BRIAN: 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.
MIKE: This week, we’re talking about investment options, both principal guaranteed and at risk, and investments that your banker or broker might not be telling you about.
BRIAN: The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Hey, good day everyone. This is Mike Decker, and Brian Decker on another edition of Decker Talk Radio’s, Protect Your Retirement broadcasting KVI 570 in the greater Seattle area or KRNS 105.9FM in the greater Salt Lake area. We’re excited to have a show today about investment options. But before we dive into that, Brian, I know you’ve got a lot of great financial news just on what’s going on today. Brian, let’s dive right in.
BRIAN: Sounds good. This information, Decker Talk Radio listeners, is about the stock market and for the stock market students and gurus, I think you’ll eat it up. And for the people who have investments in the stock market, I think you’ll find this very interesting. By the way, the rest of the show, I just want to say when we talk about options, we’re not talking about stock options, we’re talking about options of people to put their safe money. Where do you get a return when CDs, treasuries, corporates, agencies, municipals are yielding two, two and a half percent? And bond funds are yielding less than that and will lose money when interest rates go up.
BRIAN: We have hammered the bankers and brokers for this practice and people have said, well what are our options when it comes to safe money? And in the show today, we’re gonna talk about how your principal guaranteed accounts can get a very nice rate of return. And we’ll talk about the options for principal guaranteed accounts. But first, I want to start off with where we are with the stock market. So far this year, growth stocks have outperformed value stocks by more than 11 percent.
BRIAN: And this is because… triggers the usual round of debt to value speculation. The last time that growth had such a huge streak over value was when the S&P was sitting at a high during the summer months, and it led to spectacularly poor performance over the next three to six months. The NASDAQ is joining the warning signs. A week ago, we talked last week on the radio show about how breadth, the breadth signals were warning and looked at how the Dow was registering an increasing number of breadth warning signs.
BRIAN: Since then, the NASDAQ joined the party triggering a warning every day for over a week. Let me define what market breadth is. When you’ve got the Dow, S&P, and NASDAQ going up, those are the indexes. And yet, the number of new highs in the market each day is going down, and the number of new lows is going up each day, and the advance/decline line is getting more and more negative, those are market breadth warning signals and we’ve had that happen. And typically, you get a divergence of market breadth before the markets turn down.
BRIAN: By the way, the timing of this brings up another topic called, seasonality. Did you know, Mike, if you put 100,000 in the S&P May one, and pulled it out November one, and you did that every year for the last 50 years. Guess what your 100,000 would be worth.
MIKE: I don’t know. How much would it be worth?
BRIAN: About 103,000 dollars.
MIKE: That’s pitiful.
BRIAN: If you put your 100,000 in the S&P November one, and you pulled it out May one, and you did that for the last 50 years, your 100,000 is worth over 700,000 dollars. So, there’s something called seasonality, which is where historically the time between mid August and the end of October is the most difficult time for stocks. Which is why now might be a good time to kinda lighten up, and to become less aggressive, less fully invested.
BRIAN: Analysts remain convinced that the stock market really has been tightly linked to total central bank stimulus. So, if you look at TARP QE1, QE2, that’s called central bank stimulus where they’re printing money. And that has driven the markets up. It hasn’t done much for the economy, we’ve had since 2008, the lowest recovery, we’ve never had, we’ve never logged a three plus percent GDP recovery year, not once, not ever. Which makes this the weakest recovery ever. So, central bank stimulus hasn’t done much for the economy, but it has done a lot for the stock market.
BRIAN: A lot of that stimulus has driven the markets to new highs. Well guess what? This is a game changer. The central banks around the world are talking about something called tapering. Tapering is where they buy back their debt and instead of stimulus being a tailwind to the stock market, tapering, the mere mention of this 18 months ago brought the markets down almost 10 percent in two weeks. That was August of 2015. So, tapering is something that is going to happen and will present headwinds to the market.
BRIAN: Market valuations, here’s another topic. We’ve talked about market breadth, we talked about seasonality, getting right now between mid August and the end of October being the most difficult time of the year for stocks, and how central banks are gonna start tapering. Now stock markets have never been valued higher by price-to-earnings ratios, price-to-book, price-to-sales, never been valued higher than November of 1999. The valuations of the S&P are now higher than 1929, the levels that preceded the Great Depression.
BRIAN: There’s two reasons for the stock market to go higher. There’s earnings and there’s lower interest rates. Earnings have been flat for five years now, and interest rates may have bottomed. So again, two tail winds now may start to be head winds along with central bank tapering. The Dow Jones keeps making new highs, but without the support of the Dow transports. For a stock market to be healthy, the r stocks need to confirm the new highs in the markets. Those are down six percent since mid July. Dow theory requires support of the transports to have healthy, sustainable market advances, and we currently do not have that.
BRIAN: What about the strength of the economy? The ISM non-manufacturing index unexpectedly dipped in July suggesting that the service sector growth is slowing. What about that business activity? Broadly, new orders and even unemployment metrics, those are all decelerating. So, the market internal such as new highs, numbers have been dropping, the Dow Jones has been steadily moving to new highs, and there’s an erosion of underlying support. As you can see, if I could hold this chart up for everyone to see, but you can’t see it on radio so, I have to describe it.
BRIAN: The new highs peaked in March, and that represented the highest level reached recently. And then since mid March there’s been a steady decline in the new highs and a steady increase in the number of new lows. So, in a bull market, a spike of new highs represents a buying climax, after which there’s a period of churning, or decline that’s likely to take place. It’s not necessarily a period of danger, it’s just a consolidation of gains. But what we’ve seen in this divergence is more concerning, it’s that the new highs have actually gone down.
BRIAN: Looking at a much broader picture, the New York stock exchange composite new highs have performed, which is the broad market index, similar to the Dow, the S&P, and the NASDAQ especially when it comes to divergence, and price, and the new highs. So, across the broad market and some of the narrow indexes such as the Dow, which just has 30 indexes, we are not seeing the support of the market with the number of new highs. The breadth of the market is divergent. Let’s talk about complacency.
BRIAN: Complacency is measured by the VIX, the volatility index. For the first time since 2010, we’re hitting new levels on complacency indicator, and that suggests a market correction is imminent. When fear drops below 10 on the VIX, a correction defined as a drop of more than 10 percent, or a bear market which is defined as a stock market drop of more than 20 percent, has followed every single time within twelve months. So, we have triggered this VIX complacency indicator telling us that the next twelve months may be really tough.
BRIAN: Drops in measures of fear below this level, which is 10 on the VIX, always indicate a correction of bear market within twelve months. Okay, we’ve talked about quantitative easing, the central banks printing of money, how that was a tailwind, now it’s a head wind with tapering. This next one is the aggregate cash levels of the market. If you’ve got good cash levels then you can bolster the markets continually higher. But when cash levels are low, which they are right now, cash levels right now are the lowest in more than 35 years. And the only time we got close to current levels in market cash was February of 2000.
BRIAN: The next three years after that, we saw the NASDAQ drop 70 percent and the S&P drop 50 percent. Art Cashin who’s on CNBC, I really like Art, this week his comments were focused on market cycles and the tendency for challenges in years that end in the number seven. Now this sounds kind of bizarre, don’t take this seriously, its just kind of, of interest and probably highly coincidental. Art cautioned not to get overly excited, and said that August is the second worst performing month of the years with September being the worst.
BRIAN: And he said that years ending in seven, like 1987, 1997, and 2007 have been market peaks in the first three weeks in August. That’s kind of interesting. ’87, ’97, 2007. Mike, have you heard that before? I think that’s kind of interesting.
MIKE: I’ve never actually heard that before. I mean, we’ve talked a lot about the seven or eight-year cycle, but years ending in seven, that’s highly coincidental, I think.
BRIAN: I think it’s highly coincidental too. It’ll be interesting to see, we’ll see it right away because the markets are supposed to peak in the first three weeks in August, and then markets go down with… well, markets have struggled after ’87, ’97, and 2007. ’87 was a 30 percent drop. 2007 was a 50 percent drop. ’97 was just a little over 10 percent, it wasn’t a 20 percent drop. Okay so, bottom line, we here at Decker Retirement Planning with our offices in Seattle, Kirkland, and in Salt Lake are expecting a difficult next few months.
BRIAN: August through October, cash levels are low, we talked about that. All this begs the question, how do you protect your risk money? At Decker Retirement Planning, go to our website, www dot Decker Retirement Planning. You’ll learn how we do it. We’re not gonna talk about this today, were gonna talk about risk free, or principal guaranteed options, but the way we do it is we have two-sided trend following models that are designed to make money in up or down markets. We’re using six managers right now, and because we’re fiduciaries to our clients…
BRIAN: Mike, this still cracks me up. I know we talk about this on the radio show. Guess what mutual funds I would offer if I worked for bank XYZ? Guess what mutual funds you would have?
MIKE: You know, I’m gonna take a wild guess and say you’re gonna do XYZ funds.
BRIAN: That’s right. And if I worked at brokerage firm ABC, guess what mutual funds you would have in your portfolio?
MIKE: It wouldn’t be XYZ, it’s probably be ABC.
BRIAN: ABC is correct. Am I acting as fiduciary to you if I do that? Heck no. I’m following the managers incentive to do what pays me the most. We can’t do that, at Decker Retirement Planning we’re fiduciaries. A fiduciary is someone who’s required by law to put our client’s best interest before our company’s best interest. Now Decker Talk Radio listeners, I’m gonna tell you what we do and how we choose our risk managers and be fully transparent. And it defines how we separate ourselves from the other managers and from the rest of our competition.
BRIAN: And one of the reasons why we believe at Decker Retirement Planning, we don’t have any competitors. And one of the three reasons is because of this, this is huge for our firm. We go out and we look at the largest database of money managers, the Wilshire database, and we also go out to the Morningstar database and we want to know who… and we also use TimerTrac and data. We want to know from the databases who is beating the six managers that we’re currently using. Because we’re independent, we can use any manager out there, why wouldn’t we just have a look and see if anyone’s beating us. Because if they are, we can use them.
BRIAN: When we look for risk managers we look for two things. Number one, we look for managers that at least keep up with the S&P in the good years. That’s no small task because Vanguard trouts out the statistic that 85 percent of money managers or mutual funds underperform the S&P every year. So, we are trying to do something that very few people can do on the upside of the market. On the downside of the market, we want to be able to protect principal when the markets go down. Also a very high standard. Decker Talk Radio listeners, who do you know that made money in 2008?
BRIAN: Let me tell you about the six managers we have. We have three equity managers, and we have three that are diversified into other sectors, gold, silver, oil, and treasury bonds. We have a two-sided strategy in a two-sided market. Markets go up and down. It is ridiculous to have a one-sided strategy in a two-sided market. It makes no sense to us at Decker Retirement Planning to have retired clients be told by their banker, broker, or financial advisor that they need to buy and hold and take that hit every seven or eight years where they lose 30 or 40 percent of their retirement money, and then they take three or four years just to earn it back to zero.
BRIAN: All the while you’re drawing money from those accounts. You’re committing financial suicide and you’re following the direction of your advisor to do it. It is mathematic lunacy. It doesn’t make any sense to us. So, we use two-sided strategies for client’s risk money in a two-sided market. I’m gonna go through and tell you of the returns that our two-sided managers have had in 2008. Our first manager is the only manager that lost money in 2008, it was down 11 percent when the S&P was down 37. Manager number two is a manager that made 17 and a half percent when the markets were down in 2008.
BRIAN: Manager number three made 23 percent in the markets, when the markets were down over 37 percent in 2008. So, those are the three equity managers that trade the S&P and the QQQ, the NASDAQ 100 index. What about our other three managers? Well, we’ve chosen our other three managers because there’s certain sectors that do very well when the markets get creamed like, gold, silver, treasury bonds, and oil. Well, or managers for gold did 56 percent in 2008, our manager for silver did 85 percent in 2008, the manager that we use for treasury bonds did 47 percent in 2008, and the manager that we use for oil had his best year and did over 100 percent in 2008.
BRIAN: So, these managers don’t just have good years in 2008. Last year, for example the manager’s average annual return was well over the 16 and a half that they’ve averaged. These managers are two-sided strategies in a two-sided market. So, I hope after we open the show with all the reasons that we’re concerned about the markets, that you take note and have some way to protect your principal. Now, Mike, this a is a good time to, before we jump into the principal guaranteed account options that people have for their retirement portfolio, that we end the conversation here of risk.
BRIAN: All right. So, let’s talk about what we are going to talk about. On the top of the show we want people to know that when it comes to principal guaranteed accounts, this is something that is really difficult right now when interest rates are this low. When interest rates are this low, we’ve gotta make sure that we have different options. And the options right now for principal guaranteed accounts for retired people’s investment portfolio, we cover the following: CD’s, municipal bonds, corporate bonds, government agency bonds, government treasury bonds, fixed annuities, savings accounts, personal pensions, life insurance, or equity indexed accounts.
BRIAN: This kinda covers it, and we want to make sure our clients know that it’s very important in the planning we do, that clients are drawing money from principal guaranteed accounts. The reason is because when you draw money from a principal guaranteed account, the economy can go up or down, the stock market can go up or down, interest rates can go up or down, and it does not affect our client’s retirement income. Take for example, someone that retires at age 65, chances are their gonna spend about 30 years in retirement. Markets crash every seven or eight years, historically.
BRIAN: So, if we divide eight into 30 years in retirement, especially in the one that we’re due, chances are very high that they’ll see three or four markets like 2008 in their retirement years. And to think that the advice that they’re getting is to just take those hits, it doesn’t make common sense to us at Decker Retirement Planning. So, what we do is we have bucket one, principal guaranteed accounts responsible for the first five years if income. Bucket two, principal guaranteed grows for five years, and pays out for years six through 10. Bucket three grows for ten years and is responsible for paying out for years 11 through 20.
BRIAN: That’s where our clients get their monthly income. So, when 2008 hit, our clients did not lose a dime that did the planning in their emergency cash accounts in buckets one, two, or three. And the risk accounts, because we use two-sided models, the risk accounts that we’re using today didn’t lose any money as a group. That one account did, but as a group the other managers made up for that. So, this is something that is very, very important to us and is available to people.
BRIAN: When it comes to the principal guaranteed options, let’s talk about and define what we mean by principal guaranteed. There’s three types of principal guarantees out there generally speaking. The lowest form is a guarantee on municipal bonds called a corporate guarantee. We don’t like municipal bonds after 2008. The reason is because pension obligations that the states have taken on, they’re impossible to pay back at the state level, and municipalities are tied to an eventual reorganization of all of this debt.
BRIAN: So, we are very concerned since 2008 about credit risk. The risk that clients will get their principal back, we’ve seen this in certain municipalities, and a lot of people bought Puerto Rican municipal bonds because Puerto Rico is tax free in all states. So, we’ve seen the hits, and we want to make sure that our clients know that the three different types of guarantees out there, we are concerned about the first one which is Ambac, FGIC, MGIC, these are corporate insurers that stand ready to guarantee municipal bonds across the country. The problem we see is that the practice of a corporate guarantor is that they’re counting on not all their chickens coming home to roost, I guess to use that expression.
BRIAN: So, they have about 17 cents on the dollar exposure to all these municipal bond obligations, and we’re uncomfortable with that. So, we at Decker Retirement Planning have steered people clear of the municipal bonds options for retirement. Now, if someone has an existing municipal bond portfolio, we don’t tell you to sell it, we use it, we just don’t recommend people buy into it because rates are low. But if you have an existing laddered principal guaranteed municipal bond portfolio, we’re gonna give you some very important information now, because we keep that, we use that, but we watch very carefully, the price.
BRIAN: The price is a dead giveaway of any problems in your portfolio. For example, any municipal bond with interest rates this low that have a coupon interest f three, four, or five percent, those bonds should be trading depending on their maturity at 109 to 112 in price. But when you get any of those three, four, or five percent coupons and they drop below par, which is 100.00 on your monthly statement. When you see a bond that drops below par, that means that there’s something wrong, and with a low interest rate environment, typically it’s going to be something has compromised the ability for that municipality to pay interest and principal back on maturity.
BRIAN: Four years ago, we saw Puerto Rican issues start to drop below par, and we advised people just to pick up the phone and sell it. Don’t call your broker because he or she is gonna justify why they didn’t make a mistake in having you buy this bond, they’ll talk you out of it. We hope that you just pick up the phone and sell it. The people that took our advice saved themselves many tens of thousands of dollars because those Puerto Rican issues, now that we know Puerto Rico is broke, those things are trading at 20 cents on the dollar, and this is supposed to be your safe money.
BRIAN: So, when it comes to corporate guarantees and municipal bonds in general, we want to give you our concerns at Decker Retirement Planning about using municipal bonds. Again, if you have a golden laddered principal guaranteed bond portfolio, stay on top it, watch the price and if you see the price drop below par, automatically sell it. We are seeing municipalities in the northeast like New Jersey, Connecticut, Illinois, New York, some of those municipalities are dropping below par, and they’re giving you a heads up right now to pick up the hone and sell those issues.
BRIAN: Because they’re red flags with the price dropping below par. Also, California has some municipalities that also ae dipping below par. All right, that’s the lowest form of, in our opinion corporate guarantee. We don’t like it, we don’t use it, we are suspect of the eventual train wreck and day of reckoning that’s coming for the state debt levels, and the state pension so, we want to steer clear of that. The next highest guarantee when it comes to municipal bonds, I’m sorry, when it comes to principal guaranteed bonds is what we called an assumed guarantee.
BRIAN: An assumed guarantee is FDIC. We’re totally fine with FDIC being backed by the U.S. government and the tax payer bailing out banks as needed to keep the integrity of the banking system strong. So, we don’t have a problem with FDIC or an assumed guarantee, there’s no real account there, it’s just on an as-needed basis, the government bails out the banks that they want to. It’s just that interest rates are very low right now. And we’ll talk more about that in a second.
BRIAN: The highest guarantee in the world, in our opinion, is called a reserved guarantee. A reserved guarantee has three parts to it. First of all, when you have a reserved guarantee, if you put 100,000 in this type of an investment, there’s a five percent reserve on top of that from the corporation, typically the bank, or the insurance company. Second, there is, if your situation like AIG almost went down in 2008, if your compromised at the first level of guarantee, which is the reserve itself.
BRIAN: Then, the states keep a back-up where they can make you whole and have limits of 250,000, kind of like CD’s at the bank where they can make you whole if you’re compromised in any way from the reserve itself. The third and final layer of protection when it comes to a reserve guarantee has to do with a requirement that all banks and insurance companies that invest in these types of securities have to cross insure each other and engage in a consortium agreement that if one company has problems, the other companies that invest in these types of investments, swoop in and make them all whole.
BRIAN: So, this is the highest guarantee in the world, in our opinion. We like them, as far as the guarantee. Now, can you think of a situation, Decker Talk Radio listeners, where you could be compromised in some way in retirement? Yeah, you can think of a government collapse, a currency devaluation, that would affect all of us. But we have a saying that, and this is kind of silly but, when you’re in a crowd running from a bear you don’t have to outrun the bear, you just have to outrun the person next to you.
BRIAN: And so, at Decker Retirement Planning we put our clients on very high ground so that when the problems for the economy, the nation, the world, sweep through and affect people here in our back yard, we put our clients on high ground. There’d have to be real serious trouble before our clients are affected. So, that’s the background of the three types of e that are out there. What are now the different options? And by the way, we don’ even list bond funds as a principal guaranteed account because it’s not.
BRIAN: It can lose money when interest rates go up. Not can lose money, it will lose money. Just like two plus two is four, when interest rates go up, your bond funds will lose money. It is that simple. And so, I still shake my head in disbelief that bankers and brokers and financial advisors tell people when interest rates are this low, to put their safe money in bond funds because when interest rates go back up, and they eventually will, people will lose massive amounts of money in their bond funds, and they were told that that’s their safe money.
BRIAN: And this is called interest rate risk. So, now we’ve talked about interest rate risk, we’ve talked about credit risk, we’ve talked about the three different types of guarantees. Now, let’s talks about what your actual options are when it comes to principal guaranteed accounts. CD’s, municipal bonds, corporate bonds, government agencies bonds, and government treasury bonds, and fixed annuities. I’m gonna stop there because these are six different options, but they are all very similar in that they’re six different principal guarantees based on a fixed rate obligation to pay you a fixed rate over a fixed period of time.
BRIAN: So, before 2008 when interest rates were higher, this was a no-brainer for us, we could get five percent on a five-year CD, get seven percent on a 10-year, and we’d plug those babies in, and it was a no-brainer. However, now that interest rates have plummeted, now it’s a little more difficult. So, when we do planning with our clients at Decker Retirement Planning, we give you the option and we want to make sure you know the rates, which today, I’m gonna read them off the print-out that we have.
BRIAN: Right now, a seven to 10-year CD is at two point four percent. A treasury, a government agency right now is at two point 2 percent. A triple-A corporate bond is at two point five percent, a triple-A municipal bond is at two point five percent, and government treasury rate right now for a 10-year is at two point two percent. Those are the rates, two point two to two point five percent. So, you can lock in that rate for five and 10 years, that’s an option, but we want to make sure that you know what all your options are before you make a decision.
BRIAN: But those six, CDs, municipals, corporate bonds, government agencies, government treasuries, and fixed annuities, are all fixed rate investments to pay you a fixed rate over a fixed over a fixed period of time. By the way, before 2008, when we could get five percent on a five-year CD, sometimes a fixed annuity would give us five and a half percent. And we were okay taking that extra half a percent. It was apples and apples. It was a five-year investment, principal guaranteed, and if we can pick up an extra 50 basis points, we would every single time for our clients because we’re fiduciaries.
BRIAN: So, our search included fixed annuities. And by the way, when I say that word, annuity, no we don’t like variable annuities, we don’t like income annuities, life annuities, or income riders. Those thing, we believe, are not in your best interest when it comes to retirement planning. But fixed annuities was just a CD from an insurance company versus the CD from the bank, and it was apples and apples. If we could get a higher rate, we would. All right now, when it comes to savings accounts, savings accounts… hey Mike, I’m gonna ask you a quick question here.
MIKE: Yeah, well Brian, before we dive into the question, for those that are just tuning in right now on KVI 570 or KRNS 105.9, this is Decker Retirement Planning’s, Protect Your Retirement, and you’re listening to our special guest, Brian Decker from Decker Retirement Planning, licensed fiduciary who is giving the facts about these different investments. And if you’re catching the show midway through, you could always go back Decker Retirement Planning dot com, they post the shows there, iTunes, and Google Play so you can catch the full show at a different time. All right, Brian, we’re talking about savings accounts here, what’s your question for me?
BRIAN: Okay, question for you is, how much does your savings account earn you?
MIKE: I mean, if we’re talking numbers, point zero, zero, one, maybe on a good day.
BRIAN: Yeah, you didn’t have to look, right? It’s a zero, right?
MIKE: Yeah, you don’t expect your savings account to give you anything. If you do, I don’t know maybe you like watching paint dry and snails racing or something. I mean, it’s not an investment vehicle to grow.
BRIAN: Okay, but this is a part of the plan. Any plan has three parts, has cash or liquidity, it has safe money, and it has risk money. So, when it comes to your safe money, if we’re fiduciaries, we’re gonna do our homework and find where we can get some kind of a return with principal guaranteed and savings checking options, and things like that. And we have three of them. Goldman Sachs has a one point two five percent account, it’s a money market, that we help our clients set up and they get at least some kind of a return.
BRIAN: Synchrony also has one, and Capital One has one. These are all three different types of accounts that we use for savings, checking, and our emergency cash in bucket one, where we can get some kind of a return. Okay? Personal pensions. In years past, before 2008, we would call the bank or we would call the insurance company and say, we’ve got 200,000 dollars that clients are gonna take monthly income from for the next 60 months, or five years, what will you pay us? We used to get three or four percent. Now we’re getting zero point four percent. Do we use personal pensions anymore? The answer is, no we don’t.
BRIAN: Okay, the next two are very interesting. Equity indexed accounts, if they’re from an insurance company and equity linked CD’s if they’re from a bank. A lot of people haven’t heard of these. Mike, take a guess why a lot of people haven’t heard of equity indexed accounts or equity linked CD’s.
MIKE: Because other investments pay a lot more, or they can’t sell them, or there’s always like, seems to be a conflict of interest with bankers and brokers trying to give the actual information that people should be hearing.
BRIAN: Yeah. So, first off, there’s no security commissions that are paid for these so, there’s no incentive to, and a lot of banks and brokers, they will be told what they can and cannot offer. So, we’re independent and we’re fiduciaries, we want to make sure clients know about these. These are called equity indexed accounts if they’re from an insurance company, or equity linked CD’s if they’re from a bank. Because we are purely mathematical in our approach, and as a fiduciary to our clients, these have come up on the radar recently because they offer pretty good returns.
BRIAN: So, hear me out on this. If you put 100,000 in an equity indexed account, or an equity linked CD, in January one of 2000, it’s linked to the S&P 500 index in this example. So, when the market loses 50 percent in 2000, oh one, and oh two you didn’t make anything but you didn’t lose anything for that three year period. Then m when the markets go up between 2003 and 2007 and more than double, then you’ve earned the S&P makes money and you make around 60 percent of that gain every year, and you lock in that gain every year as a new floor, or cost basis from which you cannot lose money and go backwards.
BRIAN: Then in 2008 when the markets tanked, your 100,000 is now worth about 150,000 and how much did you lose when the markets go down? You lost nothing. In 2008 the markets lost 37 percent for calendar year 2008, and you lost nothing because these are principal guaranteed accounts. Then, when the markets are up over 150 percent from March of oh nine to present, every year you lock in around 60 percent of the gain and your 100,000 is worth over 270,000 dollars since January one of 2000 in this example, and the S&P during that same period is up only 200,000.
BRIAN: So, the equity indexed accounts with a floor that didn’t lose money in 2001, oh two or oh eight, actually made more money than the S&P during that stretch. So, these have been around, around 25 years they average around six and a half percent and let me say this even differently. I would say, and Mike, you correct me on this, tell me what you think. But because we’re mathematical in our evaluation of these, we have a relationship with someone that we pay, who’s an actuary, who grabs a calculator and each week goes through all the different bank and insurance company offerings, equity linked CD’s and equity indexed accounts.
BRIAN: And Mike, I would say that easily 95 percent of these are not, N-O-T, not competitive. They’re high fees, their payouts are very low, and they’re really not of interest to us. But there’s four or five that are very, very good. Would you say that’s about right, Mike?
MIKE: Yeah, I’d say that’s a very accurate, I don’t know, comprehensive way to kind of just go through it.
BRIAN: And let me give you some specific numbers then,
BRIAN: Last year, the highest returning principal guaranteed account that we use made over nine percent last year as a principal guaranteed account. And these have averaged around six and a half percent for the last five years. We like them, we recommend that people know about them, and they’re a great fit in the planning because there’s no smoke or mirrors, it’s a way that we grow money from point A to point B. Whether it’s five or 10 years, we use these accounts to grow money, principal guaranteed. Let me say this differently.
BRIAN: These accounts today, factually, mathematically are the highest returning, taxable principal guaranteed accounts out there, period.
BRIAN: All right, let’s continue. So, that’s very important to know that there are some viable, competitive returns out there for principal guaranteed accounts. Now, by the way I do want to emphasize that 95 percent of the stuff that’s out there, that are called equity indexed accounts, or equity linked CD’s, we would not recommend. We would not use, and we would hope that people would steer away from because their average annual returns are closer to two percent. We use the ones that give us returns of six and a half, or higher, and there’s only a few of those.
BRIAN: So, we want to make sure that you know that some of these are out there, and they’re not competitive. And I don’t want to name names, but there’s a lot of garbage out there. I’ll give you one example. There was one guy who calls himself a fiduciary, and this just sickens me to have to say this, that was recommending to his clients equity indexed accounts that were returning around two percent because of all the fees. The fees are what made them not competitive, but this guy was fine with that. He recommends this company constantly for his planning, and then had the audacity to tell me that if he puts enough money in, this company gives him 401K benefits.
BRIAN: That should disqualify him as a fiduciary because he’s not doing what’s in the best interest for his clients. And I hope he gets creamed in his next audit, when state auditors see that he’s putting the majority of all his clients into one product, it’s sickening. We don’t do that at Decker Retirement Planning. We have a mathematical focus to make sure that when clients fund their plan, we on a weekly basis know what the highest returning principal guaranteed account options are, and we fund our client accounts with those vehicles. And that changes on a weekly basis.
BRIAN: All right, now we’re gonna talk about… Mike, do you think we covered that, equity indexed accounts? Any questions, comments on that before we go into the last one here?
MIKE: I think we were very fair about that so, let’s go into the last one. We’ve got about 10 minutes left in the show.
BRIAN: All right, the last one is life insurance. And anyone, this is our opinion, anyone who tells you that life insurance is an investment for cash value, in our opinion is trying to sell you life insurance. But there is an option in this arena that is worth knowing about, and I will tell you up front that this option represents mathematically, the highest returning principal guaranteed tax free benefit. So, here’s how this works, it’s called IUL, indexed universal life.
BRIAN: Very similar to the equity indexed accounts, where you capture around 60 percent of the S&P’s gain every year, but an IUL is able to capture even a higher rate of that index. It captures historically about 75 percent of the S&P 500 index so, it grows faster than and equity indexed account. And when you pull the money out for income, there’s an agreement between the IRS and the insurance companies that allow you to pull the money out as a loan, not as interest, not as dividends, not as any gain. But you pull that money out as a loan, and therefore is tax free.
BRIAN: So, the way these work is, I’ll give you an example. There’s a client, 65 years old, put 200,000 into this, and by the way it’s very important to not front load these all at once because then you [meck?] the policy and you can no longer pull money out tax free. The way we do this is we put the money in, this 200,000 over a three year period f time, in this case. And then, when the money, if it’s coming from an IRA of course, you gotta pay taxes on that, we take all of that into consideration and in the first three years, this client puts in 200,000 dollars.
BRIAN: Now, the costs are front-end loaded so there’s a death benefit to cover the costs that are front-end loaded on this investment. So, if the client put in some money and then died right away, by the way I told you that our practice is very mathematical, when we run illustrations, we just focus on the IRR, internal rate of return. The internal rate of return of funding this and dying right away is very high, I’m being sarcastic, but 53, 27, 18, and 16 percent is the IRR if it’s funded and they die in the first four years.
BRIAN: But the death benefit mostly goes away after four years because, as I said the front end fees start to settle down. So, in this case someone puts 200,000 it’s funded over three years, it grows for 10 years, and then the miracle starts. After 10 years, you’re pulling money out. Listen to the rate that you’re pulling money out, its very high. In this case there’s 23,000 dollars, one, six, seven. 23,000 is 11 and a half percent, is what you’re pulling out each year. Now I get it, you put 200,000 in, you’re not getting 11 and a half percent return back, you’re pulling 11 and a half percent out each year for the rest of your life.
BRIAN: And in this case, let’s kill this person off at age, I don’t know, let’s say that 80… let’s say 84 and 89. We’ll use two different ones. So, one is a little before the average mortality, and one’s a little bit later. If the person dies at 84, they put 200,000 in and they pulled out 170,000 plus when they died they get a death benefit of 169.
BRIAN: Their IRR at the age of 84 is five point four six percent. They have a five and a half percent tax free rate of return which someone in the 25 percent tax bracket, five point four percent is the tax equivalent of a CD at seven point two percent. That’s unbeatable. Those are fantastic tax free returns. Now if the person just five years longer, they’ve drawn in 286,000 off their original 200,000, they get 23,000 a year and plus a death benefit when they die at 89 of 174,000.
BRIAN: So, that’s a six point one percent tax free IRR rate of return. Six point one for someone in the 25 percent tax bracket is the equivalent of getting an eight percent CD for 30 years. So, this is something that we want to make sure our clients know about. In our opinion, there’s no higher principal guaranteed, tax free rate of return than an IUL with one qualification. This is a huge qualification.
BRIAN: There’s only one company we would work with that has IRR’s that are competitive, all the other companies do not have a competitive product so, this is very selective when it comes to one company that is producing, and it’s an A rated company. But there’s only one company that we would recommend that is producing these returns. The other companies that we have tried to make this work to get a five or six percent IRR tax free rate of return. We have failed, failed, failed, failed to get any type of competitive return.
MIKE: Brian, in the last two minutes that we have, any last few remarks before we wrap up?
BRIAN: Yeah. I want to mention that next week, we’ll talk about all the principal, all the risk, all the at-risk type of options. We’re gonna talk about commodities, futures, options, foreign exchange. We’ll talk about probably one of the favorites which is for retirees, energy limited partnerships, non-traded REIT’s to get returns, dividend income stream, dividend portfolios, bond funds, variable annuities, mutual funds, stocks, and ETF’s, exchange traded funds. We will cover everything and all the different options, and we will narrow it down what we recommend.
BRIAN: And we want to make sure to expose one of the major problems that exist for people in retirement to use these high dividend, or high income portfolios. You’re tying your retirement to basically two sectors, the energy sector, and the real estate sector. Well, how have those done lately? In the last 2008 the energy, or the real estate sector lost 70 percent. And some people come in here and say, well I’ve got my dividend stream of six or seven percent, I don’t care that I’m down 45 percent in my principal, and I frankly just don’t believe that.
BRIAN: I know that there’s a better way to do it without losing 45 percent of your principal. And then when it comes to real estate, I’m sorry, real estate was down 70 percent and in 2015 to present, the energy markets, oil dropped from 110 dollars a barrel down to where it is now, about 50. So, you don’t have to take these big monster hits to get six or seven percent. Mike, you want to wrap this up?
MIKE: Absolutely. So, for those just tuning in right now, this is Decker Talk Radio’s, Protect Your Retirement, you’re catching the tail end of our show, giving you the transparency you deserve. You’re listening to Brian Decker, a licensed fiduciary from Decker Retirement Planning. And if you want to catch this show again, or reruns, or other previous shows, go to Decker Retirement Planning dot com, or Google Play or iTunes, as we do post all the shows. In fact, if you subscribe to us, we have podcasts you do get the show first as we post it on Fridays as well as the broadcast then is aired at KVI 570 greater Seattle area or 105.9 KRNS or 570 AM radio in the greater Salt Lake area.
MIKE: But all that aside, want to do a quick shout out to our Kirkland, Washington office our Seattle, Washington office, and Salt Lake City right there in the Wells Fargo building. We do have monthly events. These are special events where we actually in person, steak dinner on us or if you’re vegetarian, other options are available. But we present this and we talk to you in person about how to help protect your retirement. Go to the website, www.deckerretirementplanning.com to check for details.
Until next week, take care.
