Welcome back to Protect Your Retirement, where we talk about how to help protect your retirement. We will be talking about the five biggest fears we think for retirees and how you can avoid the worst of outcomes. Your retirement is important and we want to help you have the best future possible.
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 Brian and I will be covering the five biggest fears retirees face today, and how to avoid them so you can have peace of mind in retirement. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good morning everyone, this is Mike Decker.
BRIAN: And Brian Decker.
MIKE: And we’re here with Decker Talk Radio’s Protect Your Retirement. Very excited about today’s show, and just to kind of give a brief introduction, Brian Decker, you’re a fiduciary, a licensed fiduciary from Decker Retirement Planning out of Kirkland, Washington. Your office is Carillon Point, and you’ve got a great view. I love coming to your office, doing this radio show with you, ’cause it’s…
BRIAN: I do too. We’re looking out on Lake Washington, it’s a beautiful day, and by the way, Mike, all we do, we just specialize in retirement planning for people 55 and older, that’s all we do.
MIKE: So, this show really is for people that are within five years within their retirement, or currently retired, and if you’re currently retired, these are things you should be doing a double check instead of putting your head down. So, today’s show, with no further ado, very excited, is gonna be about the five things that people are scared of in retirement. These are the five real fears according to bankrate.com, and their article they released, the top five fears people face, and we’re gonna talk about how to avoid them so hopefully you can have peace in your retirement.
BRIAN: Right, now, I want to emphasize, this isn’t just five fears, these are the top five fears for retirees. Top of the list is medical expenses, so let’s talk about this.
MIKE: Let’s define first what medical expenses are, because I don’t think skiing accidents would qualify. These are more wear and tear of the body, is that right?
BRIAN: Oh yeah, and you have more of that as you age. So, with medical expenses going up, there’s a fear about how to pay for them, because the net out of pocket after insurance is going up for most people.
BRIAN: A couple of things, Mike, that are interesting, for the Obamacare that makes it affordable, the Affordable Care Act that makes costs affordable for more and more people, there is going to be, according to Econ 101, there will be a black market that will form where the wealthy have access to the top doctors and physicians, and will go on medical vacations, and get their hips done instead of waiting six months in a DMV type of medical situation, which public health care typically goes to, where, this is interesting to me, because economics have a lot to do with how you ration health care.
BRIAN: You can ration health care one of two ways, either by price or by time. Price is how we’ve done it for generations here in this country. People have complained about price rationing health care. Price equates supply and demand, so when, Mike, you refer to my skiing accidents, when I crank my ACL, and need a new knee replacement done, I can get that done right away here in the United States, because the price is set high enough so that I’m allowed immediate access.
BRIAN: In Canada that’s not the case. In Canada they ration health care not by price, but by time. So, they’ve lowered the price so that demand swamps the supply of doctors, and health care is rationed based on time. So, if I crash and Whistler, and I crank my knee, and I need a new ACL replacement, it’s not gonna be immediate up there, and it’s going that direction here where eventually the demand for health care will swamp the supply of doctors, and anyone who wants a knee replacement, or any other healthcare will have time rationed the supply of doctors’ access to patients.
BRIAN: However, the wealthy will be paying up for immediate access to health care. So, the wealthy will just book a trip down to visit US trained doctors in Costa Rica, that’s happening right now, and they will have access at a far less expensive rate, and get immediate access to doctors. You were gonna say?
MIKE: Well, I’ve got a question, though. It’s not just a line, because we recently had a client that came in, and they just didn’t qualify for the procedure that this client needed, because they had to be closer to death, and what if this person got closer to death so quickly that they couldn’t even do the procedure?
BRIAN: Oh yeah, well so, instead of doctors making health care decision, we have bureaucrats that are gonna be deciding who gets what procedure, and that’s typical in any public health care system. So, the DMV type of rationing of government health care is the direction that we’re going, and retirees should be concerned about it. As far as medical expenses go, if someone retires before 65 they need to have, and make sure to plan for, costs of about 1,000 dollars a month for non-Medicare coverage.
BRIAN: So, private insurance between 60 and 65. Once you hit 65 and you choose your Medicare coverage, and your supplementals, then you have a very good coverage that will last you from 65 on, but to get you to 65 there’s a gap there that is very important in planning that we make sure to cover.
MIKE: So, you’re talking about Medicare here, and I think it’s really important, because in my opinion Medicare can be kind of like taxes, you’re penalized for what you don’t know, and it can be very confusing to a lot of people.
MIKE: Are there things to be aware of as far as income or what you’re doing in your retirement that could hurt your Medicare costs, such as bumping up your Medicare costs because you didn’t know something? Or, are there some basic guidelines, or things we should know about Medicare?
BRIAN: Medicare reimbursement, and the supplementals are very important. So, it’s very important that in the planning process you talk to someone who’s knowledgeable about putting your Medicare package together with reimbursement for hospital visits, high expenses, prescription drugs, etcetera.
BRIAN: I wanna read some statistics KVI listeners. So, here at Decker Retirement Planning, we wanna make sure that you have your eyes wide open to what is happening in the United States with healthcare, and it’s very fascinating to me the demographics. How the different age groups view what’s happening with health care. So, more than a quarter of Americans, 28 percent say that the specter of high medical expenses in old age worries them the most.
BRIAN: That’s their number one fear according to a survey by bankrate.com. The thought of running out of money is what gives the people jitters. 23 percent of Americans identify that as their biggest retirement worry, but that’s the number one among people that are younger, not the number one of people who are older. The people who are in retirement are there now. The reality of being retired doesn’t scare them as much, but it’s the younger generation that their number one fear is running out of money before they die.
BRIAN: A couple other interesting statistics, and we’re on radio here, so I can’t show some of these charts.
MIKE: And by the way, this is Decker Talk Radio. You’re listening to Brian Decker from Decker Retirement Planning, and this is just incredible. So, this will be transcribed and be on our website at www.deckerretirementplanning.com if you wanna go and see these statistics in writing, we’ll put the information on for you.
BRIAN: Okay, overall, all demographics included, number one fear was about medical expenses being too high, number two was running out of money before you die. That’s the one two, third is about debt, and then there’s some others.
BRIAN: So, we talked a little bit about Medicare, and making sure that you have wise council on Medicare reimbursement, and the supplementals that are offered. You have a window to put your package together for your Medicare benefits. Also impacting a lot of people’s fears is long term care. Long term care, you have five different-by the way, let’s define it. Long term care is the fear of having one spouse bankrupt the other spouse with their health care costs.
BRIAN: So, this fear is very high for married couples. If you’re on your own, you’re a single person, that fear shouldn’t be as high, because now you have your assets that will be used to draw down while you’re in a long term care facility. If you are in a long term care facility, and your assets go to zero, you’re not kicked out on the streets, you go to a Medicaid facility, and the taxpayer pays your bills so that you’re not on the street.
BRIAN: So, there’s a safety net for you in the long term care coverage. It’s interesting that, KVI listeners, there’s five things that Medicaid allows you to keep before they start paying your long term care bills, a house, a car, a grave-so, a plot of grave, a wedding ring, and 2,000 dollars.
BRIAN: The house they will put liens against. So, you can’t have a mansion, and have, appropriately so, the taxpayer paying your long term care bills. So, that’s how Medicaid works. When it comes to long term care, let’s talk about a couple, a husband and wife who have high fears of one spouse bankrupting the other spouse due to high long term care facility bills.
BRIAN: A lot of the long term care industry will trot out a statistic saying that 70 percent of Americans will at some point in their life spend time in a long term care facility. That’s a widely broadcast statistic. I’m very cynical, and so, I clung to the data point that says that counts even one day of hospice as spending time in a long term care facility. Well, there’s a lot of people who spend a few days in hospice, and it send the wrong message.
BRIAN: So, if you strip out 30 days or less of time in hospice, that statistic actually flips to where now 70 percent of Americans we just die. We have a heart attack, a stroke, we die in the hospital, we don’t go to a long term care facility, but let’s hope for the best, and plan for the worst. What is the worst? You know that the worst is a healthy body with Alzheimer’s.
BRIAN: This, sadly, is the worst case scenario for a lot of people, because it lasts a long time, and the care is expensive. However, this journey goes, KVI listeners, into three parts. Number one, the first third of the journey, if your spouse forgets your anniversary, you don’t check them into a facility at 10,000 dollars a month, you don’t do that. You care for them for the first third of this journey. Is it expensive? No. Is it time consuming? Yes. Is it emotionally draining? Yes.
BRIAN: Second third of the journey is beyond what you can do individually, so now you’re paying for in home assistance, and in home care. Is it 10,000 dollars a month? No, but it starts at a couple thousand, goes to 3,000, 4,000, 5,000. It escalates as you need more and more time. At some point, when your spouse is wandering out on the streets at two in the morning, at some point you’ve got to go to full time care.
BRIAN: Now we are talking, in today’s dollars, 10,000 dollars a month. It is very expensive. Sadly, tragically, however, we are no longer talking years for the last third of this journey, typically 18 months, two years at 10,000 dollars a month, that’s 180 to 250,000 dollars. Do you have that? Do you have that coverage? In the planning we do, gosh, we sell long term care insurance, but 90 percent of the time, we recommend that people self-insure.
BRIAN: The reason is because, they have 250,000 dollars in the equity in their home, or in other areas. So, when we’re talking about options as solutions to the long term care risk, there’s typically five options. Actually there’s six, I’ll cover all of ’em. Number one is what I just mentioned where you self-insure. Where we show you that you have the 250,000, or even 400,000 as husband and wife in assets to cover. Now, I’m gonna compare apples to apples, so let’s use 400,000 as an equal amount all the way through this.
BRIAN: Do you have the 400,000 by yourself? If you do we would tell you that that’s typically what we would recommend to do to self-insure. Option number two is called traditional long term care. KVI listeners, this is where you have big companies that for 4 or 500 dollars a month will sell you access to around 400,000 dollars, and it’s called a guaranteed level premium. Now, I’m gonna say that a second time, it’s called a guaranteed level premium. Is it guaranteed level?
BRIAN: Absolutely not, it is not guaranteed level. What happens is, and we’re very cynical, and by the way, yes, we sell this, but because we’re fiduciaries I have to say this.
MIKE: Well, we technically can sell it, right?
BRIAN: We do sell it.
MIKE: Okay.
BRIAN: We do sell it. Guaranteed level premium is level up until the point where in your late 60s, early 70s you enter the ages of risk where you will be drawing on your benefit, and that’s where these big companies have plead for price hikes, and typically you’ll get the quote unquote letter.
BRIAN: You get the letter that informs you that your 4 or 500 dollars a month premium, guaranteed level, isn’t level at all, it’s just gone up 60 percent. Why 60 percent? Because that’s the maximum allowed by the state for granting you price increases on a cohort of long-term care customers. So, what the insurance company benefits from is if you panic and cancel your long-term care coverage, they keep all of those premiums and you get nothing.
BRIAN: You paid all of those years, and you get nothing, so hope you don’t do that. Or, almost as worse, when you also panic, and you cut your benefit in half, so that you have the half the benefit for the same price. What we do at Decker Retirement Planning in Kirkland in Carillon Point is we make sure that if you have it we plan around it, make sure that you’re not surprised by getting the letter in your late 60s, early 70s, making sure you understand that your long-term care coverage is going to go up.
BRIAN: We wanna make sure that you know that that’s gonna happen so that you’re not caught off guard, panic, and make a huge mistake. So, we plan around that, but that’s option two. Option two is traditional long-term care. Option number one, where we recommend most people do is self-insure. Option number three, KVI listeners, is where you have an insurance guy get ahold of you and say, you know, if you get hit by a bus you don’t collect a dime, because you just died.
BRIAN: You didn’t go into a long-term care facility, so what you need to do, Mr. and Mrs. Jones, you need to buy a whole life policy with a long-term care rider. Buy a whole life policy for 400,000 dollars, and then put a long-term care rider on it, and now, this is brilliant, if you want access to 400,000, that pot of money, you can access it either way. If you go into a long-term care facility, you can access it through the benefit, the rider benefit, but if you die before you go into a long-term care facility, you access it with a death benefit.
BRIAN: Either way you get the 400,000. Now, it sounds brilliant on the chalkboard. The problem is it’s prohibitively expensive. It’s typically around 1,000 dollars a month for someone who’s 65 years old. That’s per spouse, and gosh, I just shake my head. It’s appropriate in cases, but the people who can afford to pay the 2,000 dollars a month for husband and wife can also self-insure.
MIKE: Now for those just tuning in, this is Decker Talk Radio’s Protect Your Retirement, and you’re listening to Brian Decker from Decker Retirement Planning out of Kirkland, and this is just fascinating what we’re hearing about-well, right now it’s about…
BRIAN: Long-term care coverage options.
MIKE: Long-term care options, which trails to our first topic, which is medical expenses, which is the first of five fears we’re gonna be talking about today.
BRIAN: We’re gonna cover ’em all.
MIKE: Yeah, so stay tuned, but let’s keep going.
BRIAN: Okay, so, option three of the six is traditional long-term care-well, option number one is to self-finance.
BRIAN: Option number two, which we’ve talked about is traditional long-term care. Option three, which we just talked about is for long-term care to have a whole life coverage with a long-term care rider. Option number four is called a safe harbor trust. Now, these have gone by the wayside, because the IRS caught on to these, and they have used a five year look back to gut the usefulness of these accounts.
BRIAN: The way this works is that to avoid the government confiscating your assets, why not just put your assets, husband and wife, in a safe harbor trust, put it in one of your sibling’s names, like your brother or sister, and then, when your husband or wife goes into a long-term care facility, you don’t have an assets, and they can’t confiscate anything, and when you need those assets back you can get them back.
BRIAN: As I said, the IRS caught onto this, and they have implemented a five year look back saying that if you’re diagnosed with dementia or Alzheimer’s within that five year period, they have a claw back provision that pulls all those funds back into your estate, and you have to pay for your long-term care expenses appropriately so, right, to protect the taxpayer.
BRIAN: However, it’s also not so smart because of how abused the system was on the sibling side. So, Mike, let’s say that you were my brother, I give you all of mine and Diane’s assets to put in your name to shelter from any potential long-term care, because I’m scared of the 70 percent statistic that says that I’m gonna spend time in a long-term care facility, which at the beginning of the show, we told you is a little misleading.
MIKE: And if you missed that, just go to our website, deckerretirementplanning.com, you have catch the beginning of the show.
BRIAN: Yup, and so, you can say, with a safe harbor trust in your name, and it’s gotta be arm’s length, to be correct, you can wake up one day, and say, you know, Brian, I really like those assets that you’ve given to me. I said, Mike, I didn’t give those to you, I just moved those to your name in the short term. Well, you say, no, I think you gave them to me, and I’m gonna keep those assets.
BRIAN: There was enough abuse of the safe harbor trust, and enough cases of claw back with the five year look back, that safe harbor trusts are no longer a popular item or tool to protect you from long-term care. That’s number four. Number five, number five is where you have an account that you fund on-it’s like a saving’s account. It’s totally liquid. You have a savings account, you put 10,000 dollars a month in it, or 10,000 a year in it.
BRIAN: Get it up to 100,000 in savings, and if you ever want it back you have total access to it, you can pull it all out. This is called asset base long-term care. You save 100,000 dollars, and then when you die you have a death benefit of about 2x, two times whatever’s in the account.
BRIAN: If you go into a long-term care facility there’s a 4x, this is why it’s 400,000, 4x long-term care benefit. It’s called asset based long-term care. The problem is the people who can afford to save 100,000 per spouse typically can self-insure. So, the last one is the most tragic, this is number six, yes it is an option, and this is the contradiction, I guess, of long-term care. The people who can afford it don’t need it, and the people who need it can’t afford it.
BRIAN: That’s the tragic contradiction of long-term care. Some couples, KVI listeners, will just look at each other, and say, you know, we’ll just divorce. If it comes to where he doesn’t even know my name, and I’ve gotta protect myself financially, we’ll just divorce, I’ll keep the assets, he’ll be on Medicare, or Medicaid, and that’s the best we can do. So, when we talk about long-term care, this has been, gosh, a 20 minute discussion, but it’s something that KVI listeners, just in the previous appointment before we are doing the radio show, it was her biggest fear.
BRIAN: We have a list of all kinds of things that people can check that they wanna talk about during our initial appointment, she chose one box, it was the top box, and it was long-term care. She’s scared to death of her exposure to long-term care expenses.
MIKE: So let’s find a solution, and let’s help, because that’s what the show’s all about is to protect your retirement. So, Brian does that wrap up medical?
BRIAN: That wraps up long-term care, but I’m gonna continue with the medical fear. It’s interesting, Mike, that younger people were twice as likely to say that they have a fear of running out of money in retirement. 33 percent compared to sixteen percent of those over 65. This is interesting demographics. When you look at people 65 and older, relatively few were concerned about running out of money before they die.
BRIAN: They think they’ve accumulated enough money that with in combination with social security, and any pensions, that they’ll be okay.
MIKE: I think an important point, though, is, and I don’t have it in front of me here, I know you’ve got a lot of the information, but how young of a generation were they asking? Were they asking the millennials and 20 year olds that are possibly going paycheck to paycheck and don’t understand how to even save? Maybe they’re spending way beyond their means. So, I’m curious to see the actual demographic, and the age group, specifically on that, because the older generation, they’re typically more frugal from what I’ve personally experienced, more thrifty, and they budget, typically, in my opinion, a little bit better than the millennials would.
BRIAN: Well, let’s reference some charts. The article’s name is American’s Worst Retirement Fears by bankrate.com. They talk about what is the main reason you are not saving more money for retirement? Number one, 33 percent say they just have enough for daily expenses. Number two, they say that they’re… they say that they’re satisfied with their retirement savings. Number three, they say that they have family obligations. Number four, student debt, number five, medical debt.
BRIAN: Those are all the five reasons in order for the main reason that you’re not saving more money for retirement. Another thing that’s interesting on this topic, I know we’re bouncing around a little bit, we’re gonna spend some time on social security, how much of your income do you expect social security to replace when you retire? 42 percent said only some of my income, 24 percent said I won’t get anything from social security.
BRIAN: Actually I wanna go in other order, forget that. How much of your income do you expect social security to replace when you retire? Eight percent said all of my income, all of it. Eight percent are living only on social security. Five percent say most of my income, fourteen percent says at least half of my income, 42 percent says some of my income, 24 percent say that I won’t get anything from social security. That’s the millennials.
MIKE: Not a lot of faith in social security being around when we retire.
BRIAN: Right, nearly a quarter of those surveys say that they don’t expect to receive any money from social security. So, let’s talk about, Mike, we’re not gonna go in order here, is that all right?
MIKE: We can switch it up, that’s fine.
BRIAN: Okay, 30 percent of those under 50 believe social security will have run dry by the time they file for benefits. Younger people are very likely to say they don’t think social security will be around when they get to be old.
BRIAN: It’s a little hard to reconcile that view with the fact that you’re saving less than earlier generations, and at the same time saying that social security is not gonna be around. Those two statistics don’t reconcile. Let me say that again. The millennial generation is saying they don’t believe social security’s gonna be around on the one hand, but on the other hand they’re saving less than any other generation.
MIKE: So, what you’re saying is if I’m a 22 year old, fresh out of college, I shouldn’t be driving a BMW.
BRIAN: Maybe you’re just counting on living with your dad.
BRIAN: All right, on social security, let’s talk about-I’m very cynical, I pridefully hold my cynicism up against anyone’s.
MIKE: Well, I [LAUGHS] let’s say that a little bit better, you plan for the worst, but you do hope for the best, because I do know that you’re an optimistic person, but when it comes to reality, you like to be cynical just incase.
BRIAN: Right, so let’s continue to talk about social security. I don’t believe, even as cynical as I am, and as, the lack of faith that I have in all of our politicians, I think they’re smart enough to know that if they cut our social security, we’re coming after ‘em with pitchforks.
BRIAN: I don’t think that they’re gonna do that. I think that the government has to collapse before they’re gonna withdraw social security, but I do think that there has to be steps taken to extend social security for generations. Here’s how it’s gonna happen. First of all, the COLA’s gonna be gone. We’ve had two of the last three years where there’s been no COLA granted, no cost of living adjustment.
MIKE: Cost, okay, great.
BRIAN: Okay, number one, number two, they keep pushing out the full retirement age on social security. Let’s talk about what that is.
BRIAN: Social security benefits start at age 62. They grow five percent a year from 62 to 66 and eight percent a year from 66 to age 70. Now, KVI listeners, let’s say that, I’m the smart guy, I’m gonna wait ‘til age 70, but you’re the one that’s gonna draw at 62. Well, you’re better off than me, the lines actually cross around 76, 78. So, around a 14 year gap where you’re better off than me.
BRIAN: That means that I better have some longevity expectations if I’m gonna wait ‘til age 70, and here’s the cynicism, because the government set it up so that they want you to wait, wait, wait, wait, wait, and then die. So, they keep what they don’t pay you. Sorry about that, a little blatant cynicism, but that is the incentive of social security. Now, in a vacuum you maximize your social security by waiting to age 70.
BRIAN: Let’s take the vacuum out, bring reality in, there’s a couple very important reasons why you should draw social security sooner. One is health. So, if you’re diagnosed with a terminal condition, you’re not gonna wait ’til age 70, you’re gonna draw right away, or if you don’t have longevity, or if you have health issues, you want to draw right away, number one. Number two, if you retire at age 60, and you’re gonna wait ’til age 70 on your social security, that’s ten years of hitting your principal with the draws of income for the ten yeas, and you hammer your principal in those ten years all for the attempt to maximize your social security.
BRIAN: That makes no sense at all. So, we wanna preserve the principal that’s generating your income from your portfolio. Those are the two biggest reasons that we would deviate from maximizing your social security.
MIKE: Yeah, okay.
BRIAN: Okay, so let’s keep talking about social security, the expectation, on the strategies that are gonna be used to extend social security benefits to generations in the future is, firs of all, no COLAs, no cost of living adjustments.
BRIAN: Two is your full retirement age is going to be pushed out. So, that means people are gonna be required to work longer. Let’s talk about the full retirement age. Full retirement age, typically, right now for someone well, your full retirement age is the age where your spousal benefits max out. Just like your individual benefit maxes out at age 70, you can wait ’til age 71 to draw, but you’ve just lost a whole year’s of income, because it’s not going up anymore than what it is on your 70th birthday.
BRIAN: Your spousal benefits max out at your full retirement age, FRA. Spousal benefits are one of the important components of your full retirement age. The other is if you draw social security before your full retirement age, and make over 14,000 dollars, you will be penalized a dollar for every three dollars of social security benefits paid until you reach your full retirement age whereas after your full retirement age, you can make all the money you want, no penalty.
BRIAN: So, those are the two important things that have to do with your full retirement age, but the younger you are the older your FRA, your full retirement age. So, the government is incenting you to work longer. That preserves more of the social security money for people. That’s the demographics of social security are troubling people the most. This is the biggest fear of how social security gets tanked.
BRIAN: We used to have six workers for everyone, we’re down to half that now. So, with fewer workers for every one person in retirement, the number of people paying into social security, remember this is a classic Ponzi scheme, it is a classic Ponzi scheme where you pay in, what is paid in goes out. So, if less gets paid in, and more gets paid out, the whole system collapses.
BRIAN: So, the demographics are concerning. There’s something called means testing, that’s going to, it’s not happened yet. It’s been floated by the administration, saying, why don’t we decide, the government, even though you’ve paid in all your life, we have your money, and by the way, this is an aside, here’s a 30 second rant, it really bothers me that social security checks are being called a government benefit, quote unquote government benefit.
BRIAN: The gall of the government to say that. It’s not a government benefit, it’s my money, it’s your money. It is not a government benefit. We’ve paid into the system and we’re getting our money back, and they’re calling it a government benefit. It is not. Okay, rant over. Means testing is where the government is going to decided that anyone who’s paid in the system all their life, well, they’re making over 400,000 a year, we decided that you don’t need your social security, so we’re not going to give it to you.
BRIAN: That’s called means testing. It will start high, so you’ll have the class warfare that says, yeah, those rich guys, they don’t need their social security, they have plenty, and then, watch what happens, they will drop the ceiling, and they will drop it, and drop it, and drop it, and through means testing they’ll be able to extend the social security benefits. So, we’ve talked about social security for quite a bit here, but I wanted to cover it so that millennials and others know that there’s logical ways that social security is going to be extended and available for future generations.
MIKE: Now, for those just tuning in, this is Mike Decker from Decker Talk Radio and you’re listening to Brian Decker from Decker Retirement Planning out of Kirkland, Washington who is a licensed fiduciary, and just very excited, very excited to be talking about the first thing, which was Medicare, medical costs, which was the first and biggest fear, but the other thing we just talked about, which is point two of five, and that’s social security. So, we’re probably gonna have to have a two part segment here, because we’ve got a lot of great content still.
BRIAN: I can do it in twelve minutes. Do I have twelve minutes?
MIKE: All right, if you can do this in twelve minutes for the next three points, let’s do it.
BRIAN: Okay, so we talked about medical expenses going up. We talked about the black market, medical vacations, Medicare, the Medicare reimbursement program, and the supplementals. We talked in detail, just now about social security. We talked for 20 minutes about long-term care. Now we’re gonna talk about three things here that I’m gonna just combine together.
MIKE: Can we list the three things? So, the three things are savings running out, so running out of savings, you just, you outlive your money, and then the next one, which is not being able to afford the expenses as the cost of living continues to increase, and then the last one is?
BRIAN: Getting into too much debt.
MIKE: Which is kind of like the second point, just rephrasing it in a different way.
BRIAN: Right, I would say that all three of these are solved with what’s called a distribution plan.
BRIAN: Now, KVI listeners, I wish that I could show you a picture. Picture an asset allocation pie chart that the bankers and brokers trot out for you to assist you in retirement. They will tell you that based on how you answered the risk questionnaire on how much risk that you want, they will assign to you an asset allocation pie chart of a diversification of large cap, mid cap, small cap, growth, value, international, emerging markets, indexes and ETFs to have you diversified on the risk side, and then they will use what’s called the rule of 100.
BRIAN: If you’re 65 years old you should have 65 percent of your money in bonds or bond funds. If you’re 70 years old you should have 75 percent. The problem with the rule of 100 is when interest rates are at 100 year lows it makes no common sense to have your banker or broker tell you to put 70 percent of your assets earing nothing, but it’s worse than that. There’s something called interest rate risk that when interest rates are at or near 100 year lows, and your bond funds are paying you nothing, what do you lose when interest rates go up?
BRIAN: So, in 1994 the ten year treasury was at six percent. In one year it went form six to eight percent, and according to Morningstar, the average bond fund lost 20 percent. In 1999, the ten year treasury yield went from four to six percent. The average bond fun lost seventeen percent.
MIKE: Now, I don’t wanna glaze over this, if you have-Brian help me with these numbers here, if you’re 70 years old, and 70 percent of your bond funds just took a 20 percent hit, what does that look like in your overall retirement?
BRIAN: That hurts you. That limits, that hurts you badly.
MIKE: I mean, is that a life-changing experience?
BRIAN: On many levels. You were told by your quote unquote financial advisor giving you professional financial advice, you’ve just found out that there’s financial malpractice that’s been done by your advisor telling you that your safe money was in bond funds when interest rates were at or near 100 year lows. When interest rates are this low, interest rate risk, the risk that you will lose money in your bond funds is at or near 100 year highs.
BRIAN: If any financial professional is telling you that your safe money is in bond funds, I hope you go to our website, www.deckerretirementplanning.com, and read article after article that I’ve written about how bankers and brokers can hurt you, and learn about interest rate risk, and bond funds, and how they don’t pay you anything, and how that they can give you double digit losses when interest rates go up, and we will link to, gosh, who’s the Pimco guy?
MIKE: Bill Gross.
BRIAN: Bill Gross. Bill Gross who used to be at Pimco now is with Janice, we will link to the article that Bill Gross had, an interview with Morningstar where he says that when interest rates this low, the Fed is keeping interest rates artificially low, number one. Number two, they can’t sustain this. Number three, when, not if, when interest rates go up, people are gonna be hurt, and he advises people to be cautious about their exposure to bond funds.
BRIAN: Your banker and broker won’t show you that article. We will link to it. We want you to know, KVI listeners, that it is financial malpractice to tell you that your safe money is in bond funds, number one. Number two, bankers and brokers are using an asset allocation pie chart, which is an accumulation plan. Totally fine if you’re in your 20s, 30s, and 40s, but if you use it in your 50s plus years, and in retirement, it will hurt you, and this has to do with the fear of running out of savings, not being able to afford daily expenses, and taking on too much debt.
BRIAN: Mike, I’m linking this right here. People were told by their financial professionals to buy and hold in the stock market. They lost 40 percent in ’08, and now, they’ve taken four or five years to get back to even, but during those four or five years, guess what they had to do? They had to keep drawing from their portfolio. When you’re drawing money out of a portfolio that just took a 40 percent hit, you are sucking the air out of that portfolio’s ability to recover, and many people know that it can’t recover.
BRIAN: So, what happens? They are afraid. They’re afraid, and they’ve taken on debt, and their whole plan is going sideways, because they’ve taken an accumulation plan, which is a pie chart, and tried to-I’m pounding the table-they’re taking an accumulation vehicle, and they’re trying to retire with it. That is like-let me think of an analogy-that’s like trying to run a boat down I-5, or 405, it doesn’t work. It’s not built to do that. Is that a good analogy?
MIKE: Well, in my mind it’s kind of like, at first it doesn’t seem like that-well, actually no, at first it’s a huge deal, but you just can never really get back. It’s almost like trying to dig yourself out of a sand situation, and you dig yourself out, but it just kind of keeps going on. You just kind of, it’s a bad situation.
BRIAN: But I wanna explain why people have this biggest fear of savings running out, not being able to afford daily expenses and taking on too much debt, there’s three major problems where bankers and brokers will, will hurt you.
BRIAN: Number one, they’ll tell you to use the asset allocation pie chart, which is not appropriate when you’re 50 plus. Number two, they’ll tell you that your safe money is in bond funds when it’s not. And number three, they will use the four percent rule to distribute your income. What is the four percent rule? The four p-do you wanna explain it?
MIKE: You guy right ahead.
BRIAN: You’ve heard this so many times, Mike. The four percent rule goes like this, it says, KVI listeners, stocks have averaged around eight and a half percent for the last 100 years, that’s true, bonds have averaged around four and a half for the last 36 years, that’s true.
BRIAN: So, let’s be safe and just draw four percent from your assets for the rest of your life, and we should be fine. The problem with that is that works beautifully if the stock market goes up forever. If it just keeps going up ten, fifteen percent a year it works beautifully. The problem is when the stock market goes into a flat market cycle like it’s in right now, not only doesn’t it work, but it actually destroys your retirement. Here’s what I’m talking about. Imagine that you retired January 1 of 2000, the beginning of a flat market cycle, and you’ve got 4,000,000 dollars, you hit the lottery.
BRIAN: The bad news is, you invest your money January 1 of 2000, and in 2000, ’01, and ’02 you lose 50 percent. 50 percent of your stock portfolio is now, but it’s worse than that for you, because you drew four percent every year. So, you are actually down 62, 50, 50 plus 12, so that’s 62 percent. You’re down 62 percent going into 03, but there’s good news. Markets double between ’03 and ’07, but you don’t get all that, because every year four percent comes out of your portfolio.
MIKE: And just to clarify, you’re drawing four percent of the current value for the year, is that right? So, you’re having to redo how much you can actually take out.
BRIAN: Correct. You’re drawing four percent from your portfolio, and you’re not keeping up. So, every year when the markets double between ’03 and ’07 you’re not getting all that, because you’re drawing four percent a year, and then you take that hit in 2008, down 37 percent, and you add another four to that, you are done, and proof of this, proof was you saw the grey haired people that had to stake a for sale sign in their home, they had to go back to work, move in with their kids.
BRIAN: They had to go to plan B, because the four percent rule destroyed their retirement, and hold on just a sec Mike. I just wanna say that the guy who created the four percent rule actually came out publically and said, it’s dangerous, his words, quote unquote, he doesn’t use it, quote unquote, and that he says it doesn’t work when interest rates are this low. And yet, here’s what bothers me the most. He said that in 2009. Bankers and brokers still use it today.
BRIAN: They use a discredited strategy to distribute your assets. So, since we’re still in baseball season, I wanna recommend with the time that we have that I hope that you think of three strikes for your financial advisor, your banker or broker. Number one, strike one is when they give you an asset allocation pie chart to use in retirement. That’s like trying to drive a boat down I-5 or 405. It just doesn’t work.
BRIAN: Strike two is when they tell you that your safe money is in bond funds. That’s like a math teacher telling you that two plus two is ten. It’s just demonstrably false. And, number three where you get up and you leave is when he tells you that he’s gonna distribute your income for the rest of your life using the four percent rule. It doesn’t work. It’s publically discredited by the inventor himself. It doesn’t work.
MIKE: I wanna kinda put this in a little bit of a different perspective, because if you’re using the pie chart, and can you comment real quick, Brian, on the market conditions right now? Are they stable? Are they just at high risk? I mean, what, market conditions, ‘cause we’ve heard a lot about in the news over the last year, you’ve got Greece, you’ve got Brexit, you’ve got China and Japan manipulating their currencies or their markets as well, we’ve got the election coming up. There’s a lot of things that some people might think is a perfect storm. Is that right?
BRIAN: Okay, so let’s talk about that. I wanted to talk about the distribution plan in the time that we have left, ’cause I told ’em what we don’t use.
MIKE: 30 seconds, market conditions.
BRIAN: Right now, we have, in 2000, ’01, and ’02, one bubble, that was the tech crash. One bubble took 50 percent out of the market. In 2008, a different bubble, which was the mortgage disaster almost shut down the world’s financial system. We have four bubbles going on right now because of artificially low rates.
BRIAN: Bubble number one is the debt levels of the G7 nations, the major countries around the world. Historically when you have the debt surpass 200 percent of GDP, gross domestic product, you never recover. You have to create a new currency. You have to wipe the slate and start over again. Argentina does this every eight or nine years, but you have to start over again. We have the world’s major economies that have passed that marginal line. That’s debt bubble number one. Number two is the bond market.
BRIAN: With interest rates this low, and things are kept artificially low, people have exposure to bonds where when, not if, when interest rates go back to normalize, then people will be taking 20 plus percent hits in their bonds. Debt level number three. In a low interest rate environment you also have stock markets with a current price earnings ratio of 25. It’s only been higher twice. Once was November of ’99, peak of the market, and the second was October of ’07, peak of the market.
BRIAN: The fourth and final bubble is real estate. With interest rates this low people are putting money in anything but savings. You’re incented to invest your money somewhere somehow. Real estate prices are measured by the affordability index. The affordability index is where in any town, or city, or metropolitan area, you have the average wages of that city, and what the house price would purchase with those average wages, and what the average home price is in that area, and the gap is called the affordability gap.
BRIAN: The gap’s never been bigger than right now. Residential, corporate real estate, there is a bubble. So, right now we have four bubbles that are fed into artificially low interest rates.
MIKE: So, just to clarify, if your financial professional, banker, broker, financial advisor are putting you, and showing you in what looks like a pie chart, you are essentially saying, I am okay with this professional investing my assets, and my life savings in such a way that if the market tanked my lifestyle has to change.
BRIAN: Eyes wide open. This is Mike Decker and Brian Decker from Decker Talk Radio, and Brian Decker from Decker Retirement Planning. Take care.
