RR S4 E27 DO YOU KNOW YOUR RISK SCORE? [00:00:00]
BRIAN: Welcome to Safer Retirement Radio, where you get the transparency you deserve. With over 35 years of experience in financing and investing, we help you stay up-to-date on market news and retirement strategies. I’m Brian James Decker, owner and founder of Decker Retirement Planning, and host of Safer Retirement Radio. With me is my co-host and one of the advisors here at Decker Retirement Planning, Clayton Bradshaw.
CLAYTON: Welcome back. We’re excited to be here for another episode of Safer Retirement Radio. Today we’ve got a couple of things to update on.
RR S4 E27 DO YOU KNOW YOUR RISK SCORE? [00:00:31]
CLAYTON: So, the election results are in. And we want to talk before year end some things to that you can do for taxes because of the potential changes in the tax law that are gonna be coming up within the next few years. So, we’re gonna cover some of that stuff today, as well as because we are approaching year end, a couple of weeks ago, Brian, we did an episode on taxes and talked about some things to consider so we’re going to be doing some updates with that. But as well, we’re also going to be talking about other considerations before year end. We’re gonna be talking things related to estate planning and a couple other topics that we’re gonna be touching on today. So, we hope you enjoy the show.
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CLAYTON: One other thing that we are gonna be bringing up, so we hope you stick around, is with the market being close to all time highs, there’s a lot of, we talked about this before kinda some seemingly artificial inflation on the numbers with where the markets are at. So, we want to talk about making sure that you know what your risk score is. For our listeners, that you know what your risk score is. And we’ll explain a little bit more by what we mean by that. And also making sure that you know if your portfolio matches up with that. So, we’ll give you some more information on how to get a free risk score later on in the show.
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CLAYTON: But, Brian, why don’t you start us off. We’ll talk about, so, Biden’s headed to the presidency. And he’s talked about some changes potentially to the tax law. So, why don’t you fill us in and update us a little bit on what that is going to be looking like.
BRIAN: Okay, so, if Biden gets in as president then he’s talking about two things. He said two things on his tax policy. One, anyone making under 400 thousand dollars is not gonna have their taxes changed. But the problem is he’s also said, number two, he’s gonna get rid of the Trump tax cuts, which effects most everyone under 400 thousand dollars.
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BRIAN: So, with the news that we’ve been able to gather on this, the capital gains rate, we just know it’s, we expect it to go higher. I can’t quote an exact rate that it’s gonna be at. For incomes over a million, we know what that is. It’s gonna be taxed as income at 39 percent. Think about that. Fifteen percent capital gains will be taxed when income’s over a million, at 39.7 percent. So, we do expect that tax rates will be going up.
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BRIAN: So, if that’s the case, and, Clayton, we’re managing, let’s talk about Roth. This has got to be done. If you’re gonna convert IRA to Roth, you’ve got a deadline of five weeks from now. And so, a Roth account grows tax free. It distributes income back to you tax free, and it passes to your beneficiaries tax free. If you give us a hundred dollar IRA for us to manage, and we grow it in 20 years to a million dollars are you happy?
CLAYTON: Sure, I love the idea of a million dollars. That’s a lot more than 100 thousand.
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BRIAN: Yeah. So, we’ve done a great job for you until we talk about the taxes you owe on that account. You could’ve paid tax on 100 thousand. Now you owe tax at a higher rate, probably, on a million dollars.
CLAYTON: And, also, to give a reference point, taxes are near historic lows right now. The tax rate is, generally speaking. And so, because of that, that’s why we’re talking about this, making sure your taxes are, you’re taking advantage of this, as I like to say, taxes being on sale right now. So, that’s why we’re bringing this up. So, in 20 years, the tax rate not only could be higher, but then you’re also paying tax on a lot more money.
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BRIAN: Correct. So, another illustration that we’ve talked about, Clayton, is, if you’re a farmer, would you rather be taxed on the weight of the seed, or the yield? So, the corn seed, or the corn crop?
CLAYTON: Right, yeah. Definitely that’s a no brainer, the seed.
BRIAN: The seed, yeah. So, we’re not talking about contributing to a Roth, which, most people have to be-
CLAYTON: We hope you’re doing that if you can.
BRIAN: If you can. But some people make too much, or, they’re retired, and they can’t contribute.
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BRIAN: We’re not talking about Roth contributions. We’re talking about a Roth conversion, where there’s no limit to the amount of money you can convert from an IRA to a Roth. Now another thing to know is that, once you convert IRA to Roth, you can’t pull that money for five years, right? You can’t pull that money as income. So that has to stay there.
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BRIAN: Okay, so, a Roth account has a deadline of 12/31. Here’s the steps. And, you might want to jot this down as a way to properly go through your Roth account. Step one is to identify how much money you can separate that’s in growth accounts that can grow retirement accounts like an IRA or 401K as fast as possible. Don’t put a Roth account in your CD account. Or, a Roth account in your commercial bank account earning zero point. They need to be in high growth accounts.
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BRIAN: Okay, so the way we do it at Decker Retirement is we have their growth money is, usually for someone in their 60s, is about 25 percent of their total portfolio. So, 75 to 80 percent of their portfolio pays them income. This is kinda cool, actually. Seventy five to 80 percent of their total investible assets pays them income for the first 20 years from principle guaranteed accounts. So, when the market tanks, it doesn’t effect our clients on the majority of their funds. Kinda cool.
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BRIAN: And, in 20 years, that 20-25 percent position grows and replaces the 80 percent that they spent. I think that’s cool. That’s a quick aside. But with Roth money, we want that Roth money. We want the IRA money converted to a Roth. Let’s say, Clayton, that you’re married filing jointly. And, your income is, I’m just gonna make this up, let’s say it’s a hundred and 30 thousand dollars.
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BRIAN: You’re in the 22 percent bracket. Now you can make up to 360 thousand in the 24 percent bracket before you are jumped to the 32 percent bracket. Now the managers that we use are averaging-that’s a whole another story.
CLAYTON: Right. And we have talked about these managers on other episodes. But somebody, if you are interested and you wanna learn more, go to our website deckerretirementplanning.com. We’ve got our phone number on there, you can give us a call. You can reach out. We can schedule just a quick 15 minute call for free to go over these if you want some specific details on them. So, sorry, carry on.
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BRIAN: No, good. Okay, good. So, we’ve done the math, we’ve reviewed the databases, the Worcester database. The largest database of money managers in the world. The Morningstar database, the largest database of mutual funds in the world, and a couple others that we use. And we know what the highest earning risk managers are, and they’re all computer trained, following modules. That’s what we use for our clients. So, when the trend of the market is higher, we’re able to make money.
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BRIAN: But when the trend of the market goes down these computer models can go to cash or they can make money going into inversed ETFs and make money as markets drop. So, the average returns for these managers going back 15 plus years is well above 20 percent net of fees. So, if you are paying 24 percent tax and you have managers that are averaging 20 percent, and the break even on those managers are about 18 months to make up for the taxes that you paid on your IRA, is that a good deal? The answer rhymes with yes.
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CLAYTON: Yes.
BRIAN: It is a good deal. Because then after 18 months you pay the tax. All that growth after that in that IRA is tax free. All of it. And then when you pull the money out, it’s tax free. And then, if you get hit by a bus, it passes to your beneficiaries tax free. But that has to be done before December 31. And it needs to be done in a way that you stay within your tax brackets. Ideally, not going up to 32 percent.
RR S4 E27 DO YOU KNOW YOUR RISK SCORE? [00:09:19]
CLAYTON: Right. There’s a lot of different factors you have to consider when looking at a Roth conversion. Because you don’t want to convert-and this is something, we can help clients with. And we can also make sure to sync up with your tax advisor so they can sign off on everything. But this is important to note. Because when all these pieces fit together, this is really where you get at least that Roth conversion portion taken care of in a financial plan. And our distribution plans that we put together do incorporate this aspect.
BRIAN: Right. Anything else that we should cover on a Roth conversion before we talk about harvesting capital gains before year end?
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CLAYTON: No, I think that’s it.
BRIAN: Okay. So now, let’s talk about harvesting capital gains. So, let’s say that your portfolio, Clayton, has, I don’t know, 30 stocks in it. Some you’ve held for years, some not so much. But you’ve got kind of a mish-mash of stocks in your portfolio. Typical, right? Let’s say that you have Google in there, Amazon, Facebook, and those are low cost spaces positions. And you’ve also got some losers in there that are oil related that have just been tanked. Same with banks.
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BRIAN: Let’s say you’ve got General Electric in there. So, there’s two steps in harvesting capital gains. One step is to look and see in your previous tax years if you’ve got any loss carry forwards to offset those gains, because you’re incented to lower your cost, to raise your cost basis on your stocks if you can.
BRIAN: So, couple of things. Point one, if you know that capital gains rates are gonna be a lot higher next year, you’re incented to take some gains.
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BRIAN: And you can buy the stocks back. If you like those stocks, buy them back. But raise your cost basis and take advantage of a 15 percent capital gains tax this year. Because probably, we’ll never see that again in our lifetimes. Do you agree?
CLAYTON: Right, yeah. And one other consideration. I’m gonna jump in here really quick. So, I mentioned at the beginning that for anybody that wants to know, and I think this is timely, talking about portfolios. If anybody wants to know, considering if they’re gonna sell some positions and try to do the capital gains harvesting, you can get a risk score.
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CLAYTON: We can help you get a risk score for free. And you can look at what is your procedure what is your ideal risk score that you want to have and then, how does your portfolio match up with that. ‘Cause that can also help you understand if there are positions you should sell or not as you’re trying to take advantage of year end capital gains.
BRIAN: Right. So, step one is to try to offset to make sure you are using, this year especially, to use any loss carry forwards and offset gains with losses.
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BRIAN: Also, look at the portfolio you have. And, you’ve got losses in your portfolio you can sell those. Sell the stocks with gains and also raise your basis. So that going into next year, if we have higher capital gains rates going forward, you’ve taken advantage of the last five weeks of 2020. Probably the last five weeks we’ll ever have 15 percent capital gains ever. So that’s critically important.
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BRIAN: Anything else you’d add to that on the subject of harvesting capital gains? Oh, actually, same applies to real estate. We have clients that are selling some of their real estate portfolio to establish higher basis because capital gains rates are going up. And, also, another thing on the Biden plan is a stepped-up basis is on the table as being either phased out completely or staggered away because of your income levels.
RR S4 E27 DO YOU KNOW YOUR RISK SCORE? [00:13:35]
CLAYTON: Yeah. And so, I think I don’t have anything to add on those topics that we have touched on. But it brings me to something I at least want to touch on. I know we’re about out of time, but, and it has to do with year end and estate planning.
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CLAYTON: Obviously, we always to encourage you to work with your attorney when it comes to your estate documents. But in terms of how your accounts are going to pass onto your beneficiaries, we love to help our clients review those kinds of thing to make sure that everything’s gonna transfer as smoothly and as planned out as possible.
CLAYTON: Because there are accounts that are more preferable when it comes to passing assets onto beneficiaries. And if that stepped-up basis does end up going away that’ll be a huge impact and there’s gonna be a lot of things that’ll need to be changed as a result of that.
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CLAYTON: Because I’ve had clients that they’ve got some pet stock that they’ve hung onto for a couple of decades, that they don’t want to sell and they’re just gonna pass onto their kids. But if that stepped-up basis goes away then it doesn’t benefit their kids the way they were hoping. So, these are all considerations and so for anyone who is wondering, well, how does this affect my situation? Does it all affect my situation? Please give us a call. We can answer a few questions within 15 to 30 minutes just to make sure we’ve got a handle on your situation.
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CLAYTON: And, if you wanna have a more in depth discussion and go through building a plan out, we can do that with you as well. We’re happy to talk you through it. So, again, our website is deckerretirementplanning.com, got our contact information on there and additionally some more resources to help as you’re going through. We’ve got some eBooks on there, some other free pamphlets that you can download with some other great information about various subjects related to retirement planning.
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CLAYTON: And I mentioned that risk score, Brian. So, I’m gonna touch on this a little bit more. We recently partnered with a company that helps build out a risk score for a couple or for an individual. And then you can sync that up and get your actual portfolio score. So, you get two scores to make sure that they way you feel about the market and your comfort level with gains versus loss syncs up with where you’re actually invested.
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CLAYTON: It’s really neat to see kind of how this can effect clients because some people think, and you know it ranges anywhere between one to 99. Some people think, you know what, I love risk, I’m a 90, I’m a 98, and they look at their portfolio and they’re sitting at a 50 on their portfolio. Or, vice versa, which is probably the more common one for retirees that, you think, you know what?
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CLAYTON: I wanna be able to lock in my gains, I wanna be able to make sure I can retire and have comfort, do the things I want to in retirement. I think I’m probably somewhere in the middle of the road with risk or on the lower end with risk, maybe a 30 or a 40. And then we do their risk score, and it comes out at an 80, right? That really causes people to think, is this right for me? And so, we can do this risk analysis for you for free. Again, give us a call. Go to our website, deckerretirementplanning.com ‘cause you can pull that information. We can help you put that score together for you.
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CLAYTON: We actually have a link on our website to do your risk score for free. Then we can help you build out your portfolio score when that’s done.
BRIAN: On our website, you go to Our Services right? And under Our Services, you’ll see Riskalyze [PH]. And they can enter, they can take the questionnaire, fill that out, and find out what their risk score is.
CLAYTON: Yeah, and it takes about five minutes, is all. So, it’s pretty slick.
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BRIAN: Now that the market’s trading at 31 times trailing earnings. That’s only been surpassed one time, and not by much anymore. That was 1999. So, 1929, 1999, and now, are the highest peaks of market valuation ever in the history of our stock market. And, 10 years from 1929, the markets hadn’t recovered. Ten years from 1999, the markets hadn’t recovered.
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BRIAN: So, now is a good time to go to our website and take that riskalyze score. Find out where you should be, and then optimize that portfolio by bringing it inline with the risks that you want to take. Because FOMO, the fear of missing out, is pushing the momentum of this market up without any consideration of the valuations that were added, stratospheric.
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CLAYTON: Right. Well and too, this has been evident in the past week or so. As we’ve seen where the markets have liked the news that has come out of Moderna and Pfizer with the vaccines and the results, the preliminary results that they’re seeing. And, we’ll have to see where that takes us. But when the news comes out about positive results, the markets cheer that. And they’ve popped up both times they’ve seen those positive results.
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CLAYTON: And so, it’ll be interesting if we see a delay in the release of the vaccine or anything negative that has to do with what that vaccine can provide is gonna be a major shock to the markets. And so, taking advantage of market highs and adjusting your portfolio before year end, for not only to match up with what your risk comfort is but also to take advantage of taxes.
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CLAYTON: I think now’s a great time and if you want some help with that, we’re standing by. We’d love to talk to you and kind of help you through understanding what all this means for your specific situation. Because we’ve talked about things that don’t apply to everyone. Some of them do apply to, in certain situations, to certain households. But in other situations, they might not.
RR S4 E27 DO YOU KNOW YOUR RISK SCORE? [00:19:09]
CLAYTON: So, we can talk you through how this applies. How you can take advantage of these last five weeks of the year, to make adjustments to your portfolio. So that you’re realizing gains, you’re taking advantage of taxes being on sale right now and some other year end things. One quick note, I talked about with estate planning, and we’ll talk about this and then we can wrap up.
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CLAYTON: Year end, and I always encourage all of my clients that, one a year, once every two years, as you approach the end of the year, read through all of your documents. Your estate planning documents. Your will, your trust, your power of attorney, all that stuff. Make sure it makes sense to you, that you are comfortable with what’s in there. Something that you maybe wrote down eight or nine or 10 years ago might not make sense to you anymore. If that’s the case, obviously we encourage to go to your attorney and get that reworked as needed.
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CLAYTON: But on the account side of things we’re happy to take a look to make sure that everything’s transferring the right way, the way that you want to your beneficiaries. We can get together with your attorney and have a conversation to make sure all of that’s syncing up as well. So, we’re happy to do that. If that’s something that somebody needs, please let us know.
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BRIAN: When they read their estate documents, because of the legalese, most people, they’re not gonna know if something makes sense or not. So, I would recommend that they go to our podcast on this topic. ‘Cause we bring up in that podcast a lot of great things for them to think about. And then they can see if they need to make any changes or not. Do we have the podcast on a library?
CLAYTON: Yeah, so our podcast, wherever you’re getting your podcasts from. I think that episode we did was probably in the last two months. So, just scroll back through the last, probably eight to 10 episodes, and-
BRIAN: And it’s titled, “Estate Documents”, right?
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CLAYTON: Yeah. And so, you’re gonna see that episode on there. A lot of great information, so we hope you check that out. And if you wanna know if something pertains to your situation, give us a call and we’ll see if we can point you in the right direction.
CLAYTON: So, we love doing the show. We’re happy that you joined us this week. Again, if you want more information on anything, please visit our website, deckerretirementplanning.com. You can go there for that free risk score. Call us if you’ve got any questions on anything that you’re reading through on our site. We’re happy to chat about it. We love this.
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CLAYTON: We hope you enjoy the year end through the holidays and hopefully if you’re in state that allows you to get together with family you can, and if not, maybe you can do a virtual zoom and you can all eat some turkey.
BRIAN: Virtually.
CLAYTON: Yeah, you can virtually eat some food, you can share a picture of yourself eating some food. So, we hope you enjoy the holidays. We love having you listen in. We look forward to next week’s show.
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ANNOUNCER: Investing involves risk, including the potential loss of principal. Any reference to protection, safety, or lifetime income generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying ability of the issuing carrier. This radio show is intended for information purposes only. It is not intended to be used the sole basis for financial decisions, nor should it construed as advice designed to meet the particular needs of an individual situation. Decker Retirement Planning is not permitted to offer, and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the US government or any governmental agency. The information and opinions obtained here and provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Decker Retirement Planning.
