MIKE: Tax season is over, but we’re here to review the best and the worst on how your retirement plan could be affected by taxes going forward. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good morning everyone. This is Mike Decker and Brian Decker on Decker Talk Radio’s Protect Your Retirement. We’re excited today. We’re going to be talking about taxes as we’re recording this actually on tax day. But before we jump in, Brian, let’s go over some financial news. There’s a lot of things going on in the news today.
BRIAN: Yeah, just a couple things to finish up what we started talking about last week. And that is that the stock market has kept up from two things, basically: higher earnings expectations, and lower-trending interest rates. Those are the two things that typically cause stocks to continue higher.
BRIAN: When it comes to earning estimates for this year, 2016, the first estimate early in 2016 was for a dollar, 37 on the S&P 500. The last one was for a dollar, six. Huge miss. Earnings have been trending down for the last two years, so that means that the support from earnings is not there currently. The expectation, and this is the soft data versus hard data, the soft data, the expectations for higher earnings in 2017 are there.
BRIAN: But the hard data, the actual reported earnings, have not supported the stock market. So the stock market, at some point, the hard data and the soft data need to have the biggest gap ever in the history of keeping that statistic in the last 50 years. Already 2017 forecasts are down 10 dollars from their original prediction, and are starting to go lower.
BRIAN: As far as lower interest rates to generate higher stock returns, we have the Federal Reserve talking about pulling back some of their bonds, over a trillion dollars in bonds. They’re dialing back the Keynesian bond purchasing. So we’ll see what happens there. So the tail winds of lower interest rates are not there. The tail wind of higher earnings are not there either. So we’ll see where the stock market goes this year.
BRIAN: Every bear market since 1947 did not come during a recession. I’m sorry; every bear market, correction, since 1947 that was not accompanied with a recession, was quickly reversed. Obviously, it’s important to have a sense of when the next recession will happen. But, though the economy is at stall speed, this past week’s unemployment report was weaker than expected. And that’s what I mean by the hard data needs to be supporting the soft data.
BRIAN: If there’s no recession by 2020, then we will have lived through the first decade in 120 years without one. By the way, the odds of that happening are still small. But for that to happen, from now, in April of 2017, everything has to go right. We have to have major tax reform. We have to hope that the European banks don’t blow up, and that Italy somehow figures out its own banking crisis, that China evades a major credit crisis. All kinds of things are out there that could derail.
BRIAN: Now, are we pessimistic? No, we’re realistic. We hope for the best, but we plan for the worst. So at Decker Retirement Planning at Kirkland, we want to make sure that the financial planning we do for our retired clients and our soon-to-be retired clients, that they don’t have a stock market crash derail their financial future; or inflation or interest rate risk, or long-term care. None of those things…
BRIAN: We want to make sure that our clients are safe from all of those problems that derail many people in retirement, and where they have to go back to work or sell their home. All right, Mike, since today is tax day, and we’re doing the recording on tax day, April 18, we are going to talk about taxes. Comprehensively, we’re going to talk about taxes.
MIKE: Before your get in there, though, I just want to introduce Brian Decker more specifically. Brian Decker is a licensed… this is who’s going to educate us on a lot of taxes, here. He is a licensed fiduciary, so a retirement planner. That’s an important word.
MIKE: We’re going to dive into some important details about taxes, but a fiduciary is someone who is legally bound to do what is in the best interest of the client. So you’re going to see a lot of transparency. You’re going to see a lot of things that could be missed with your current financial advisor, or your current planner, or maybe even your CPA. Now, we’re not CPAs. So I’m not saying we’re going to replace them. What I am saying is that we want to open up the curtains and show you some things throughout the show today that could help you with your retirement planning and your tax situation. And, throughout the show, we are going to extend a few offers, just as a quick head’s up, to come in and visit with us in either our Seattle office down in 2 Union Square.
MIKE: Beautiful corner office. Overlooks the Space Needle. Brian, don’t you just love being there?
BRIAN: Yeah, it’s gorgeous.
MIKE: And then we also have a Kirkland, beautiful, on the waterfront, Carillon Point. And we would love to have you visit us and go over this, as taxes are a very important part of any financial situation. They’re relevant. They just exist, and we need to account for them. So, with that introduction, Brian, let’s dive into the taxes.
BRIAN: All right, I’m going to start… we’re going to comprehensively talk about how taxes affect investors and retired people specifically.
BRIAN: So the first thing we’ll talk about is on lines eight and nine of your 1040, that’s when you report interest and dividends to the IRS. Generally, there’s a large number there for people in retirement because it’s coming and generated from reinvested dividends and interest from your mutual funds. Bankers and brokers are paid to put all your money at risk in the Asset Allocation Pie Chart.
BRIAN: Now, for many, many reasons, that’s unnecessary and a failure on their part to appropriately, wisely invest your money. But they get paid to keep all your money at risk. We don’t. But that generates a large amount of taxes, reinvested dividends and interest, on lines eight and nine. So let me say this differently. You’re being taxed on money you never even touched. That’s an inefficiency that we at Decker Retirement Planning offset by one of two ways.
BRIAN: We either, number one, turn that income on, so that you are at least spending that income that you’re getting taxed on. And even there, we’ll talk about how we minimize the taxes on your spendable income. Second, we want to make sure that the other option is to repurchase those same mutual funds and receive the benefit of reinvestment, but have those wisely be in your retirement accounts, your IRA or your Roth.
BRIAN: We want to minimize the amounts on lines eight and nine of your tax returns. So that’s number one. Number two is going to be the biggest tax-saving strategy in most of you, Decker Talk Radio listeners, most of your lifetime. Imagine, and now this is very true, imagine that we have an IRA that is 250,000. And you’re 65 years old.
BRIAN: And in 20 years we grow that IRA to now you are, let’s say it’s a million dollars. At six percent, 250,000. Let’s say that we grow it a million dollars. Are you happy with us? Everyone would say absolutely. We’re happy to have quadrupled our money in our IRA. Except for when it comes to taxes, because what we’ve done now is, in your 80s, in your mid-80s, we’ve put you in the top tax bracket.
BRIAN: And you’re paying taxes through RMDs, and you’re frustrated because now you realize, although it’s too late, that you could have paid tax on 250,000 dollars and now you’re paying tax on a million dollars. So what we do at Decker Retirement Planning, is we have a Roth IRA calculation… and check this out, Decker Talk Radio listeners, we are mathematical in our approach to retirement planning at Decker Retirement Planning in Kirkland and Seattle. We know, to the dollar, how much you should convert from an IRA to a Roth. We know to the dollar.
BRIAN: Ask your financial planner at the bank or the brokerage firm how much you should convert from an IRA to a Roth. And most of them will have no clue. So when it comes to the planning we do, the Roth IRA is golden in three ways. Number one, it grows tax free. Number two, it generates income back to you while you’re alive, tax free. Number three, it passes to your beneficiaries, tax free. It’s a golden account.
BRIAN: So, in fact, we show it in color gold on our financial planning distribution plan. Now imagine, I’m going to describe this for radio listening. In our spreadsheet of income, we have Bucket One that generates income for the first five years of your life. Bucket Two, years six through 10. And Bucket Three, for years 11 through 20. And Bucket Four is the risk bucket.
Principal guaranteed accounts, Bucket One, Two and Three, because our clients at Decker Retirement Planning are going to generate income from principal guaranteed accounts. So when the stock market gets creamed, every seven or eight years, just like it did in 2008, many bank and broker clients will have to go back to work because they lost 25 to 35 percent of their money, and they can’t afford to do that. And they’re drawing income on that, which exacerbates the problem.
BRIAN: Our clients, that did the planning in 2008, sailed through 2008 unaffected. Now, we’re talking about taxes, but I want you to know that we do not convert IRA to Roth in Buckets One, Two and Three. It’s only the risk account. Why? Because those principal guaranteed accounts are taking income too soon, and the returns aren’t high enough to receive the benefit of an IRA to Roth conversion.
BRIAN: So we know, to the dollar, how much should be converted from an IRA to a Roth account. Now let’s talk about how we do it. We don’t convert it all at once. We convert it over five to seven years. Here’s some of the genius of distribution planning that we do at Decker Retirement Planning. Every person has a combination of qualified and non-qualified money.
BRIAN: Qualified is your retirement plan money. Non-qualified is your already-taxed money. If you were to take 1000 dollars out of your bank account at Bank of America, you’re not taxed on that. That’s already-taxed, non-qualified money. If you take 1000 dollars out of your IRA, you’re taxed on it as income in that year. So what we do when we set up your account is we put the already taxed, non-qualified money in the front of your plan.
BRIAN: By doing that, the taxes that you owe on drawing that income goes way down for the first 10 years. So that’s effect number one. Your AGI, your Adjusted Gross Income, goes way down. Number two, by putting your already taxed money in the front part of your plan in the first ten years, the taxes you owe on your Social Security also go way down. And number three, and this is the reason we do it, it gives us a window of ten years to convert your IRA to a Roth.
BRIAN: Now, that money can grow tax free, and the income that it generates can come back to you tax free, and the money that is transferred to your beneficiaries on your death is transferred tax free. The Roth conversion, many people will think, wait a second, Brian, I make too much money. That’s contributions. We’re talking about conversions.
BRIAN: Three years ago, the IRS dropped any limits on conversions, so now you can convert no matter what your tax bracket is. But let’s go back to contributions. When it comes to a Roth, let’s say you do make too much money, either individually or as a couple. There’s what we call a back door Roth contribution strategy, where you contribute the amount of money that you’re able to a non-deductable IRA. This is very important.
BRIAN: You contribute the maximum amount to a non-deductable IRA, and then you immediately convert that, because there’s no income limits. You convert that to a Roth. That’s how you can jam-pack your Roth. Now, typically, as a rule of thumb, if you have about a third of your investable funds in a Roth IRA, you should stop converting. It will be… you don’t need to have more than about a third is what we figure, 33 percent.
BRIAN: So Mike, this is probably a good point, now that we’re 15 minutes into the show, if someone has questions on how much money they should have converted from an IRA to a Roth, then we should have them come in and, for no charge, I’ll go through and I’ll show them the calculations we do so they should know exactly how much they should have in a Roth IRA in their retirement account.
MIKE: Absolutely.
BRIAN: All right, the next thing… so, first of all we’re talking about taxes, comprehensive tax minimization. We talked about lines eight and nine, minimizing that. If you missed that, you can go to our website, this podcast, pull that up and listen to it. If you’ve got reinvested mutual funds, and you’re paying taxes unnecessarily, it’s an inefficiency you can easily fix. But it’s problematic, and it’s common, poor financial planning that the banks and brokers do, maximizing your reinvested dividends and interest, where you’re paying tax on that.
BRIAN: We just talked about the second point, which is the IRA to Roth conversion. That… the difference in paying taxes on 250,000 and a million dollars is huge, and will probably be the biggest tax-saving strategy of your lifetime. Number three, when we talk about transferring assets to your beneficiaries, these are inheritance tax, estate taxes at the federal and state level. Let’s talk about this.
BRIAN: Half of our clients… by the way, all of our clients at Decker Retirement Planning are very sharp, smart people. Half of them will say, hey, whatever Johnny and Julie get from us, net of state or federal estate taxes is more than we ever got. We’re not going to do any planning on that part. And that’s fine. The other half of our clients fall into this category.
BRIAN: It’s not about getting Johnny or Julie more money, it’s about, after a lifetime of paying taxes, not willing to have the government take another hunk of flesh after I die. So, let’s go down that road. When it comes to estate tax planning, we work with estate tax planning attorneys as partner with you, to make sure you can zero that out.
BRIAN: Now, in the state of Washington, you have an exemption of about 2.2 million per person, and we want to make sure you preserve that exemption. Let me give you an example. Let’s say a client with 4 million dollars in assets… by the way, assets include your investible assets, and your home, and any other real estate. All your assets total up, let’s say, for this client, that happens to be married, and, tragically, the husband dies and in the will there’s no preservation of that exemption.
BRIAN: So all the assets go over to the spouse, the wife. And when she dies, she has a 2.2 million dollar exemption, and their estate will pay taxes on the 4 million dollars. Let’s assume it hasn’t changed in value. So they owe taxes on 4 million minus 2.2, that’s her exemption. So they owe taxes on 1,800,000. And at 18 percent, that’s 324,000 dollars of taxes that is owed to the state of Washington. Now the feds, the federal estate tax level is approximately a little over 5 million per spouse.
BRIAN: So, but to continue on this state estate tax situation, instead of paying taxes of 324,000 dollars upon the last spouse’s death, can very easily be avoided by adding the exemption to the will, or with simple language that says that, upon the death of the first spouse, that there is a decedent’s trust created, and that assets are rolled into the decedent’s trust, allowing the preservation of the first to die, their 2.2 million.
BRIAN: So that when the second spouse dies, how much tax is owed? Well, there’s 2.2 plus 2.2. There’s 4.4 million of exemption on an estate that’s only 4 million in size. Now the state tax, the state estate tax owed is zero. But let’s say… and, by the way, that’s the easy part of estate planning, is just making sure your will is preserving your exemption of 2.2 million. That’s step one.
BRIAN: Step two is to make sure that you know of other ways to bring your estate down. One is spending your estate down. That is having wonderful, expensive family reunions, so that you’re creating memories while you’re still alive, and you’re spending your estate down. Because if you don’t spend it, someone else will. I know that sounds irresponsible.
BRIAN: What we’re saying, though, is that responsible spending and creating of wonderful memories is a part of a good estate tax plan, so that we are trying to shrink the size of the estate. Gifting is also very important. So, you’re allowed to gift around a little over 14,000 dollars per spouse per year. So that’s 28,000 per child for a married couple per year, and that’s also something that can and should be done.
BRIAN: You can gift that by funding your children or your grandchildren’s college fund, account, or whatever you’d like to do. But moving money that way is very important. The next part is on estate tax planning. Let’s say that you have an estate that now is above the federal level, and it requires a bigger strategy to move more money.
BRIAN: This is where the Life Insurance Trust comes in. An ILIT is very common strategy to move money and make it available, so that when funds are needed to pay an estate tax, that it’s available. So here’s how an ILIT work. An ILIT is a Life Insurance Trust that is held outside of your estate. And let’s say that your…
BRIAN: Let’s say that the value of your estate is 8 million dollars. And let’s say that you, even with your exemptions of 2.2 each, now you’ve got 4.4, you have an 8 million dollar estate, so there’s 3.6 million that is approximately exposed to state estate taxes. That’s a 648,000 dollar estate tax bill that’s going to be due. So what do you do?
BRIAN: You can buy a 650,000 dollar Last-to-Die Insurance Policy held outside of your estate. Why outside? Because if you hold it inside your estate, then you have a bigger estate tax problem, because now you’ve got an additional 650,000 that you have to pay taxes on. It has to be held outside of your estate in a Life Insurance Trust, and you’re able to gift the premiums to your children, your beneficiaries, through the Crummey Provision.C-R-U-M-M-E-Y.
BRIAN: The Crummey Provision allows you to, arm’s-length, gift money to your children. And they have to be arm’s length to be able to use that money in any way they want, but they wisely pay the life insurance proceeds because they know that they’re helping handle a 650,000 dollar estate tax problem for pennies on the dollar, through life insurance. So, when the last spouse dies in the estate, that 650,000 comes due to offset the state estate taxes that are due upon the last spouse’s death.
BRIAN: Estate tax planning is very important in the retirement planning we do at Decker Retirement Planning in Kirkland and Seattle. As I say, there’s many aspects to it. We work very closely with your state estate planning attorney. We have many that we’re working with, and we would highly recommend. Or if you have your own attorney, we work with him or her to zero out your estate tax problem. Okay?
BRIAN: So that’s estate taxes. And, by the way, if you have an estate tax strategy, that’s something that we and your attorney would like to review, because many times, and I would say 75 percent of the time, you think it’s handled and it’s not. We find out after reviewing what you’ve got and looking at your current value of your estate that there’s some gaping holes left in your estate tax plan.
BRIAN: So, Mike, this is probably a good time, now that we’re almost halfway through the show. Estate tax planning is very complicated and complex. And most people charge many thousands of dollars for estate tax planning strategies. So this is something that we can offer for free for clients whose estate is more than 2.2 million dollars. Have them call. Have them come in. And for free, we can help guide them through or be a second opinion on what they already have in place.
MIKE: Oh yeah, well we’d love to run our analysis on that. And quite frankly, this is not something you can just figure out. Like Brian said, it’s very technical, very complex. And so this is something you should be talking with a professional about.
BRIAN: All right, so we talked about… we’re talking comprehensively about taxes today.
BRIAN: We talked about lines eight and nine on your 1040, where you have reinvested dividends and interest that you’re paying taxes on inefficiently. So we talked about already how to fix that. We talked about the IRA to Roth conversion strategy, which typically is a huge tax-saving strategy for most people. We talked about zeroing out estate taxes in your financial planning that we do. And now, finally, let’s talk about other ways to minimize the income taxes that you pay.
BRIAN: And that is Nevada Corporations, Family Limited Partnerships, or… Nevada Corporations, Family Limited Partnerships, or foundations. So let’s say that you have many different pieces of real estate. Many times, a Family Limited Partnership are able to transfer those assets generationally, and reduce the taxes that you have on a heavy real estate-laden portfolio in an estate.
BRIAN: So, if you do have that situation, that’s a favorite on how to transfer real estate and minimize taxes and also receive income, is using a Family Limited Partnership strategy. When it comes to a corporation, Nevada Corporations can give you a lot more flexibility, deductions, things like that.
BRIAN: We would work with your CPA to make sure that if you are retired but still have a corporation and you’re receiving income from it, there’s a way that we can brainstorm and see if a Nevada Corporation format would benefit you on the taxes on your income and the deductions that you can take. And finally, having a foundation is something that we look at to see… and, sadly the Clintons have abused this in a huge way, but a very popular way.
BRIAN: A foundation is something that we look at if you’ve got a mixture of real estate, low-cost basis stocks, and a high income, and a corporation. If you’ve got all of the above, sometimes we’ll brainstorm with your CPA to see if a foundation format and strategy can minimize the estate… or the taxes that are due on the income you’re receiving. All right, now I want to go off on two other parts of the taxes, and that is…
MIKE: Oh, Brian, before you start, for those that are tuning in right now, you’re listening to Brian Decker from Decker Retirement Planning on this program, Decker Talk Radio’s Protect Your Retirement. And we’re talking about taxes. And these are just things to look… we’re, as fiduciaries, pulling the curtain back and showing exactly what’s going on.
MIKE: As fiduciaries we want to enable you to make the right decisions. So, just wanted to put that right there for our new listeners that are just tuning in right now to Decker Talk Radio. All right, Brian, let’s keep going.
BRIAN: All right, so there’s something called a Generation Skipping Tax that you’ve got to be careful of, and that is… you know we… I’ve got two grandchildren now, and we want the best for our children and grandchildren. And so, we can send money down to our grandchildren, and our inheritance. But there’s something called the Generation Skipping Tax. It’s huge. It’s 49 percent.
BRIAN: There’s a way to get around a Generation Skipping Tax. Why is there a Generation Skipping Tax? Because the IRS wants their money, and they lose out by you sending money down to your grandchildren, which you can do, but you’re using up your own exemption by sending money down. Once you’ve used up your exemption, then you are going to be taxes at… penalized at 49 percent for the Generation Skipping Tax.
BRIAN: So how do you avoid that and preserve your exemption? There’s something called a Dynasty Trust that works like this. Let’s say that husband and wife, 65, they have two children. Their estate is a million-five, and, let’s say, a million-six, just for easy, round numbers. So, upon their death each child gets 800,000. That’s how they have it set up today. But the grandchildren come along, and they’re so cute, and they want to send money down to their children and grandchildren.
BRIAN: And so, what can happen, is instead of dividing the estate in two, they can divide their estate in three parts. Let’s say they divide it into three different parts. So now, for math, let’s say that a million-five, now 500,000 goes to child one, 500,000 goes to child two, and upon their death, 500,000 goes into the Dynasty Trust. The Dynasty Trust is a per stirpes account, meaning it’s bloodline only.
BRIAN: Upon the divorce of a spouse, the non-bloodline spouse cannot claim those assets. Those have to say at bloodline. Then, when it comes to sending assets down, we want to make sure that the per stirpes bloodline is followed, and it’s generational, and also the timing is over 100 years.
BRIAN: So what you’ve created using a Dynasty Trust, is the Dynasty Trust has to… is allowed to do whatever you want. So a percentage of assets can be taken out by grandchildren and their children, and their children, for usually some kind of a education, for college, for books, tuition, things like that. And you’ve created a legacy account that your children and grandchildren will be grateful for you forever. That’s called a Dynasty Trust.
BRIAN: All right, now the last thing I want to talk about when it comes to taxes is kind of an interesting twist, because we want to minimize your taxes in every area except for one. And the timing of this conversation, now that we are in this part of the business cycle, is very, very important. When it comes to all areas of your financial planning…
BRIAN: When it comes to all areas of your financial planning, we want to minimize your taxes, with one exception. And that is the taxes you pay on your gains on your account. And that is, if you’ve got a portfolio of stocks, and let’s say that you’ve got 15 or 20 stocks in there, you’ve got a low-cost basis position, let’s say, in stuff, in stocks that you’ve held for many, many years.
BRIAN: We say that it’s time to sell those and convert those into higher producing assets once you are retiring. And you say, no, I don’t want to pay the taxes on that. So, we sarcastically say, let’s wait until the stock market hammers the stock, and then let’s pay taxes after it’s lost 30 or 40 percent. And you say, no, that makes no sense. And we say you’re exactly right, it makes no sense.
BRIAN: So when it comes to low-cost basis stocks, we want to maximize the taxes you pay, because what that means is that we’ve maximized the after-tax gain. Now I’ll give you an example. Now, I know a lot of you are wincing when I, as a financial planner, say that we want to maximize the taxes that you pay on this part of your portfolio. Hear me out on this. Microsoft stock peaked in November of 1999, and did not make any new highs for 16 years after that.
BRIAN: If you could, with 20-20 hindsight, go back and sell Microsoft stock in November of 1999, would you? Every person I’ve asked that question to has said yes. So what they’ve said yes to, they’ve said yes to maximizing the taxes that they pay because they have maximized the after-tax amount that they get back.
BRIAN: So what we do is, in the planning, we want to create efficiency in your portfolio. And it’s not efficient to have a large portion of your portfolio become frozen like a deer in the headlights because you can’t pay taxes, or don’t want to pay taxes on those funds. Now, if you have legacy money, this is very important. Let’s say that you’ve got an estate of 5 million dollars. You’ve got investable funds of three-and-half million.
BRIAN: And you only need, oh gosh, let’s say that you only need 10,000 dollars after tax, each month. So that means that you’ve got large amount of your estate in Legacy Column. That’s a column where that’s money you control your whole life, but it’s probably money that you’re going to pass on to your children when you die. If you have legacy money, then we definitely move low-cost basis assets to pass to your children, because they get a stepped-up basis.
BRIAN: A stepped-up basis is, upon your death, instead of owing tax on your cost basis, they get a new cost basis, based on date of death. Date of death, whatever Microsoft stock is what is your new basis. So now the taxes owed to diversify that portfolio is much more manageable. But the problem is with many, many people that we run into is they can’t bring themselves or don’t want to sell their low-cost basis stock because they don’t want to pay the tax.
BRIAN: And we have to talk them through this because the stock market cycles. Now I’m going to bring in another very important component here, and that is the stock market is on year nine of a seven/eight year market cycle. Markets crash every seven or eight years, like clockwork. 2008, the markets were down from October of ’07 to March of ’09.
BRIAN: And at Decker Retirement Planning, our clients did not have to change their lifestyle, their travel plans, when most people in this country sadly had to sell their home, move in with the kids, go back to work. They had to do a Plan B, because that market crash changed their life in retirement. Seven years before 2008, that was a 55 percent drop off October of ’07 to March of ’09.
BRIAN: Seven years before that was 2001. Twin towers went down. That was the middle of a three-year bear market. That was a 50 percent drop. Seven years before that was 1994. Iraq had invaded Kuwait. Interest rates went up, the economy struggled, and the stock market struggled. Seven years before that was 1987, Black Monday, October 19, 30 percent drop in one day. Seven years was 1980. ’80 to ’82 the market dropped over 40 percent.
BRIAN: Seven years before that was the bear market of ’73/’74, it was a 44 percent. Seven years before that was the bear market of ‘66/’67, over 40 percent drop. And it keeps going. Decker Talk Radio listeners, we are in year nine of this economic expansion. Market cycle, stock market cycle, real estate cycles, and we have a bubble that is going to cycle down.
BRIAN: So, when it comes to how richly valued the stock market… we, at the beginning of the show, talked about how earnings are not supporting the current value of the stock market. At 25 times earnings, it’s only been higher twice. Once is 1929, and the other is November of 1999, at the beginning of the tech bubble. So, we are richly valued. We need either lower interest rates and/or higher earnings to support it, and we’re getting neither. Interest rates have been going up in the last year, and earnings have not been going up.
BRIAN: So we have different things that can be the pin that pops the bubble in the different markets. But are you protected? But we’re having this discussion right now because when the markets come back down, you don’t have to have the stock market drop be such a horrible scenario in your retirement.
BRIAN: Markets drop every seven or eight years. We’re in year nine. If we go 10 years, that’s the longest ever in the history of our country’s stock markets without a 30 percent or greater drop, and that was in the 90s. From 1990 to the year 2000, that 10 year period was the longest period ever without a 30-plus percent drop. So here we are. I hope that you have protection. I hope that you will add efficiency.
BRIAN: At Decker Retirement Planning, we want to make sure that all of your money is efficiently placed to produce income for the rest of your life. The banker and broker will have all of your money at risk because that’s how they get paid, number one. And then they will tell you after the markets drop 30 to 40 percent, “Hey we only lost 25 percent. Aren’t you glad that you’re working with us?” And you should be disgusted at that kind of a comment because you can’t afford to take a 25 percent hit in retirement, and then take four years to recover.
BRIAN: At Decker Retirement Planning, we have distribution planning strategies where we have your income coming from principal guaranteed accounts. So if interest rates go up or down, if the economy goes up or down, or if the stock market goes up or down, you’re unaffected. This is something that you’ve got to see. Mike, this is a good point where, if their banker or broker has all their money at risk, we can show them two things, Mike. Just hear me out and then we’ll have people call in for this.
BRIAN: Number one, instead of a pie chart, where all your money is at risk, let us show you a distribution strategy where you can draw income from Principal-Guaranteed Accounts, and make sure that when the markets crash it doesn’t send you back to work, number one. Number two, let us show you that there’s alternatives to CDs, treasuries, corporate, agencies, and municipals. When interest rates are this low, they’re yielding maybe two or three percent on ten-year CDs.
BRIAN: The Principal-Guaranteed Accounts that we’ve been using have averaged six-and-a-half, seven percent. You need to know about these. These are available. So, Mike, let’s make this available to 10 callers, have them come in and see a distribution plan, and we will show you how you can get around six-and-a-half, seven percent on a Principal-Guaranteed Account.
MIKE: Absolutely.
BRIAN: All right, we’ve got another 10 minutes, don’t we, Mike?
MIKE: That’s right. Well, just under 10 minutes. But yes, about nine, eight minutes or so. Is that enough time for you?
BRIAN: Yeah, I just want to finish with giving more information about how we put together financial plans here at Decker Retirement Planning. When it comes to your portfolio, first of all, instead of a pie chart, we have a distribution plan. So imagine, if you can on the radio here, that you have a spreadsheet that shows all your sources of income.
BRIAN: The income from your pension, the income from your Social Security, the income from your rental real estate, and the income from your investable assets, your portfolio. We total it up, minus taxes. It gives you annual and monthly income for the rest of your life. We plan to age 100. And we put a COLA, and three percent Cost of Living Adjustment on that, and we COLA that money up to protect you from inflation. Then, that’s the left side of the spreadsheet. It shows all your sources of income.
BRIAN: On the right side of the spreadsheet, it shows a laddered portfolio where Principal-Guaranteed Accounts are responsible for generating monthly income, for Bucket One, years one through five, Bucket Two, years six through 10, and Bucket Three, years 11 through 20. Those are Principal-Guaranteed Accounts. When it comes to how you invest that money, we have a full meeting on… this is one of seven or eight meetings we have with our clients.
BRIAN: But that meeting is usually meeting four, five, where we talk about all the different Principal-Guaranteed Accounts out there. All of them. CDs, treasuries, corporates, agencies, municipals. We talk about money market accounts. We talk about everything that’s out there. And there’s two things, Mike, that we talk about that people are stunned that they don’t know about.
BRIAN: One account is called equity-linked CDs or equity-indexed accounts. This is where, when the markets go up… and both banks and insurance companies offer these. When markets go up, you capture around 60 percent of the S&P 500 gain. And when the markets go down, you lose nothing. You lose nothing. So, these have been around for 25 years. They average around six-and-a-half, seven percent. And they are something that we’ve used since the interest rates have been crushed after 2008.
BRIAN: Before 2008, it was a no-brainer. We used CDs. We’d get five percent on a five-year CD, seven percent on a 10-year. It was a no-brainer. Now, what are your choices? So this is something very, very important. Number one, that these returns of six-and-a-half, seven percent are still available in Principal-Guaranteed Accounts. By the way, many people haven’t heard about them because banks and brokers don’t get paid any security commissions at all, so they’re not incented to sell them.
BRIAN: The second thing you need to know about is that there are some Principal-Guaranteed Accounts that are tax free, that are also returning six-and-a-half, seven percent. Now if you’re getting six-and-a-half percent tax free, and you’re in the 35 percent tax-bracket, that’s the equivalent of a 10 percent CD taxable rate of return. This is spectacular, and you need to know about these. These are Principal-Guaranteed Accounts that are tax free, that generate tax free income back to you on a very high level.
BRIAN: So this is also something that is not paying any security commission, so banks and brokers are not incented to sell them. We are fiduciaries. We do what’s right for our clients, and are required to by state law. So we make sure all of our clients know about these. Now let’s talk about risk accounts. The risk account is also something where we as fiduciaries cover all the different options that are, because almost all of our clients have risk exposure.
BRIAN: By the way, your banker and broker will have all your money at risk, and you don’t need to do that. We cut clients’ stock market exposure by about 70 percent. 70 to 75 percent, we cut that exposure. And the money that is in risk are in what are called two-sided models. A two-sided model is a model that is a mathematical algorithm that is designed to make money when markets go up, and designed to make money when markets go down.
BRIAN: These are not Principal-Guaranteed Accounts, these are risk accounts. However, in 2001 and ’02, when the stock market lost 50 percent, these models made money every year. When the markets went up from 2003 to 2007, and the markets doubled, these models more than doubled. When the markets got creamed in ’08, these markets collectively made money. And when the markets were up 150 percent from 2009 to present, these models were up more than that.
BRIAN: So let me emphasize. We are fiduciaries. We do what’s right for our clients. And we are using two-sided models because the market is a two-sided market. It goes up and it goes down. It makes no sense whatsoever to use a one-sided buy-and-hold strategy in a two-sided market. When you’re retired, you can’t afford to take a 30 or 40 percent hit every seven or eight years. You can’t do that. This is common sense.
BRIAN: So we at Decker Retirement Planning put in place two-sided models that are designed to make money in up or down markets when it comes to your risk portfolio. And we greatly reduce the risk. 100,000 invested in the stock market in the S&P 500, with dividends reinvested, grows today to about 220,000. 100,000 invested in the managers we’re using today grows to over 900,000. Average annual return is over 16½ percent, net of fees.
BRIAN: Why are you doing… why are you continuing to do what you’re doing with your banker and broker? Mike, we’ve got a couple of minutes. This is something where we can have people come in. I’ll show them the different managers we’re using one-at-a-time, how they work, and how we’re getting six-and-a-half, seven percent average annual returns on Principal-Guaranteed, taxable and tax free money.
MIKE: Love it.
MIKE: And, Brian, I’m just going to put it out there, this is pretty transparent. We’re opening up, we’re showing you the managers. We’re showing you what their history is, what their trades are… I mean, it’s pretty remarkable what we’re doing. But, if I may speak openly, we’re doing it not only as a fiduciary, but we want people to see that this works, that this is out there, and that this is a common-sense strategy, or it should be, at least, to invest in the market. Two-sided model for two-sided market. It’s just, it seems like it should be common sense to invest this way. So we want to educate people. We want to show them. And we would love to have you in, because chances are you’re taking too much risk.
