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, we’re talking about potential problems in pulling income from assets, how to avoid those pitfalls, and how to properly pull income in retirement. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good day, everyone. This is Mike Decker and Brian Decker on another edition of Decker Talk Radio’s Protect Your Retirement on KVI 570 in the Greater Seattle Area, as well as 105.9 KNRS. We got a great show lineup today, talking, a continuation from last week about problems, potential problems in retirement. And Brian, let’s just dive right in here on the details here. Do you want to do a quick recap? We kinda started a little bit last week barely.
BRIAN: We’re gonna just start with the potential problems that you’ll run into in retirement. So this is important at Decker Retirement Planning because we want to put version one together of your plan, firm it up.
BRIAN: And by the way, when we talk about your plan, we’re talking about imagine, I know it’s hard to create this over the radio, but imagine a spreadsheet that shows your sources of income, your social security income, your pension income, your rental real estate, the income that you derive from your portfolio. You add all of that up, gross it up, minus taxes, and that gives you, annual and monthly income to age 100. We put in a three percent COLA, cost of living adjustment.
BRIAN: This is priceless information because now mathematically you can see how much money you can spend so that you don’t run out of money before you die. Very, very, very important. On the right side of the spreadsheet is the buckets. So we have emergency cash set aside. Everyone has their own number that they keep savings, checking to pay bills, have some little extra on the side. Bucket one is responsible for the first five years of income. Bucket two is responsible for the years six through 10.
BRIAN: Bucket three is responsible for years 11 through 20. These are principal guaranteed accounts. So when the markets get creamed every seven or eight years, which has been the historical cycle in the stock market, our clients that did the planning, that went through 2008, did not have to even change their travel plans because there was no loss in their emergency cash. That’s just savings, checking. No loss in their principal guaranteed accounts for the first 20 years of retirement.
BRIAN: And then when it comes to the risk accounts that we use, we use a two-sided strategy. These are models that are designed to make money in up or down markets. They’re called trend following models. The six managers that we’re using right now collectively made money in 2008 and they made money in 2000, ’01, and ’02. Who do you know whose risk models have made money every year in the last 16 years and whose average annual returns net of fees is around 16 and a half percent net.
BRIAN: We’re fiduciaries to our clients. We’ve done the research. We’ve gone out to the databases, like Morningstar, the biggest database of mutual funds in the world. The biggest database of money managers is the Wilshire database. And then TimerTrac and Theta. And we want to know who has the highest returns, net of fees. And as a fiduciary, we’ve done that homework. And you would expect a fiduciary to do that. We’ve done that. So now we have the plan together in version one.
BRIAN: And now, with the plan together for our clients, we want to hammer that plan with the biggest problems that they’ll face in retirement. So let’s talk about this list. Mike, over 32 years of doing this, this is a Word doc that we put the biggest problems that clients have faced in retirement. Guess what’s at the top of the list?
MIKE: [LAUGHS] It’s income, right?
BRIAN: It’s income.
MIKE: It’s all about income. That’s the biggest problem people face is how do you get income out of your life savings?
BRIAN: And create a cash flow, that’s right. So most people that we talk to, I shouldn’t say most people. Most people do know what their budget is. Some people don’t. So step one, we can’t help you unless you know how much money you need each month. And based on that, we can tell you if your income plan is gonna work or not. But the very most important top of the list item that we want to make sure that you know is how much income do you need.
BRIAN: People before retirement mistakenly think that their expenses will go down when they retire. That’s not our observation or our experience at all. What we’ve seen is that while you’re at work, you’re engaged and you’re getting paid and you go home from work, you’re tired. You might go out to dinner or something. But when you’re retired, you have time and you want to fill your time and do things. And doing things costs money. So usually people’s expenses go up when they retire by about 20 percent.
BRIAN: So whatever you’re spending pre-retirement, multiply it by 1.2 to get approximately ideally what you would spend after you retire. Some clients after working for 40 years and budgeting and saving, I’m really proud of these people, they scrimp, save, do without, budget, frugal lifestyles, and they put away so much money that when they get to retirement and they’re used to spending five or 6,000 a month, and they have their home paid off, and they enter retirement, now they see that they’ve got 12, 13, 14,000 a month that they can spend.
BRIAN: And they literally are shocked. So we have to talk them through the process of making that emotional change of thinking that it’s irresponsible to spend money to where now when you’re retired, it’s okay to spend money. This is what you’ve set aside. This is someday. You’ve saved for someday. Today is someday.
BRIAN: These are your retirement years, and we want to make sure that you know that just like the flight attendant that tells you to put on your oxygen mask first, and then you’re able to help people around you, it’s not intuitive to do that by the way, we recommend that people take care of their home base first, and then reach out and have a wonderful fulfilling retirement by looking for ways that they can be involved with their children and grandchildren and their community doing whatever they’re passionate about, whether it’s travel or service, or whatever it is.
BRIAN: Those people have a wonderful and fulfilling retirement. But we talk them through making sure that are they living in the house that they want, driving the cars that they want, wearing the clothes they want, with the furniture that they want in their house, and the artwork that they want in their house, with the travel schedule that they want, seeing the destinations they want, with the bucket list they want. It’s not selfish to put together home base first. And then when you see that you have extra, that’s when you’re able to add and layer in the passions that you have, the service that you have.
BRIAN: All right, but the first item here is making sure that you have the cash flow, the income that you need and want for the rest of your life. That is by far the most important. A lot of bad things go away when you have the income coming in every month, every year with a three percent COLA, cost of living adjustment, for the rest of your life. So number one is income. Number two is inflation. Inflation is a destroyer of people’s retirement because what used to be 20 years ago a wonderful monthly income is no longer today.
BRIAN: So Mike, when I was in high school, I could fill up my motorcycle gas tank, a gallon gas tank, for 25 cents.
MIKE: That’s incredible.
BRIAN: Cars were 1500 bucks. Houses were 40 to 50,000 dollars. So imagine, and that was in the ‘70s. So what is that, 40 years ago? 40, almost 50 year, 40 to 50 years ago. Now it’s very important to know that this generation may be the first generation that spends more years in retirement that they did working.
BRIAN: New discoveries for biotechnology, medical, genetic engineering are creating longevity, which is good, high-quality of life, which is good, but can your money last as long as medical science can make you last? So inflation is a major deal.
MIKE: It’s almost like you’re paying science to let you outrun your money unless you do what we’re gonna be talking about.
BRIAN: Yeah. And these, it’s wonderful, I love my job. One of my favorites is in the research that I look at, the bioengineering they’re doing, the genetic designs, Mike, just like you grow lettuce in your gardens or tomatoes in your gardens, they can take your stem cells and with no risk of rejection, they can grow skin and certain organs right now. So just like you bring your car in to replace a radiator, if you need a new liver, not, I don’t know if they’re ready for livers but-
MIKE: Kidney?
BRIAN: Certain organs are able to be grown in the lab and then using your stem cells, they replace your organs. So it’s just fantastic what they’re doing right now. But inflation is a very big deal right now. The government uses statistics, the CPI, the Consumer Price Index, and will tell you that inflation is low right now. Not true. If you’re in college or if you’re undergoing anything related to medicine and prescription drugs, you’re experiencing inflation. If you have a healthcare insurance plan that you’re paying for, you’re experiencing inflation.
BRIAN: Those three things, education, and medical have gone just ballistic. So we want to make sure that you’re covered. There’s five ways that we cover that inflation risk for our clients. Number one we put in a COLA, cost of living adjustment, so that every year you get more money to pay for the food and energy costs that continue to go up. Second, we talk and plan into, I know this is very awkward, but if there’s any inheritance, it’s an event that’s going to happen, we are conservative in the dollar amount and the time, but we put that in your plan.
BRIAN: That’s number two. Number three, do you own a home? If you do, your residence acts as an amazing hedge. In fact, all real estate acts as a wonderful inflation hedge. Because if we have inflation, hard assets like real estate act as a great hedge for you with inflation. At Decker Retirement Planning in Salt Lake, and in Kirkland, and in Seattle, we also factor in something that happens to most all our clients, and that is something where in your late 70s, early 80s, you will do a downsize.
BRIAN: That’s where you no longer are interested in the stairs or gardening. And you’ll sell your home for X, buy a condo for Y. And usually Y is less than X. And there’s an injection of usually a couple hundred thousand dollars at least in assets that come back into your plan. The last thing is the risk bucket itself. So the risk bucket net of fees has been growing historically at 16 and a half percent net. We show a six percent rate.
BRIAN: So what happens is there’s a very large buffer that grows in the next 20 years. And that buffer is there for any extras that you need in your plan and in retirement. So in that way, we can tell if someone has inflation risk or not. Now by the way, one of the things that we do for the COLA, the cost of living adjustment, in our plans, we warn our clients that the 80s, when it comes to health, the 80s are rough on most people.
BRIAN: So they have, if they’re retiring at 65, they have around 15 years to hit their bucket list, to do the things that they want to do, to go see the world, to do the travel, to do whatever is on your bucket list. So what we do is we flatten the COLA from three percent to 1.7 to push more money up during your healthy travel years, so that you have more money per month. And that’s a common sense thing that we do with our clients. So when it comes to inflation, the people who are at risk are the people with low assets and do not own a home.
BRIAN: And but to compensate for that, those clients, those people typically are able to live off their social security or whatever now. But those people have inflation risk. I would say that 99 percent of the people we see don’t have any inflation risk. The next thing are stock market crashes. Stock market crashes are something that destroy more people’s retirement than everything else on this list combined.
BRIAN: It is the number one Boogie Man and horror film that runs every seven or eight years. And it really changes the life of people that are in retirement. Now in your 20s, 30s, and 40s, you can take a stock market hit and ride it out because you’ve got cash flow from your employment. When you’re retired and you’ve taken that last paycheck you’re ever gonna take, and you are in retirement drawing money from your income sources, whether it’s social security, pension, income from assets is part of your income in retirement.
BRIAN: That’s income from your savings, from your IRAs, Roths, 401(k)s, those accounts generate income. If you are drawing income from a fluctuating account, you are committing mathematically, you’re committing financial suicide. This is the banker broker model. We warn people against this. The bankers and brokers get paid to keep your money at risk. That’s how they’re paid. They’re financially incented to keep all your money at risk, and in the stock market with a buy and hold strategy.
BRIAN: And they use nonsense statistics like if you miss the best five days in the market, your return drops from X to Y, and Y is shockingly lower than X. What they fail to tell you is that if you miss the five worst days of 2017, your return goes from X to Y, and Y is much higher than X. So it doesn’t make sense to have a buy and hold strategy in your retirement because every seven or eight years you’re going to get nailed.
BRIAN: So let me give you some dates here. 2008, from October of ’07 to March of ’09, the markets dropped 50 percent, a little over 50 percent. Seven years before that, the Twin Towers came down in 2001 and 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 spiked, the economy went into recession, and the stock market struggled.
BRIAN: Seven years before that was 1987, Black Monday, October 19th, 30 percent drop in one day. Seven years before that was 1980. From 1980 to ’82, the markets dropped around 46 percent. Seven years before that was the bear market of ’73, ’74. That was a 42 percent drop. Seven years before that was the ’66, ’67 bear market. That was an over 40 percent drop, and it keeps going.
BRIAN: So the markets bottomed in March of ’09. Seven years, eight years plus that is about now. We are due. Ladies and gentlemen, Decker Talk Radio listeners, we are due a market correction. Nobody knows if it’s gonna be this week, this month, next month, next quarter, next year. Nobody knows. But I hope that you have a plan. It makes no sense, zero sense to have your advisor tell you to ride it out. When you take that hit every seven or eight years, the market’s down, there’s so many things wrong with the banker broker model.
BRIAN: Here’s a few of ‘em. Markets take a 30, 40 percent hit and you get a call from your broker saying markets are down 30 percent, good thing you’re only down 25 percent. Think of that. 25 percent of all the money you’ve saved and earned and set aside, you’re supposed to be happy and grateful and paying fees to someone who just lost you 25 percent of your money. That makes no sense. The other thing is the buy and hold, and to pull money out of an account using the four percent rule to draw money out of your account.
BRIAN: We feel passionately strong and angry against the four percent rule. The four percent rule is where in my opinion it’s responsible for destroying more people’s retirement in this country than any other financial strategy out there. Here’s how the four percent rule goes. Says that stocks have averaged in the last 100 years around eight and a half percent return. That’s true. Bonds have averaged around four and a half percent for the last 32 years. That’s true.
BRIAN: So let’s be really safe and just draw four percent from your assets for the rest of your life. That works beautifully if the stock market stays in a forever up market, a bull market for the rest of your life. That’s not what’s gonna happen. So when the markets go into a flat market cycle, like we’ve been in since oh let me deviate and talk about this. Stocks don’t trend, they cycle. So from 1946 to ’64, there’s a nice bull market. So 1964 to 1982, 18 years of flat.
BRIAN: ’82 to 2000, the biggest bull market we’ve ever seen. And then from 2000 to present, the markets are up, yes. We’re at or near record highs, yes. But it’s been a flat market cycle with returns about half of what is normal. So right now, to be retired, you’re in a perfect storm of a flat market cycle with interest rates are at or near all-time record lows. So that makes it very difficult to retire in. But we are in a flat market cycle.
BRIAN: And when you use the four percent rule, when interest rates are this low, and in a flat market cycle, ladies and gentlemen, not only doesn’t it work, it actually destroys your retirement. So let me prove mathematically that what I’m telling you is true. From 2000, let’s say that everyone that’s listening has four million dollars, they retire. And that’s the good news, is you’re retired January 1 of 2000 with four million dollars.
BRIAN: The bad news is the markets dropped 50 percent in 2000, ’01, and ’02. But it’s worse for you because you’re drawing four percent per year. Four, four, and four, you’re down 62 percent going into ’03. Markets double from ’03 to ’07 but you don’t get all that because you’re drawing four percent in ’03, ’04, ’05, ’06, ’07. And then you take that hit of 37 percent in 2008, plus four percent. And now you can no longer be retired. Now you’ve got to go to plan B. In 2009, proof of what I’m saying is true.
BRIAN: The gray-haired people you saw them come back to banks, fast food, retail, Walmart greeters. They had to go to plan B, they had to sell their home, move in with the kids. They could no longer stay retired because the four percent rule destroyed their retirement. William Bengen, the creator of the four percent rule in 2009, came out and said when interest rates are this low, it doesn’t work, and he doesn’t use it. And he called it dangerous when interest rates are this low. We have those quotes on our website at deckerretirementplanning.com.
BRIAN: And yet the banks and brokers still use it today. The discredited strategy of the four percent distribution rule puts clients, in our opinion, at serious risk. And we feel that bankers are brokers are committing financial malpractice by using a discredited strategy to draw income for the rest of your life. We hope, Decker Retirement, Decker Talk Radio listeners, we hope that you’re hearing this loud and clear and that you stay away from the four percent rule distribution strategy because it was discredited.
BRIAN: So when stock markets crash every seven or eight years and we’re due, how do we do it? We insulate our clients from stock market risk by having, any portfolio has three parts to it: cash, safe money, and risk money. Our cash we set aside as emergency cash. Our safe money incorporates a laddered principal guaranteed strategy for the first 20 years. So when the stock markets crash every seven or eight years, these principal guaranteed accounts do not even feel it.
BRIAN: So our clients literally did not have to change their travel plans going through ’08. They had priceless peace of mind because this number one destroyer of people’s retirements they’re insulated from that. We have removed stock market risk from their income for the first 20 years in retirement. When it comes to the final piece of their portfolio, the risk portion, we use two-sided strategies. The stock market is a two-sided market. It goes up and it goes down.
BRIAN: Just like I mentioned in the first part of the radio show, we are fiduciaries. We’ve done our homework. We’ve gone through the Wilshire database, the Morningstar database, TimerTrac, and Theta, and we’ve chosen the highest returns net of fees. And we have six managers that have made money every year in the last 16 years, including 2000, ’01, ’02, ’03, ’04, ’05, ’06, ’07, and in ’08, and every year after. Average annual returns net of fees, 16 and a half percent.
BRIAN: So we have almost quadrupled the S&P return because we did one very important thing. We have a two-sided strategy. So when markets trend higher, these are trend following models, they’re computer algorithms, they track with the market when the markets go up. And when markets go down, these models shift and they protect principal and they’re able to make money when markets drop. We have six managers that we’re using. Five of the six managers made a lot of money in 2008.
BRIAN: So I just want to make sure that it’s crystal clear that the biggest destroyer of people’s retirement are stock market crashes. When we go through this with our clients, this item is taken off the table as a big Boogie Man, a big destroyer of people’s retirement, for Decker Retirement Planning clients.
MIKE: This is Decker Talk Radio’s Protect Your Retirement on KVI 570 AM, Greater Seattle Area, and KNRS 105.9 FM, Greater Salt Lake Area, or if you listen to us via podcast on iTunes or Google Play, which is at your convenience.
BRIAN: That’s us and okay. So now the next item, we talked about having a budget, having peace of mind of knowing that your plan can distribute the income that you need and want for the rest of your life. It has inflation protection with five different strategies. We have stock market crash risk for our clients at Decker Retirement Planning that we’ve eliminated or minimized.
BRIAN: And now we go to the next big problem faced in retirement, and this is the number one for most women. And that is how much income is lost at the death of a spouse. This is very awkward. I usually, figuratively just kill off the man first. So I tell the female, the spouse hey the worst time to lose your husband is right now today. So let’s see what would happen. If he dropped dead today, what would you do? And without any practice or preparation, women are extremely good at knowing intuitively what to do.
BRIAN: Well she says well I’ve still got the income from assets, I’ve still got my social security. If we have rental real estate, I’ve still got that. But then we look and see what’s lost. Pensions. If there’s a pension in her husband’s name that is very large and it doesn’t have any survivability, that is an income hit. When a spouse passes away, the surviving spouse doesn’t get both social securities. They get to choose the bigger of the two.
BRIAN: Let me give you a devastating situation. Let’s say that there’s a 70,000 dollar pension a year. Every year they get 70,000 from the pension that dies with the husband. And his social security is 3500 a month. Her social security let’s say is 3000 a month. Well 70,000 a year plus 3000 a month, there’s 100,000 dollars that is now gone at the death of a spouse.
BRIAN: That’s a big hit. So we make sure that the client has insurance. We like to see insurance in place for two reasons, actually three reasons. One is to get them to retirement. Second is income replacement. In situations like this, where there’s a death of a spouse, we want to walk through the situation to make sure that the surviving spouse is not financially damaged with the death of a spouse, and that he or she has income replacement to any lost pension and social security income.
BRIAN: Want to make sure that they’re okay. The third way that we use life insurance is to pay typically large estate taxes. So we’ll put together an ILIT, which is an irrevocable life insurance trust, to pay usually cents on the dollar the taxes that are due from the estates. These are estates that are over on the federal level 11 million in size. So those are the three major reasons that we use life insurance for death benefit.
BRIAN: But this discussion’s very important because if the spouse sees that there’s a huge income hit, we fix it. We put it together. Term doesn’t make any sense because tragically, sadly once that term comes off, you’re old enough to make your surviving spouse almost uninsurable. So we want to make sure that that income is there for the rest of her life.
BRIAN: What we typically see is in a situation where insurance needs to be put in place, what we typically see is where the wife says all right, I’ve taken an income hit of 3000 a month, here’s what I would do. And they intuitively know I would downsize. I would sell the home, buy a condo, bring expenses down, generate cash flow, and more than make it up. But we have this discussion, which is priceless, so that the wife can see that she is okay in a worst case scenario of losing her husband.
BRIAN: Then we flip it. Okay John, the worst time to lose your life Jane is right now today, financially speaking. So let’s say that she drops dead. And we walk through his situation. He still owns the house. He still has the income that’s generated from their portfolio. He has his social security. We’ll see what social security losses he has, and pension losses he has, and see if he can live on that. But we walk you through this. This is very important to have this exercise so that you can see financially what the hit is of losing a spouse.
BRIAN: This is very, very important. Next is we talk about risk, how much risk to have. It’s just unfortunate that the banker broker model keeps all your money at risk. It’s no mystery why that is. Banks and brokers are paid to keep you at risk. They are not fiduciaries, they are salesmen doing what they were trained to do, which maximizes the bottom line of the bank and the brokerage firm, not yours.
BRIAN: So at your expense, they keep you at risk. Our clients, we’re a math-based firm and we run the numbers to see how much of your money needs to be at risk. Typically it’s only 20 to 25 percent. That’s really important for a couple of reasons. First of all, the fees that you’re paying at the bank and brokerage firm, they’re billing you fees for all of your money. When clients transfer to us, they see those fees drop by 70 percent. Because we don’t bill management fees on your savings, checking, or your principal guaranteed accounts, which are usually 75 percent or so of your money.
BRIAN: So your fees drop quite a bit. Also your risk exposure drops significantly. With the planning that we do at Decker Retirement Planning we have a saying that chances are you’re taking way too much risk. We see this all the time, don’t we, Mike? I mean time after time, people come in in retirement with all their money at risk. How much sense does that make?
MIKE: Well and they don’t realize it because they’re being told this song and dance of well it’s good enough, or oh you’re fine. And they just have no idea.
MIKE: I mean it’s surprising what when people come in and have that light bulb turn on and the realization of what they were doing and what they should be doing when they come in.
BRIAN: And we’ve always done it that way. So they’ve been raised on this banker broker model. So we want to offer a significantly lower risk option. We’re fiduciaries and this comes out in a huge way when we see clients with large assets or large income streams from pension or rental real estate, and they say Brian we could never spend more than six or 7,000 dollars a month.
BRIAN: You’re showing us that we can take 13,000 a month. We create a legacy account for them to take the extra money so that it’s invested differently. There’s different tax strategies that we use for those funds. But it’s money that’s liquid and available to them for the rest of their lives. And that’s when we turn to them and say hey you know, you really don’t need to take any risk. This account, you can be 100 percent principal guaranteed because this risk account that you’ve got is just generating more money that you can never spend.
BRIAN: So we have some clients, probably around 20, 25 percent of our clients don’t need to take any risk. Now think of this, Mike, we get paid, the only management fees that we charge in our whole firm are on the risk account. Why in the world would any salesman advise people not to take any risk? That’s cutting our own financial throat.
MIKE: Yeah. [LAUGH]
BRIAN: We do that all the time. So we do what’s in the best interest for our clients.
BRIAN: All right. And Mike, there’s a lot of smart people listening to Decker Retirement Planning. In fact, I would say anyone listening to our show is very smart.
MIKE: [LAUGH]
BRIAN: Wouldn’t you say?
MIKE: Yeah.
BRIAN: But even the smart people that are listening, unless you’ve done the numbers, unless you’ve done the mathematical calculations, you’re guessing on how much money you can draw. Let us do that for you. We’ll run the numbers and hand that to you and show you how much income you can draw with a COLA, cost of living adjustment, all the way out to age 100.
MIKE: And that’s okay. You can be a smart person and not know how to run these numbers. We have Boeing engineers as clients that are brilliant. But in the financial sector, how to run these numbers is just a different mindset, one that a lot of people don’t have, and that’s why we’re here.
BRIAN: Yeah. Okay. Continuing on, we bring up, because we’re fiduciaries, to be a client at Decker Retirement Planning, we ask our clients do you want us to manage your risk money. You don’t have to have us manage your risk money. You can manage your own money. We give you the options.
BRIAN: We’re respectful that this is your money, this is your retirement money. All options are open. So it is not a correct assumption that any one of our clients that we require them to have us manage their risk money. So just an important point. Okay this next part is the split. This is a huge tax-saving strategy that we’re gonna be open and transparent and share with you the typical client we have is married, has 1.2 million, and 800,000 of that, or 75 percent of that money, is in retirement accounts.
BRIAN: That’s called qualified money. 25 percent is already tax money called non-qualified. When you go into the bank and you pull money out of your Bank of America or Chase account, there’s no cost to you, there’s no taxes. It’s already tax money. It doesn’t cost you anything. When you pull 1,000 dollars out of an IRA, you’re taxed on that in the year that you draw it out, and it’s taxed as income.
BRIAN: So we call retirement accounts not yet taxed money or qualified accounts. And we call already taxed money your non-qualified money. So with the 75/25 split of qualified/non-qualified, what we do in the plan is something that I think is just absolutely brilliant. We put your already taxed money in the front part of the plan, and your retirement not yet taxed money in the back of the plan.
BRIAN: Here’s what that does. In the first 10 years, you’re getting your already tax money back as your income. So in the first 10 years, your AGI, your adjusted gross income, drops to a very low amount. Guess what else drops? You’re taxed on your social security based on your AGI, your adjusted gross income. So your taxes fall off a cliff in the first 10 years. And what that does is that creates a window for us to help you convert your IRA to a Roth in the risk account, not in buckets one, two, or three. Those are principal guaranteed accounts.
BRIAN: The returns are too low and you’re taking the money too soon. We’re a math-based firm. We know to the dollar how much money you should convert from an IRA to a Roth, and it’s in your risk account. If your risk account is growing at, I don’t know, four or five percent, you really can’t justify paying 20 percent tax and then what, waiting five or six years to break even on one conversion? No. The models that we’re using are averaging 16 and a half percent. Our breakeven is about 18 months.
BRIAN: We can justify the Roth conversion. That’s a very important point. Number two, we don’t do it all at once. We spread it out over five to seven years. But all that money in the Roth or in the IRA account, we’re not doing you any favors by taking an IRA from 300,000 to 1.2 million. Now, in your late 70s, early 80s, we put you in the highest tax bracket because you’re pulling required minimum distributions from a much larger amount. And you asked us the fair question, hey Brian, why didn’t we pay taxes on 300,000 20 years ago?
BRIAN: We had the option. So we do that. We are again a math-based firm. We do the right thing, and that is for most clients to convert the IRAs to Roths, so that that account can grow tax-free, number one, can send income back to you tax-free, number two, and pass assets to your next generation tax-free. It’s a golden account.
BRIAN: And this for most of you is the biggest tax-saving strategy that you can have in your lifetime, because the difference between paying 20 percent tax on 300,000 and the difference of paying 20 percent tax on 1.2 million is over 100,000 dollars in taxes. So we want to make sure that we do the right thing. We are a math-based firm. So we call this placement. This next point here in the planning we do in tax minimization, we put the already taxed money in the front part of your plan, your not-yet taxed money in the back of the plan.
BRIAN: So in the first 10 years, the income is very small, creating a window to do the IRA to Roth conversions. And then in bucket three, that’s where we pull your RMDs, your required minimum distributions. So on your IRAs, when you’re over 70 and a half years old, you’re required by law, the IRS requires you to start pulling a certain amount out of your IRAs. It’s called RMDs, required minimum distributions.
BRIAN: Any money that you don’t pull out is penalized at a very steep penalty. It’s 48 percent. No it’s 50 percent. It’s 50 percent. 50 percent penalty and then they tax you on what you didn’t distribute as income. So it’s high anxiety for retirees to get that number right every year.
BRIAN: So when it comes to the tax minimization strategies we have at Decker Retirement Planning, the Roth conversion is huge, and placement of assets, already taxed money, non-qualified and qualified money. Those two strategies bring our clients tax savings of six figures by doing it that way. It’s not effective, in our opinion, to do what most people do, and that is they draw their income from their portfolio, which satisfies their monthly needs, and then they take this big wad, usually in the fourth quarter, they take their required minimum distributions.
BRIAN: And on top of all your taxable income during the year, now you’re taxed on this big wad that is plunked down on you in the fourth quarter on top of that. We feather the required minimum distribution into your income during the year so you never get that lump sum on top of everything else. And by doing it that way, we can minimize taxes. All right so now, I’m gonna just kinda out of the blue bring up something that’s really important, and that is a way to escape the generation skipping tax.
BRIAN: So the generation skipping tax is when you say to your spouse hey let’s give the grandkids some of our inheritance. If you do that, you are using some of your estate tax exclusion. So the feds give you 5.4 million exclusion for each of you. And so if your estate is below 11 million dollars, which for most people it is, then this is not a big deal. Yes, you can give your children, your grandchildren gifts and send it down and you’ll use some of your exclusion.
BRIAN: But if your estate is over 11 million dollars, you are gifting to your kids as an estate tax strategy anyhow. But on top of that, you want to send more money down to your grandkids and their kids and their kids, there’s something called a dynasty trust that is spectacular. It’s called a dynasty trust and it’s also called a generation skipping trust. Here’s how it works. It’s created while you’re alive. It’s funded upon your death as a beneficiary to receive funds.
BRIAN: Let’s say that you’ve got 10 million dollars, you’ve got two kids. You say that Johnny and Sally only need upon your death three million dollars. So you give them three. You’ve got four that goes to the dynasty trust. That dynasty trust is perpetual and per stirpes. It’s perpetual, meaning that it’s you know 100 years or more that it will last. And it’s per stirpes, which is Latin for blood line only. So when your grandkids marry, if they have a spouse that wants to divorce, they cannot access this trust.
BRIAN: It stays in your blood line. Typically when these dynasty trusts are funded, they’re used for education purposes. It can be whatever you want, but it’s typically used for education so that when your grandkids and their kids and their kids need tuition money or books or whatever it is, they can pull that from this dynasty trust and thank you, grandma and grandpa, forever for this trust that has minimized the horrible burdensome costs of secondary education.
BRIAN: All right, so that’s a dynasty trust. We’ve talked about dynasty trust, Roth conversions making sure you’re spending your RMDs, required minimum distributions. Now let’s talk about legacy. Legacy money is money that’s part of the tax minimization strategy. Because if you have extra money that you’re not gonna spend, that you’re probably gonna send to the next generation, it makes no sense to us to list a charity as your beneficiary, die, and have your tax credit die with you.
BRIAN: Think of that. It’s done all the time. You list your kids as beneficiaries. You list your charities as beneficiaries. You die and the tax credit died with you. Why not, with legacy money, why not retain control in the income and do charitable remainder trust, charitable annuities. There’s different options out there so that you while you’re living can receive the tax credit that you can use while you’re alive, and it doesn’t die with you.
BRIAN: So when it comes to tax minimization, making sure your legacy holdings give you tax credits is very important. A lot of people miss tons of tax minimization strategies. And if this is a big deal to them, they should come in, because any of our planners can help them with this.
MIKE: You know it’s a little bit more relaxed to talk about taxes when it’s not tax season as well.
MIKE: So you can kinda get ahead of it, so once January comes and tax season hits again, you’ll have a plan. You’ll have a strategy and hopefully it will go a little bit smoother.
BRIAN: Right. But it is the fourth quarter and now you have a 12/31 deadline for some very important things, like funding any retirement accounts, like making sure that you’ve pulled the proper amounts, required minimum distributions. With a 50 percent penalty, that’s kind of an anxiety producer for a lot of people in retirement.
BRIAN: Okay, now, we talked about tax minimization. Now let’s talk about asset protection. Just using the analogy again, when a flight is ready to take off from the airport, the flight attendants will tell you something that is not intuitive to any parent, and that is put your oxygen mask on first in case of an emergency, so that you can help others around you.
BRIAN: We have a similar situation, where in a distribution plan, if we estimate that you’re gonna be in the next five years at X and you see that you’re at 2X and you have extra money, we highly recommend that you use that money and create memories with expensive family reunions, to create memories while you’re still alive with your children and grandchildren. That’s priceless but we want to make sure that your oxygen mask is on first, that your financial house is in order.
BRIAN: With Decker Retirement Planning, with the distribution planning that we do, we make sure that you see each year where your assets should be growing at certain rates. And we’re conservative, so that each year, we can see that you’re hitting those marks. When you have extra, we encourage you to use those extra funds to create those wonderful priceless memories. All right, will there be money left over for your heirs?
BRIAN: We want to make sure that in the distribution planning that we do that you see that you’re probably not gonna both live to age 100. And the rates of return that we show for our clients, bucket one, one percent, we’re usually getting 1.25 on money market rates. Bucket two, we’re estimating three percent, we usually get five, five plus. Bucket three, we’re estimating four percent when we actually get usually six plus.
BRIAN: Bucket four is a principal guaranteed account we estimate at five, when it actually has averaged seven. And the risk buckets that we show at six, the risk buckets have averaged around 16 and a half percent. So we’re creating a lot of money that you will pass on to your beneficiaries, plus your house. We don’t put your house in your income plan. So you are passing, all of our clients are passing significant assets to their children as beneficiaries, or whoever your beneficiaries are.
BRIAN: Mike, I want to close… oh darn. We only have a couple of minutes, is that right?
MIKE: Yeah we got two minutes left.
BRIAN: This next one is called the bleeding heart, and it’s more than two minutes long. But this actually destroys people’s retirement.
MIKE: And it’s avoidable.
BRIAN: And it’s avoidable. And this is where children are raised where they think mom and dad’s money is their money. So when they crash their Mercedes, they say hey mom, dad, geez I had an accident. Oh honey, are you okay? Yeah I’m okay, but hey can you just wire me an extra 70 or 80,000? I gotta buy a new car. I just had an accident.
MIKE: [LAUGHS]
BRIAN: And they want to buy a house or a newer house or one closer to the beach or whatever. And mom and dad fork it over. They’ve raised kids who feel that mom and dad’s money is their money. Mike, I’m gonna start with this next time. You have one minute to close this up.
MIKE: Yeah. So stay tuned for next week. Same time, same channel: KVI 570 in Greater Seattle Area, AM radio, or KNRS 105.9 FM, in the Greater, uh Salt Lake Area.
MIKE: But also check out the website, deckerretirementplanning.com, for this show or previous shows, if you want to catch up, or on iTunes or Google Play. You can always catch the show or any show, those are actually posted on Friday before anything else. So if you want to get it as soon as possible, Fridays the shows are posted. Also, feel free to check out Decker Retirement Planning’s website for other events, such as seminars, special events, where we dive into a fire hose of information, and dive into the details about retirement planning. Have a great everyone and we’ll talk to you then.
