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 wrapping up last week’s show, Potential Problems in Retirement and more. 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 [KRS 105.9 FM?] out in the Salt Lake area. We’re wrapping up our show from last week, a continuation of Problems in Retirement. Brian, we were about halfway through, I don’t I remember correctly, on addressing potential problems you could face in retirement. Isn’t that right?
BRIAN: That’s right. So, what we want to do is make sure that we bring up all the problems we possibly can to test your retirement account to see if it can handle any of the speed bumps that are coming. So, we would rather discuss any and all of these problems to make sure that we’re ready; we hope for the best, but we plan for the worst. In the last week, we talked about the biggest ones, and that is making sure that you have a budget.
BRIAN: You’ve got to make sure that you know how much money you can, that you know that you have enough money coming in. Because, if you do, if you have the income you need and want for the rest of your life, a lot of problems go away, or, a lot of other problems shrink and you can deal with it. On the financial side, we talked about, last week, inflation, we talked about stock market crash, we talked about death of a spouse, and the impact that that has to your retirement account. We want to make sure that you do a dry run.
BRIAN: By the way, Mike, what would someone do if they wanted to pull up last week’s discussion and listen to it?
MIKE: Oh, sure. So, it’s posted on Deckerretirementplanning.com, or you can go to Google or iTunes for Last week’s show, or any other show in the past, and listen to it at your convenience.
BRIAN: Okay, but the easiest way is just to go to our website and pull it off the podcast, right?
MIKE: I think most people, yeah. Well, it’s [part of the?] podcast on the website, you’re streaming it individually. On iTunes you just click the subscribe button and then you get every show just loaded to your phone. Just do a search for Protect Your Retirement on iTunes. But, to each their own, either way is easy.
BRIAN: All right. Well, I’m going to pick up, we’re halfway through the problems that you can and probably will face in retirement. The next one cracks me up, it talks about a bleeding heart. A bleeding heart comes two different directions. These are the parents that have raised children that believe that the parents’ money is their money. So, when they crash their Mercedes they call mom and dad, hey mom and dad, can you please fork over another 70, 80 grand so I can pick up a new, used low miles Mercedes?
BRIAN: Or, hey, I want to buy a new house, hey, I’ve got my eye on this or that, and mom and dad fork it over, because Johnny and Sally are their kids, and they are not going to, they are loving parents, in their minds, if they, even in their adult years, anything that Johnny and Susie want, they pay for.
BRIAN: We, tragically have seen, the biggest extreme we saw this was in Seattle, a husband and wife in their mid-70s had no retirement account, their IRAs were gone, they had no ROTH accounts, no 401Ks, their IRAs were gone, their savings and checking were down to ten thousand dollars, they only had one asset, and that was a house on Lake Washington. It was a nice house, it was probably a million five, two-million-dollar house.
BRIAN: The people living in the house, these people we were talking to, came in for a meeting, we told them that they had to sell their house, because they couldn’t even afford the gardeners to come by, they couldn’t pay the gardeners to mow their lawn and trim their shrubs. So, they were down to their last ten or 15 thousand dollars. Well, of course they have to sell their house, or they will lose the house because they can’t even pay the taxes.
BRIAN: So, they were trying to live on social security, and they got to this position because of a bleeding-heart mentality that anything our kids want and needed, they would pay for. So, we want to warn you of that, I’m sure most of clients don’t have that view. But, here’s where it comes from, it comes from parents that went through a tough time financially when they were kids in their teens and their twenties and thirties, and they say to each other, let’s make sure our kids never go through what we went through.
BRIAN: Well, that’s logical, but we would say love your kids enough so that they can experience the financial squeeze that typically comes in your twenties, when you’re getting your house in order, when you’re on your own, you’ve got your degree, you go out and you have your new jobs; that financial squeeze, love them enough to let them go through that alone so that they learn to go without , so that they learn to budget, so that they learn to be financial responsible, because those life lessons, if they’re left alone, are precious and priceless to them, because they teach them things that mom and dad could never do.
BRIAN: So, we, again, when it comes to the parents’ view of the children, love them enough to let them go through that by themselves. So, that’s the bleeding heart. We warn people, we talk to them about that, and it’s not being a bad parent to let your children stand on their own financial feet. If they can’t afford a house, don’t help them get into a house that they can’t afford. If they’re not ready because they haven’t put money aside, then have them wait on buying a house, don’t help them get into a situation where they can’t afford the taxes, the insurance, the mortgage payment; that’s not helping them.
BRIAN: All right, the next thing that we want to talk about here is liability insurance. We had a client two and a half years ago, again in Seattle, they bumped someone in the parking lot. When you bump someone in the parking lot, or they slip on your property, these days people know that they have a blank check. But, I want to tell the rest of this story, that this guy, very nice gentleman, got out of his car, saw that there was no damage to either car.
BRIAN: Being a gentleman, he went over and just wanted to make sure that the guy was okay. The guy rolled down the window, he was already on a cellphone conversation with his attorney, and when asked if he was okay, his response was I don’t have to respond that I’m okay right now or not, but I’ve got my attorney on the phone, here’s his email address, send him a net worth statement.
BRIAN: By law, you have to send your net worth statement when there’s any kind of accident, so that they can assess if they want to sue you or not. So, that’s the world we live in, we hope that everyone has an umbrella policy. We don’t sell it, but we advise people to get it. This is where you’ve got, an umbrella policy is a rider on your homeowner’s insurance, typically whoever has your homeowner’s insurance will issue an umbrella policy.
BRIAN: It’s very inexpensive, it’s three or four hundred bucks a year for a million dollars of coverage. If you have a son or daughter that brings friends over and they hurt themselves on your trampoline in the backyard, they’re going to, typically, sadly, they’re going to sue you. So, in retirement, we want to take that problem off the table by having you get an umbrella policy, and that covers you.
BRIAN: Now, do you have homeowner’s insurance with liability? Yes. Do you have car insurance with liability coverage? Yes. But, some of Decker Talk Radio listeners have seen this commercial that accentuates the problem with insurance companies not assuming coverage. Mike, do you remember that, have you seen that radio and TV commercial where this guy calls in, his air conditioner went down and he wanted homeowner’s insurance to help him pay for a new air conditioner.
BRIAN: And the girl says that air conditioners aren’t covered, but a zombie apocalypse is, and the guy’s response is, well there would never be a zombie apocalypse, and the lady’s response was, well if there was, you’d be covered. Mike, have you seen that? Have you seen that TV or radio ad?
MIKE: No, but that sounds hilarious.
BRIAN: Okay. The way insurance companies get wealthy is not by paying every claim, it’s by denying claims. So, if you’re denied coverage or denied a claim from your homeowner’s or your auto insurance, guess what steps in, your umbrella coverage is able to, because it’s attached to you and it helps you make sure that you’re protecting your retirement.
BRIAN: All right, the next one is life insurance. We have, we sell life insurance, but we don’t sell it very often because of this, our feeling on life insurance is if you have it, keep it, if you don’t, you typically don’t need it. There’s three reasons that we would say that someone needs life insurance, one is to get you to retirement. So, a husband and wife want to make sure they have coverage, and typically they do through their employer.
BRIAN: And, that’s very inexpensive, it’s typically subsidized by the employer, and it gets you in a situation so that if the husband or the wife, if they’re both working, if one of them died, the life insurance would cover those last years of salary that would be missing with the passing of a spouse. So, that’s one reason, is to get you to retirement.
BRIAN: The second reason is, let’s say that there’s a husband and wife, and one spouse has a very large pension with zero survivability. 70, 80, 90-thousand-dollar pension, that died with him or her. Well, that leaves the other spouse, the surviving spouse, financially vulnerable. And so, for, quote, “income replacement reasons,” we would recommend life insurance on the person who has the very large pension, so that the other spouse can make sure that they’re financially whole in the case of that one spouse passing.
BRIAN: The third and final reason that we typically recommend life insurance is for estate tax reasons. So, estate tax, this is so common, if you have an estate that’s over 11 million dollars if you’re married, 5.4 if you’re single, you have estate tax exposure, and many states have state estate tax.
BRIAN: Now, there’s two types of philosophies on estate taxes, and our clients are equally divided on this. Whether you pay estate taxes or not, half of our clients have the feeling that, hey, whatever Johnny and Sally get, our kids, net of our estate tax is more than we ever got, we’re not going to take any strategies to get more money to Johnny and Sally.
BRIAN: We’re just not going to do anything. Let the state or the Federal Government take their hunk, net is going to be big enough that our kids get plenty of money. So, half of our clients have the feeling that they don’t want to do anything. The other half say this, it’s not a matter of getting Johnny and Sally more money, it’s a matter of, after paying a lifetime of taxes, government steps in and takes a hunk of flesh just because I passed, there’s no way I’m going to allow that to happen.
BRIAN: And so, they will take strategies, put strategies in place to make sure that they eliminate or minimize the estate tax. For some clients, they might have a portfolio of rental real estate that, to pay the estate tax, would require breaking up a portfolio of rental properties to pay the estate tax; and they want to pass those properties intact to their children, and so they will take action to make sure that the money is there to pay the estate taxes.
BRIAN: The most common strategy is called an eyelet. This is an irrevocable life insurance trust, it’s where a husband and wife purchase a second to die policy outside of the estate. Gifting is given to the children through Crummy provisions to make sure that the children are able, the Crummey provision requires an arm’s length passing of funds that the kids could use to do anything, and they decide to pay the premiums on the second to die life insurance.
BRIAN: When that life insurance comes due when the second parent passes away, funds are available in cash, tax free, to pay the estimated estate taxes and the estate of the parents pass intact to the children, preserving any portfolio, whether it’s a corporation, whether it’s a real estate portfolio, or whether it is a stock portfolio; whatever assets, that estate passes in total, in whole, because for around ten or 15 cents on the dollar, you have purchased a second to die life insurance policy.
BRIAN: Now, we have seen some make huge mistakes by buying a life insurance policy, but it’s not held outside the estate. So, when an 11-million-dollar estate passes, they have another million dollars that comes due in the estate, now the 11 million dollars is 12 million dollars, and now it’s even more money, that all assets above that 5.4, 5 million exemptions, are taxed at the federal estate tax level, which the marginal rate is about 50 percent.
BRIAN: So, half that money, nothing good was accomplished by having that money come due in the estate, because now there’s even more estate taxes due. So, it needs to be held outside of the estate in an eyelet, an irrevocable life insurance trust, where the premiums are paid by the children, who are incented to do that because the estate passes eventually to them, and they want a whole estate, rather than an estate where in nine months, in cash, the state taxes are due the IRS.
BRIAN: Another estate tax strategy is to move to Texas, or move to a state where there’s no state estate taxes. For example, the state of Washington has a state estate tax, but Idaho does not. So, if you have less than the 5.4 million, but you’re in the range for state estate taxes, you can move to a state like Idaho or Texas where there’s no state estate taxes.
BRIAN: So, that’s our feeling about life insurance. Those are the three reasons that we use it, income replacement, to pay estimated estate taxes, and to bring clients to the finish line for retirement. All right, the last thing we want to talk about when it comes to insurance, is long term care. This is a long discussion and this is a big deal to our clients.
BRIAN: Long term care is defined as the risk of one spouse bankrupting another spouse because of healthcare costs.
BRIAN: There’s a statistic out there that we feel, this is our opinion at Decker Retirement Planning, we feel is a little dishonest, it says that 70 percent of Americans will spend time in a long-term care facility. Decker Talk Radio listeners, if you Google what percentage, according to the US Census, what percentage of Americans will spend time in a long-term care facility, Mike, guess what number this is. It’s not 70 percent, guess what the number is, take a wild guess.
MIKE: Of people that actually spend a lot of time there?
BRIAN: Spend any time in a long-term care facility, according to the US Census.
MIKE: 60 percent?
BRIAN: Seven.
MIKE: Seven percent, well, I mean, how are we defining it, because you said spend time in a long-term care facility, is it a day, is it 30 days, what’s the stipulation?
BRIAN: Well, that’s the question. If you Google what percentage of the US population spends time in a long-term care facility, according to the US Census, it’s about seven percent. So, we want to make sure you know that the number that we feel, at Decker Retirement Planning, is a little deceptive that the long-term care industry is using is skewed, because they count even one day in hospice as part of that 70 percent.
BRIAN: So, if you strip out 30 days or less of hospice, the number goes way-way-way down. Now, the chances of you spending time in a long-term care facility is very small. We Americans, we just die; we have a heart attack, stroke, car accident, whatever it is, we have a fall, we have pneumonia, we do spend time in hospitals, but not so much in long-term care facilities. But, they, this is kind of a scare statistic that we want to tell Decker Talk Radio listeners that the chances of you spending time in a long-term care facility are actually much smaller than that 70 percent. How’s that, that’s safe to say.
BRIAN: So, what we want to do, when we talk to our clients about his long-term care risk, is let’s hope for the best, but let’s plan for the worst. What is the worst? The worst-case scenario, in our opinion, is to have a healthy body, let’s say you’re 75 plus, healthy body with Alzheimer’s, that’s the worst-case combination, as far as finances go.
BRIAN: And so, here’s the journey that lies ahead, and when I describe this, this is something that most people have actually seen and witnessed what I’m going to describe. The first third of the journey where one spouse is diagnosed with Dementia or Alzheimer’s, the first third of the journey is on the surviving, healthy spouse. Is there any cost? No. Is there an emotional cost? Yes. But, the first third of the journey is where on spouse is taking care of the diagnosed Alzheimer’s or Dementia patient.
BRIAN: The second third is where it’s too much for the surviving spouse, and so they’re calling in in-home care. In-home care is where, this is where they have an in-home care service, is it ten thousand dollars a month, no. It’s around 15 hundred, starts around 15 hundred, and it goes up as you use their services more and more.
BRIAN: That’s the second third of this journey. The third-third of this tragic journey, when someone has a healthy body with Alzheimer’s is where, yes, they need full-time care. The surviving spouse is dressing up for a meeting at two in the morning and wondering out in the neighborhood or on the highways, and that’s when they need to be checked in for full-time care. So, at full-time care, in today’s prices, it’s eight to ten thousand dollars a month in today’s dollars.
BRIAN: Tragically, this last part of the journey doesn’t last for a real long time, it’s probably 18 to 24 months. So, ten thousand times 24, do you have 250,000 dollars to self-insure this worst-case scenario? Most people do in the equity in their home, or in their risk bucket. We at Decker Retirement Planning, we plan for this risk by producing extra money in a buffer in people’s plans under their risk bucket.
BRIAN: So, we want to make sure that our clients can pay for this two ways. One is with the equity in their home, and the second is with the extra money in their risk bucket. This is very important, and for peace of mind. So, for most of our clients, they are self-financing this risk, because the statistic is not accurate that 70 percent of Americans will spend time in a long-term care facility. According to the US Census, it’s around seven percent.
BRIAN: So, with that statistic being so low, we recommend that our clients self-insure this risk. However, we also want to make sure that Decker Talk Radio listeners know all of your options. Here’s what they are, there’s five, I’ll go through six. There’s six different options out there to insure, or strategies to address the risk of long-term care.
BRIAN: The first one we just talked about, that’s self-insuring, and because of the statistic being so low, that you’ll spend time in a long-term care facility, that’s what we recommend most of the time. The second option that you have is to buy traditional long-term care insurance. Now, if you do, we want to make sure you’re fully informed of what typically happens when you buy a traditional long-term care policy.
BRIAN: What typically happens is those policy premiums are called guaranteed level premiums, and they may be four or five hundred bucks a month per person for life. And then, what happens is in your late 60s, early 70s, you get the letter, the quote-unquote letter. The letter comes from the state insurance commissioner telling you that your insurance premiums have just been jacked up 60 percent, and it’s allowed, so it happens.
BRIAN: And, by the way, when I bring this up, a lot of people say no-no-ono, that can’t happen because my premiums are called guaranteed level premium. Well, we’re here to tell you that guaranteed level doesn’t mean guaranteed level at all. Guaranteed level is the name that they put on the premium, and we want to warn you, that’s deceptive, because in your late 60s, early 70s, you will get the letter, it will tell you that your premiums have gone up.
BRIAN: And, what happens is, sadly, one of two things. Either first you panic and cancel your long-term care policy, and at that point your insurance company wins, because the insurance company keeps all those past premiums, and now they have zero risk. Or, option number two, you panic and you cut your benefit in half. Now the insurance company wins again because for half the risk, they’re getting paid the same.
BRIAN: So, for our clients, if you have it, keep it, we plan around it, but we want to make sure you don’t panic when you get the letter, so we tell you in your late 60s, early 70s, that’s the risk period for long-term care clients, you’re going to get the letter. So, we want to make sure you know it’s coming. If you have it, keep it, if you don’t have it, we want to warn you and give you a heads up, that guaranteed level premiums, when it comes to traditional long-term care, doesn’t mean guaranteed level at all. That’s the second option, and it’s by far the most popular.
BRIAN: The third option is where guy from the insurance companies, they’ll get ahold of you and say, hey Mike, you know that if you just have a heart attack and die, or get hit by a bus, all those premiums you’ve ever paid go down the drain, because you never went into a long-term care facility, you just died. So, what you need to do is buy a whole life policy from me, for let’s say 400 thousand dollars, that’s the death benefit, and we’ll put a long-term care rider on it.
BRIAN: And now, you get that 400-grand no matter what. If you die, not if, when you die, you get it, or if you go into a facility you get it. So, on the chalkboard it sounds really good. In real life, we want to point out that it’s very expensive, and here is the quandary of traditional long-term care, if you can afford it, you don’t need it, and if you need it you typically can’t afford it.
BRIAN: So, that’s the third option. The fourth option is along these lines, and when we have clients that need traditional long-term care, this is our favorite. This is called asset-based long-term care, it’s where you save up ten thousand dollars a year per spouse, per year, to where you accumulate around a hundred thousand dollars. When you die, you get a two X kicker, or a two X benefit on your hundred thousand for a death benefit.
BRIAN: If you go into a long-term care facility, you get around four X, three and a half, four X, four times the benefit in the long-term care benefit. If you change your mind, it’s totally liquid and you can pull all that money back. As I said, if you can afford this, you don’t need it, if you need it, you can’t afford it. It’s very hard for most people to put aside ten thousand dollars per year, per spouse, for ten years, to accumulate 100 thousand per spouse, or 200 thousand for both, when your cash flow is pretty tight.
BRIAN: The fifth option is called a Safe Harbor Trust. A safe harbor Trust is where people are freaked about the 70 percent statistic that’s, we have already talked about, is kind of deceptive, saying 70 percent of Americans will spend time in a long-term care facility. So, one spouse looks at the other and says, let’s use a Safe Harbor Trust and move all our assets to our brother’s name, let’s call the brother named Sam. So, we move all our assets to Sam’s name, so now when our diagnosis comes we can go on Medicaid.
BRIAN: The taxpayer pays the money, the one spouse passes away, the surviving spouse financially survives and calls back all their assets. So, in the Safe Harbor Trust, the IRS caught wind of this strategy and put in, several years ago, actually a claw-back provision that says that if you’re diagnosed within five years of funding a Safe Harbor Trust, they’re going to pull all those assets back, and you pay for your long-term care expenses yourself.
BRIAN: But, the bigger problem is this, in a Safe Harbor Trust that’s arm’s length, Sam the brother can wake up one day, and can make the call, and say, you know, bro or sis, I’ve decided I really appreciate you giving me these assets, I’ve decided to keep them. So, for a whole bunch of reasons, we don’t recommend a Safe Harbor Trust to handle your long-term care risk.
BRIAN: The last one, number six, is, tragically, the most popular. As I said, the quandary with long-term care is, if you need it you can’t afford it and if you can afford it, you don’t need it. So, people that need it and can’t afford it, this is, by far, this number six, is the most popular, and it’s, sadly, tragically, it’s divorce.
BRIAN: So, what will happen is, one spouse will divorce the other when they’re diagnosed, and sadly, the spouse that is in Dementia or Alzheimer’s at this point, doesn’t even recognize the other anyhow, but they will divorce so that they can financially survive.
BRIAN: All right. So, when we talk about traditional long-term care, if someone has concern about their policy, their protection, the strategy, they should contact one of our planners and come in and talk to us.
BRIAN: All right. So, continuing with some of the biggest problems that you’ll face in retirement. I have a Word doc here that over 32 I’ve kept the biggest problems that people face. We talk these through to make sure that you’re ready, because when our clients go through the planning process, we spend a whole 90 minutes going through all of these problems to make sure that they’re ready, and we put strategies together to make sure that they are ready.
BRIAN: The next part is how the banker-broker model typically destroys people’s retirement by using the pie chart, the asset allocation pie chart, which, by the way, we’re fine with; in your 20s, 30s, and 40s, it keeps all your money at risk, and when you take those market hits, you’ve got an income coming from your employer, so you just ride it out and you’re fine.
BRIAN: Contrast that to the predicament of the retiree that’s not getting any wages, no W2 or 1099 income anymore, and they take those 30 or 40 percent hits in the market, and what are you supposed to do? Your banker-broker says to ride it out, be a long-term investor, buy and hold. That makes no financial sense, that makes no mathematical sense, because when you take a 30, 40 percent hit, like ’08, and it takes you three or four years to go back to even, and on top of that, you’re drawing money for your retirement from your portfolio.
BRIAN: Now, you’re drawing money from accounts that are fluctuating. So, here’s what’s happened. The bankers and brokers will tell you that, keep all your money at risk. Mike, here’s an easy softball question for you. Why do bankers and brokers want all their clients to keep all their money at risk?
MIKE: That’s how they get paid.
BRIAN: That’s how they get paid. I had a manager, when I was a broker in my early years, and he emphasized, on a regular basis, that we get paid by keeping clients at risk. Now, Decker Talk Radio listeners, that should bother you, because you’re not dealing with a fiduciary, you’re dealing with a salesman with the banker-broker model that keeps all your money at risk. That’s should be strike one. So, we’re in baseball season, by the way, I can’t believe that the Cleveland Indians didn’t beat the Yankees. I thought the Indians would be in the Playoffs. All right, or, they were in the playoffs, so I thought they’d be in the World Series.
BRIAN: Strike one, when we talk about risk, is when your banker and broker puts all your money at risk. Strike two is when they tell you to put your safe money in [bond funds?]. Oh, by the way, when we talk about risk, here’s the mathematical approach that we take. At Decker Retirement Planning, we are extremely math-based. Here’s what happens mathematically to a portfolio that’s all at risk and throwing off income; you compromise the gains when the markets are going up, ’cause you’re pulling money out to=f your portfolio, and you accentuate the losses when the markets go down.
BRIAN: And, you are committing financial suicide. But, here’s another thing, strike two is when the bankers and brokers tell you to put your quote-unquote safe money in bonds or bond funds. So, this makes no sense. This fails the common sense of, now that interest rates are at or near one hundred-year lows, bankers and brokers will use what’s called the rule of 100 to determine how much money should be quote-unquote, safe. They use the rule of 100 that says this; if you’re 65 years old, you should have 65 percent of your money in bonds or bond funds, and I don’t you’re 70 years old, you should have 70 percent, etcetera.
BRIAN: So, let me be sarcastic and say that, with interest rates at or near all-time record lows, banker and broker, your financial advisor, is telling you to put 65 or 70 percent of your money, of your investable assets, where it’s earning almost nothing-almost nothing. But, the bigger problem is something called interest rate risk.
BRIAN: Interest rate risk is the amount of money, your principle, that you lose when interest rates go up. Just like two plus two is four, when interest rates go up, bond prices go down. So, anyone, any advisor that’s recommending you put your safe money in bond funds when interest rates are this low, in our opinion, is committing financial malpractice. Let me explain, let me say the same thing two different ways.
BRIAN: Number one, interest rates are at or near all-time record lows. Number two, interest rate risk is at or near all-time record highs. Your funds are not safe when interest rates are this low. In fact, we have an article of an interview that Bill Gross did with Morning Star, no, with Barron’s, April of last year. Bill Gross, he used to run Pimco and is now with Janus. One of the smartest guys in the world when it comes to bonds and bond funds.
BRIAN: You would think that this guy would tell you all the reasons that you should invest in bonds or bond funds; he’s not. In the interview with Barron’s last year in April, he said this, four very important points. He said that the Federal Reserve and the central banks around the world are keeping interest rates artificially low, that’s point number one. Point number two, it’s unsustainable. Number three, eventually interest rates will go back up and you are not paid currently for the interest rate risk that you’re taking right now.
BRIAN: And, number four, they’ll be double-digit losses when interest rates go back up. So, from 1994-in 1994 the ten-year treasury went from six to eight percent in one year. In that year, according to Morning Star, the average bond fund lost around 20 percent. In 1999, the ten-year treasury went up in yield, again, went from four to six percent in one year, the average bond fund in that year lost about 17 percent.
BRIAN: Decker Talk Radio listeners, if we go from where we are now, at 2,2 percent on the ten-year treasury, and it just goes back to four percent, where we were just a few years ago, if we get that move in the market, you will see, about a 17, 18 percent hit to principle on what bankers and brokers are telling you is your safe money. We want to jump up and down, wave our arms, and tell you that bond funds are not safe, not when interest rates are this low.
BRIAN: So, let me go back to the strikes. Strike one is where they keep all your money at risk, and you’re pulling money out of a fluctuating account; that should be strike one. Strike two is when your advisor tells you to put your safe money in bonds or bind funds. And, strike three, this is where we hope you get up and walk out, is where your banker and broker uses the four percent rule as a way to distribute your income for the rest of your life.
BRIAN: The four percent rule, in our opinion, is the most toxic, destructive financial strategy out there, and is responsible, in our opinion, for destroying more people’s retirement in the United States than any other financial strategy out there. Here’s how the four percent rule works, it says that stocks have averaged around eight and a half percent for the last 100 years. That’s true. Bonds have averaged around four and a half percent for the last 37 years. That’s also true.
BRIAN: But, we should be able to pull around four percent from your assets for the rest of your life, that’s conservative, and we should be fine. Now, that works great when the markets are trending higher; when we go in to a flat market cycle, like we do typically, in a hundred years’ history of the stock market, markets don’t trend, they cycle, and you can Google this, it’s called the 18-year cycle chart.
BRIAN: So, from 1946 to ’64 we had a nice bull market, ’64 to ’82 was flat, ’82 to 2000, the biggest bull market we’ve ever had, and since January one of 2000, the average returns since then have been about half of what they normally are, around four and a half percent. So, we want to point out that when you get into a flat market cycle and you’re using the four percent rule, not only doesn’t it work, it actually destroys your retirement.
BRIAN: Here’s what we mean. Let me give you an example. Again, we’re a math-based firm, and let’s give everyone, Decker Talk Radio listeners, let’s give you all four million dollars and retire you January one of 2000, so that you can live the horror story of so many millions of Americans and what happened to their retirement, but because they listened to their banker and broker and used the four percent rule.
BRIAN: So, here’s what actually happened. Remember, January one of 2000, everyone’s retired, you’ve got four million dollars. That’s the good news. The bad news is, the markets crater in ’01 and ’02, you lose half your money, but it’s worse than that, because you’re drawing four percent every year. Four, four, and four, you enter 2003 down 62 percent. The good news, then, I don’t=s the markets double from ’03 to ’07, but you’re not getting all that because you’re drawing four, four, four, four, four, and four percent.
BRIAN: And then, you take that hit in 2008, which is down 37, plus you draw four percent, and now you can no longer stay retired. Your investment portfolio that pumps out your retirement income is now hammered so hard that you can no longer stay retired. And, proof of what I’m telling you actually happened, is in 2009, do you remember, the many people that we saw that had grey hair, that showed up in banks, fast food, retail, Walmart greeters; they had to go to plan B, because the banker-broker model, and particularly the four percent rule, destroyed their retirements, by the millions.
BRIAN: The guy who invented the four percent rule, his name is William Bengen, he came out in 2009 and said that the four percent rule doesn’t work, not with interest rates this low. He called it dangerous, and he said he doesn’t use it. His quotes, by the way, are on our website at Deckerretirementplanning.com, you can scroll through and see William Bengen quotes, and yet the bankers and brokers still use that strategy today.
BRIAN: So, let me tell you the three strikes again. Strike one is when your banker and broker tell you to keep all your money at risk, that’s strike one. Strike two is… by the way, that’s not in your interest at all. Strike two is when the banker and broker tells you to put your safe money in bonds or bond funds; nit when interest rates are this low.
BRIAN: And, number three is when they tell you, this is strike three, when you get up and walk out, is when they use a discredited strategy, nine years ago, telling you to use the four percent rule to distribute your income for the rest of your life. So, we want to warn you, we want to have a public service here and warn you, that those are risks that will hurt you in retirement.
BRIAN: So, we’ve talked about interest rate risk, we’ve talked about the four percent rule, we’ve talked about the failing strategy of drawing income from fluctuating accounts. Now, in contrast to that, and I’m going to keep going with the other problems in retirement, but in contrast to this, Decker Talk Radio, or, Decker Retirement Planning clients, they’re deriving their income from principle guaranteed accounts.
BRIAN: Bucket one is responsible for producing income for the first five years. Bucket two grows for five years and pays income for years six through ten. Bucket three grows for ten years and provides income for years 11 through 20. So, our clients are deriving income from principle guaranteed accounts. Here’s what that means, that means when interest rates go up or down, we have zeroed out interest rate risks, because none of these are bond funds.
BRIAN: And, it also means something very important, it means that stock market risk has been negated, zeroed out. When the markets crash every seven or eight years, which they typically do… by the way, I’ll just deviate for a second and show you the schedule on this. Mike, you know that markets crash every seven or eight years, right?
MIKE: Oh yeah, like clockwork it seems like.
BRIAN: Okay. So, here are the dates. In 2008 from October of ’07 to March of ’09, that was a 50 percent drop, 37 of which was in 2008. Seven years before that was 2001, the twin towers went down. And, we’re in the middle of a three-year 50 percent bear market. Seven years before that was 1994, Iraq had invaded Kuwait, interest rates spiked, the economy was in recession, and the stock market struggled.
BRIAN: Seven years before that was Black Monday, October nineteenth, a 30 percent drop in one day. Seven years before that was 1980, sky high interest rates, the markets were in a bear market, the 46 percent drop from ‘80 to ’82. Seven years before that was ’73, ’74, that bear market, in two years dropped 42 percent. Seven years before that was the bear market of ’66, ’67, that was also a 40 percent drop, and it keeps going.
BRIAN: So, the markets bottom March of ’09; seven, eight years, plus that, just puts us at a point now where we are due this next market drop. When that happened in 2008, when the markets crashed in 2008, our clients did not take that hit. They were deriving their income from principle guaranteed accounts, they didn’t have to change their travel plans even. They definitely didn’t have to put a stake, a for sale sign, sell their home, move in with the kids, go back to work, they didn’t have to do any of that.
BRIAN: Our clients were un-phased by the market drop of 2008. Now remember, this is a big deal because the typical retiree is going to be 30 plus years in retirement, seven into 30, you’ve got four, typically, historically, you’ve got four 2008 events that are going to happen in your retired years. These are life-changing events for a lot of people, not for our clients. Because we’re using principle guaranteed accounts, we zero out that market risk on their income for the first 20 years.
BRIAN: This is huge, priceless peace of mind for our clients. I want clients to come in, or Decker Talk Radio listeners, to come in and see the laddered portfolio that we’ve put together. By the way, we hate variable annuities, we don’t use income annuities, life annuities, or income riders, in any of our plans. So, I want to make sure and be clear that with principle guaranteed accounts, we are able to get, on bucket one, those are typically money market accounts, we’re able to get about one and a quarter, 1.3 percent on the bucket one.
BRIAN: Bucket two is averaging six percent, bucket three is averaging 6.3 percent. These are on principle-laddered principle guaranteed accounts.
MIKE: This is Decker Talk Radio’s Protect Your Retirement on KVI 570 and KRS 105.9. We’re wrapping up here, we got a few more minutes here, let’s wrap up. Well, I think like five, six more mins.
BRIAN: Yep. All right, so, the next problem that we see, potential problems in retirement, have to do with liquidity. Liquidity used to be down the list for us, it’s bubbled up to the top as a problem. Liquidity, we define liquidity as money that can be in your savings, checking account, next day, no penalty. If all your money is liquid, that means it’s not working for you. If all your money is locked up, that’s equally ridiculous.
BRIAN: So, what we do is we want to make sure that our clients have, the sweet spot is around 30 or 40 percent. So, in the planning that we do, all of your emergency cash is liquid, we carve out money, usually 25 to 75, 80 thousand dollars, we carve that out, set it aside, then put it in savings, checking, where we try to get the best return possible.
BRIAN: And, by the way, we’re fiduciaries to our clients, we’ve already done that homework. The highest retuning money markets, there’s four of them, Goldman Sachs, Synchrony, Capital One, CIT, are four different institutions that are paying 1.25 to 1.35 percent on their money market accounts. We’re a fiduciary, so we help our clients set those accounts up with savings and checking.
BRIAN: Then, bucket one is also completely liquid, it’s also a savings checking account, and it’s responsible for generating the income for the first five years. The risk bucket is completely liquid, and typically clients have about ten percent liquidity in bucket two or three. We usually have 30 or 40 percent liquidity in our plans. This is a big deal because our competitors have a bad habit of locking people up in annuities, and, when they do, and they have a need for a major purchase, guess what, they’re all locked up.
BRIAN: So, liquidity is very important. With each draft or each change, or each addition of our client plan, we want to make sure that-that liquidity score is right in there between 30 or 40 percent. All right. The next item which is a problem in retirement is retiring too soon or wondering when you can retire. Before 2008… gosh, Mike, we’re running out of time. Before 2008, what was the number one risk in the United States, do you remember? It wasn’t spiders or snakes, what was it?
MIKE: No, it was going to war or the fear of dying, and I can’t remember the first one.
BRIAN: That was, number three was the fear of death, number two, the fear of going to war, number one before ’08 was…
MIKE: Public speaking.
BRIAN: Public speaking. Okay. After 2008, the number one fear for people over 50 years old was and still is running out of money before you die. This is very-very important, this is a big problem in retirement, is knowing how much money you can draw from your retirement. There’s a lot of smart people out there that are listening to our show right now, and let me boldly say that you cannot know how much money you can draw unless you do the calculations that we do.
BRIAN: We run a distribution plan that shows all your sources of income. It shows social security, it shows rental real estate, it shows your pension, and it shows income from assets. We plan to age 100, we total up all your sources in gross income, we take taxes out, and that gives annual and monthly income with a three percent COLA to age 100.
BRIAN: We plug in the assets that we’ve got in your portfolio, and then we calculate, mathematically, how much money you can draw. The good news is, if you’re already retired, we can tell you how much money you can draw so that you don’t run out of money before you die. The number one fear in this country is not a fear for our clients.
MIKE: Love it, love it. All right, tune in next week, everyone at 9 AM, KVI 570 greater Seattle area, or 6 PM KRS 105.9 the greater Salt Lake area, or on Fridays, we do post first thing to our podcast on iTunes or Google Play. Just search on iTunes or Google Play for Protect Your Retirement. Have a great week everyone, we’ll talk to you next week.
