surviving spouse.
BRIAN: Now do you need tradition-do you need long-term care if you are single? No, you don’t. You don’t have the risk of one spouse destroying your financial future. You do have a choice to use your assets that you’ve accumulated in long-term care because that journey in assisted living and in 10 thousand dollar a month full time care is going to be much longer when you’re the surviving spouse…
BRIAN: Or a single person, because there is on one there to take care of you and you will have longer periods of time of 10 thousand dollars a month. In a full time facility. So, it’s a choice whether you want to use your assets or you want to pay to offset the financial bills that will be coming in that are typically quite large, which right now in today’s dollars average around 10-seven to 10 thousand dollars a month. All right, that is the planning that we do for medical expenses.
BRIAN: If you’re just tuning into Decker Talk Radio, we are talking about the four horsemen of retirement problems. One is longevity, we talked in the program how we deal about-how we deal with that, the second problem is medical cost. High medical cost for a longer period of time with longevity. Now I’m going to introduce the third-by the way, Mike, at this point we should probably-I still go back to that planning that we do.
BRIAN: If someone hasn’t run the numbers mathematically, they can’t know how much they can draw, we’re going to talk about financial repression, but we should make another offer after this financial repression discussion for maybe another 10 people. I know it takes a lot of time to put these plans together, but we should offer this for 10 more people to come in and at no cost we’ll put a draft together of their income plans so they can see how much money they can draw for the rest of their life? How’s that?
MIKE: I think we can do that just fine. The bottom line here is we really just want to help people protect their retirement and if that’s what it’s going to take, then we’re happy to do that for our listeners on this show.
MIKE: So let’s do it after the next segment here because the next one is critically important as well.
BRIAN: Financial repression has to do with interest rates. Interest rates are the lowest they’ve been in recorded history, last year 2016 in April of 2016, the 10 year treasury hit 1.3 percent. 1.3 percent, that’s the lowest ever. Ever, for a ten year treasury bond. Right now we’re at 2.6 we’ve doubled, so what happened to bond funds that your banker and brokers said would be your safe money. I’m being a little sarcastic and snarky.
BRIAN: Guess what happened to your bond funds simple April of last year. In the trailing 12 months, almost 12 months, if you checked the rate of return on your bond fund, you will have lost especially for the intermediate or long-term funds, double digit losses on those bond funds. Because when interest rates go up, bond prices go down. It’s a mathematical fact, and for a financial planner or a financial advisor, to tell you, to look anyone in the eye over 55 years old when interest rates are at or near 100 year lows and to tell you to put your safe money in bonds or bond funds, that again is financial malpractice.
BRIAN: What the banks and brokers are doing in the advice that they’re giving makes no common sense. Let me make-I’ll prove what I’m telling you is true. In the asset allocation pie chart which keeps all your money at risk, they tell you using the rule of 100, that if you’re 55 years old you should have 55 percent of your money in bonds or bond funds. If you’re 60 years old you should have 60 percent of your money in bonds or bond funds.
BRIAN: If you’re 65 percent-if you’re 65 years old you should have 65 percent of your money in bonds or bond funds. That makes no sense because now I’m going to repeat back to you sarcastically realistically, what your advisor just told you to do. In a low interest rate environment, your advisor just told you to put 55, 60, or 65 percent of all you’ve worked for in investable assets in bonds and bond funds that are earning next to nothing, number one. Number one. But the bigger problem is number two. Number two is interest rate risk. When interest rates go up, your bond funds will lose money.
BRIAN: They will lose money. And your bankers and brokers telling you to put your safe money in bond funds is-it lacks common sense. So, we want to warn you, Decker Talk Radio listeners, that if you’re getting that advice, guess why you’re getting that advice. Take a wild guess why all of your money is at risk with your banker and broker? Take a wild guess. It’s green, it’s money. That’s how the bankers and brokers get paid. We’re fiduciaries to our clients, we can’t get away with that.
BRIAN: And we wouldn’t do that. So, we don’t do that. We don’t recommend that you put your safe money in bonds, bond funds. I’m going to say the same thing two different ways. Interest rates right now are at or near record lows. So, interest rate risk is at or near record highs. So, when interest rates are at or near record highs, we have a real hard time hearing how the banks and brokers are telling you to put your safe money in bond funds. We don’t. But there’s a problem.
BRIAN: How do you handle-what do you do with your safe money? By the way, Mike, I’m going to switch that, instead of bond-having them come in to talk about the same offer that we talked about the last offer with the income plan, I’m going to talk about what we use for our safe money and have them come in and show them, prove to them, of something that’s out there that most people haven’t heard of. So, with a burgeoning debt balance in the United States, it’s in the government’s best interest to artificially keep interest rates suppressed through central bank policies as a means of managing a debt balance that’s growing faster than economic growth.
BRIAN: It’s a tax to you. T-A-X. It’s a tax. When a 10 year CD that used to be-gosh, remember the good old days? You could get five percent on a five year CD, seven percent on a 10 year CD, now a five year CD is 1.7 percent, and a ten year CD is 2.2. So, we want to make sure that you know that there are options out there. We are not saying that you shouldn’t invest your safe money.
BRIAN: You should. But there are things out there that you already know about, such as CD’s, treasuries, corporates, agencies, municipals, and fixed annuities. So those are all fixed rate investments, and they offer a fixed rate over a fixed period of time which right now is not the best time to lock in a fixed rate. On anything, because it’s at or near all-time record lows. It doesn’t benefit you, and you don’t even keep up with inflation when interest rates are this low.
BRIAN: But there are other things that are out there. For example, the number-the top returning principal guaranteed account that we us returned 9.3 percent last year, in 2016, in calendar year 2016, principal guaranteed account did 9.3 percent. Do you know about these? They’re called equity linked CD’s or equity indexed accounts. We use them. Because we’re fiduciaries, we use them. Why haven’t you heard of them? Because the banker and broker has no incentive to recommend them because they don’t pay any security commissions. Here’s how these work.
BRIAN: You capture around 60 percent of the S&P gain when the markets go up, and you lose nothing when the markets go down. They’ve been around 25 years or so, they average around six and a half, seven percent, and we use them. They’re called equity linked CD’s or equity indexed accounts, both banks and insurance companies offer them, and they offer a positive return. There’s no interest rate risk, they’re principal guaranteed, and that’s where we’re getting the highest return since 2008. Before 2008, we just plug in CD’s it was a no brainer.
BRIAN: After 2008, when interest rates have been crushed, you’re left with very few options on your safe money. Here is where we’re getting the highest returns. Now I don’t want to make an offer yet, Mike, I want to tell about the other side.
MIKE: Sounds good.
BRIAN: There’s another one that’s out there that’s called an IUL, index universal life, where on a tax free basis, clients historically can pull six percent tax free, which by the way, if you’re in the 30 percent tax bracket, let me do the math, it’s pretty easy.
BRIAN: That’s the same as an eight and a half percent taxable investment. So, six percent tax free, or six and a half seven taxable. Both are principal guaranteed, both are out there, both are available, we’re fiduciaries to our clients, you should know about these.
BRIAN: All right. Part of financial repression with low interest rates has to do with the risk markets trading in 18 year cycles. The markets-a lot of people think that the stock markets trend higher, they don’t. In the last 116 years, you can see on the DOW Jones chart that stocks don’t trend, they cycle. So, in an 18 year cycle chart for example, the last several segments of that, from 1946 to 1964 there’s a nice bull market. From 64 to 82, 18 years of flat choppy markets. 82 to 2000, the biggest bull market we’ve ever had.
BRIAN: And then from January one of 2000, most people haven’t made a lot of money in the last 16 years. They just are making back what they lost in 2008. So, the average annual returns for the S&P 500 which 85 percent of money managers and mutual funds don’t beat, is around four and a half percent for the last 16 and a half years. That’s even including dividends reinvested. Most people are getting around half of what the S&P is, so your returns on risk money for the last 16 years is around two percent. So what we want to do is make sure that you know of something else that’s out there that you should be told about, but bankers and brokers won’t do the work.
BRIAN: Won’t do the homework, or because they’re not fiduciaries, they’re not interested in putting in the elbow grease and time required that we have. So, the problem with your risk money is a quandary when you’re in retirement. On the one hand, you can’t make it on CD’s at two and a half percent. On the other, you can’t afford another hit like 2008, and we get it, we get it. So, what we do, because we are fiduciaries, we’re not salesmen, we are required by state law to put our clients best interests before our company’s best interest.
BRIAN: Is we go out and we are actively looking through the largest databases in the country and around the world. We use the Morning Star database for mutual funds, and we use the Wilshire database for money managers along with timer track and data and we are searching for managers that beat the six that we’re using right now. We want to see if there’s anyone who is beating the managers that we have in place right now. That’s all, that’s all we care about. And we do this four times a year, every quarter, we get around 60 or 70 that beat us.
BRIAN: And by the way, all we care about when it comes to these six managers for the risk money that we have our clients use is all we care about is two things. Number one, track with the S&P when the markets go up. Very hard thing to do. Because 85 percent of money managers and mutual funds underperform the S&P every year. So, if you beat the S&P two times in a row, you are in a small minority. If you beat them three, four years in a row, you’re in a very tiny slim percentage.
BRIAN: You’re called a black swan or an anomaly. The mangers that we use, we have them track with the S&P when the markets go up, and when the markets go down, they have protection of capital measures that kick in. So, when we talk about the six managers and beating us, they’re not-we’re not talking about beating us last week, last month, last quarter, last year. We’re talking about since January one of 2000, who’s beating us.
BRIAN: Who has better returns at least since January one of 2008. So, that’s what we’re talking about. Every quarter we get around 60 or 70 managers and mutual funds that beat us. They fall into four categories. Number one, yes, they’re beating us, but they’re closed to new investors. We can’t use them. Number two, they’re hedge funds and we won’t use a hedge fund for our client’s retirement portfolio, it’s way too volatile.
BRIAN: Number three, yes, they’re beating us, but they’re per account minimum is three million dollars, I can’t diversify client assets with those high individual per account minimums. And number four, it’s just plain volatility. There’s two mutual funds that deserve to be on our platform outright. Mathematically. The Bruce fund and CGM Focus, both are mutual funds that deserve to be on our platform, but we can’t use them because in 2008, they both lost over 40 percent. So, what we have left are six managers that all of them are computer algorithm trend following models.
BRIAN: And the average annual return I told you for the S&P since January one of 2000, the average annual returns-and I told you that a hundred thousand invested January one of 200 in the S&P grows to today, around a little over 200 thousand average annual returns is four and a half percent. Average-the hundred thousand invested in the six managers that we have, hundred thousand grows to over 900 thousand, average annual returns is 16 and a half percent net of fees.
BRIAN: Net of fees. So, Mike, I want to give full transparency to our clients, Decker Talk Radio’s listeners, this is also something Mike that they should come in and see. We’ll give you the names of the managers, show you their year by year track record, but this is something you should know about. Your banker and broker-let me cover this first, Mike and let’s make the offer. Why if this is so great-why isn’t everyone doing it? If this is so good, why isn’t every financial person doing it?
BRIAN: I can tell you why. There’s four reasons. Number one, two of these managers that we’re using are no load mutual funds. Who do you know that’s a banker or broker that’s going to tell you about a no load mutual fund that they don’t get paid on? That’s not going to happen, number one. Number two, bankers and brokers put their careers at risk by telling you about these models because they tell you what to buy, when to buy, and when to sell, now you don’t need them. They have just replaced themselves.
BRIAN: Number three, and this is the biggest reason, by the way. Banks and brokers require their sales people to use the asset allocation pie chart not because it’s in your best interest because it’s not, it keeps them from getting sued. It reduces or eliminates their liability altogether. Here’s why. Think about how you got your asset allocation pie chart. Your banker or broker handed you an asset-or a risk questionnaire.
BRIAN: And based on how you filled that risk questionnaire out, it spit out a version of your diversified pie chart and then it cranked out an investment policy statement which you signed and dated. Now you can’t sue them, you created that. And they have been absolved of all liability. And then there’s number four, the big mutual fund companies like Vanguard and Fidelity, that have a business model of creating hundreds of funds to gather billions of assets, they are not going to go to the ten or 11 funds that you really do need.
BRIAN: So for all four reasons, you are not going to find a two-sided risk model outside of a fiduciary’s office. Now I ask Morningstar when I call in and when I gather the information, I ask Wilshire, who else is doing this? We’re an independent company and we can work with anyone. Why aren’t the bankers and brokers doing it? Because they are not independent, they are told what they can and cannot trade. And what products they can and cannot use. That’s one of the reason they cannot list themselves as fiduciaries, they are not arm’s length.
MIKE: Now Brian we’ve only got about two minutes left in the show, is there any last things you’d like to say before we wrap up?
BRIAN: Yeah, I want to talk about inflation for a couple minutes, do we have two minutes?
MIKE: Two minutes.
BRIAN: Okay, inflation is the fourth horseman. Inflation hurts people in retirement. The long run inflation rate is averaged 3.77 percent since World War two. Over a 25 year period, three and a half percent inflation equates to a 58 percent reduction over 25 years. Put another way, it takes 11 thousand 816 dollars to buy the same goods and services that five thousand buys today. More than doubles over a 25 year period when you’re in retirement.
BRIAN: How are you protected? Do you have a cola? We at Decker Retirement Planning have four different ways and we don’t have time to go into it, but we have four different ways that we protect people from the effects of inflation. Since the year 2000, stocks and bonds have yielded an average return of around five percent. But with treasury yields down around 1.8, you cannot keep up with inflation in a flat market cycle like we’re in right now with historically low interest rates.
BRIAN: That is a killer for your portfolio in retirement. So I do have one more minute left is that right, Mike?
MIKE: That’s right.
BRIAN: Okay, I’m going to keep going. So, the four things that we use to minimize or eliminate-actually five, oh darn, I’m not going to be able to get through it. We’ll start the next show with inflation protection.
MIKE: Awesome, all right, so for those just wrapping up right here, this is KVI 570, in the greater Seattle area, or via podcast on Google Play or ITunes. Decker Talk Radio’s protect your retirement. And we’ve got-we’re going to have a great show lined up next week, nine AM.
MIKE: But for those that are just tuning in for their first time, you are more than welcome to and we invite you to visit our website at www.deckerretirementplanning.com where we have all the past shows that we have, listen to them at your leisure, for your enjoyment. As well as, we’ve got a number of articles on our website which are absolutely fantastic. Sorry, don’t’ mean to boast here, but it’s high detail information that is geared to help you protect your retirement. Whether you’re working with a banker, broker, hopefully a fiduciary as you can tell. We encourage you, you should be working with a fiduciary for your retirement plan, but we want to educate you as best as we can so you can make the right decisions and help protect your retirement.
MIKE: That’s the bottom line here, so from all of us here at Decker Talk Radio and Decker Retirement Planning, from both Seattle and Kirkland, we wish you a wonderful week, and we’ll talk to you next week. Take care.
