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 covering principal guaranteed accounts, what they mean to you, and the different options you have, in great detail. 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. You’re listening to KVI570 in the Greater Seattle area, or also broadcast in the Greater Salt Lake Area at 105.9 FM. Glad to have you listening today. We’ve got a great show lined up today. Brian, should we just dive in? Kind of a continuation of last week. Actually real quick, a little plug, if you didn’t catch last week’s show, just go to DeckerRetirementPlanning.com. You can catch it or other shows as well. But, Brian, let’s dive into the content right now.
BRIAN: All right, sounds good. Last week, in fact, the last two weeks, we’ve talked about potential problems in retirement. These are issues that come up or may come up, and when we do planning at Decker Retirement Planning, we want to make sure that we discuss, gosh, we’ve got a list of 22 different things that may or may not come up. We cover everything. In 32 years of being in the business, I’ve kept track of a bunch of different things that come up or may come up as potential problems in retirement.
BRIAN: This is inflation, stock market crash, death of a spouse, long-term care, liability coverage, Roth conversions, dynasty trusts, legacy holdings, tax strategy. We cover everything, and we want to make sure at this point in the planning that we are hitting the plan with the biggest problems you could potentially ever see in retirement. We go down the list one by one and want to make sure that that plan is rock solid.
BRIAN: So at Decker Retirement Planning, we want to make sure. And these are the last few, so I’ll start with this. By the way, Mike, you mentioned how people can go to our website, and they can just pull up the last two radio shows. These are one hour of uninterrupted, commercial-free information that we’re throwing out there for people to listen to that are in retirement or pre-retirement to get ready for their retirement years.
BRIAN: So I’m finishing up two hours that we put out there of potential problems in retirement. So this is the final part. When do you want your income to start? This is an issue for people that really isn’t a big deal for most. For some it is because their income, they may have a pension, they may have rental real estate. When do we want to turn on the income from their portfolio?
BRIAN: Obviously, for most people, 90 plus percent of our clients, when they retire they’ll turn that income on, and every month they’ll get auto-deposit from their portfolio. They’ll get checks coming in every month. They’ll get their social security checks coming in, any pension or rental real estate checks. All of that is your new quote unquote income.
BRIAN: So for 49 years you’re used to getting paid by your employer, and this is a mental transition that some people make. They hold their breath for three or four months making sure that these checks are coming in. This is your new income for the rest of your life. Once you retire, these checks are not W2 income, it’s not 1099 income. This is your investment income, your social security, your pension income. This is your new income for the rest of your life.
BRIAN: So we ask you when you want to turn that on and note that. The next thing we talk about is something very important, and that is when do you expect your slow go years to start? You have three different phases in your life. You have your healthy years, your slowing down years, and your really slowing down years. So once you retire, we point out that for a lot of people, around 80 years old is when the health starts to really deteriorate.
BRIAN: We bring that up because if you retire at 65, we emphasize that you’ve got about 15 years. That sounds like a long time, but when you’re retired it goes by very quickly. You’ve got around 15 years if you retire at 65 to hit your bucket list. These are the things that you and your spouse want to do, or you individually want to do, and you’ve waited for some day. Well, someday is here. Let’s hit your bucket list.
BRIAN: So we get it out. We talk about it. We plan it out. We don’t take a lot of time on this, but we point out for conversations with your spouse or you to think about individually hitting your bucket list and how you want to do that. Travel, hiking, serving, charitable work. Some go into politics in their community. They want to serve in the school district. Whatever it is that you want to do, your next 15 years, make sure it’s fulfilling.
BRIAN: And by the way, our clients, the most fulfilling retirements that we see are where they have, number one, gotten their own house in order. They’re living in the house they want with the furnishings they want, the artwork they want, driving the cars they want, and going on the trips they want and eating at the restaurants that they want.
BRIAN: They take care of themselves first and then they also weave in serving and giving back, and loving and lifting and helping others, involving themselves with their grandchildren and their children. And those are the most fulfilling retirements that we see. Okay, the next one is on your current advisory relationships, we talk about this as a major problem in retirement.
BRIAN: Many clients have two or three or four different financial advisors. That’s great for diversification. That’s horrible when you get three or four or five cooks in the kitchen giving you different advice and using different strategies. So I want to point out here that at Decker Retirement Planning, we are distribution planners, number one, with a math-based approach, number two, using distribution planning, number three, and with the risk models having a two-sided strategy, number four.
BRIAN: I honestly don’t know of anyone, no one in the country, doing this. And so, our voice is very specific. I guess in February of this year I had an ACL operation on my knee. I didn’t go to a dentist. Dentists are good people, but I didn’t want or need that specialized focus on my teeth. I needed a doctor who specialized in putting my knee back together.
BRIAN: So we specialize in retirement planning, retirement money management, comprehensive tax minimization, risk reduction, and making sure you have the income that you need and want for the rest of your life. That is our focus. Our clients are 55 and older, and that is what we do. When you get someone that is using a banker broker model, and they’re telling you to buy and hold, and take those hits in the market every seven or eight years of 30 or 40%, that makes no sense when you’re over 55 years old.
BRIAN: And then they tell you to put your safe money in bond funds when interest rates are this low. That also makes no sense. And using the rule of 100, saying that if you’re 65 years old you should have 65% of your money in bonds or bond funds earning almost nothing. That also makes no sense. And when interest rates go back up, you lose money on your bond funds that they called safe money. And we’re talking double digit loses. So all these things, they don’t make sense.
BRIAN: And keeping all your money at risk and billing you for all of that with management fees. We are entirely different at Decker Retirement Planning in Seattle, Kirkland, and Salt Lake. We have a totally different message for our clients. And so, when you have advice coming into one ear telling you to buy and hold, don’t time the market, be a long-term investor, and then you have another person in your other ear telling you to bring the risk way down.
BRIAN: They shouldn’t be billing you on that. It creates a lot of problems and unnecessary stress in retirement. So do you diversify your doctors when it comes to knees, or do you choose one and trust one and go with them? So we talk about that, the advantages and disadvantages. Of course the client’s gonna decide in the end. We respect that. But we bring this up as a potential problem that exists in retirement to have two or three or four different voices that are telling you contradictory things.
BRIAN: All right, the next thing is… Actually I’m gonna finish there and I’m gonna go into… Mike, this is gonna be a big deal.
MIKE: Let’s do it. Let’s talk about it.
BRIAN: Let’s talk about the different principal guaranteed accounts that are out there. This is very, very important. We hammer the banks and brokers on their strategy of putting their safe money in bonds or bond funds.
BRIAN: CDs, treasuries, corporate agencies, municipals, government agencies, these are all available, but their yields are very low right now. So now we’re gonna talk about the portfolio. On the left side of the distribution plan, Decker Talk Radio listeners, is all your sources of income, income from assets, rental real estate, pensions, social security. We total it up, minus taxes, and that way our clients on their distribution plan, which is a spreadsheet, are able to see annual and monthly income with a COLA, cost of living adjustment, to age 100.
BRIAN: The number one fear in this country for people since 2008, for people 55 and older, is running out of money before you die. Our clients don’t have that fear because they, on their distribution plan, see how much they can spend each month. There’s a lot of smart people listening to this program. Unless you’ve actually done the calculations, you cannot know how much money you’re drawing from your investments without doing the math and seeing how much money you can draw.
BRIAN: So our clients don’t have that number one fear. They have priceless peace of mind because they see on the left side of their spreadsheet all their sources of income, total it up minus taxes, annual and monthly income with a cost of living adjustment to age 100. Our clients don’t have that fear of running out of money before they die. They see how much money they can spend. They see where it’s coming from for the rest of their life. Unless you do these calculations, you are guessing.
BRIAN: All right. The left side of the spreadsheet for a distribution planner is all your sources of income. The right side shows your portfolio. So bucket one is a principal guaranteed account. It’s earning the smallest amount of interest, and it’s responsible for distributing monthly income for the first five years of your retirement. Bucket one goes to zero in five years, and then bucket two grows for five years, principal guaranteed, and then it kicks in for distributing income in years six through 10.
BRIAN: After 10 years, bucket two is now gone, and then bucket three kicks in and grows for 10 years and then provides income for years 11 through 20. Now we have a bucket four and five. This is called a laddered principal guaranteed account. Huge, huge, huge to see that you have a laddered principal guaranteed approach so that if interest rates go up or down, you lock in the higher rates as your money comes due.
BRIAN: We’ve reduced interest rate risk. Actually, we’ve eliminated interest rate risk by using a staggered principal guaranteed account because none of these are bond funds. We’ve eliminated stock market risk. Now, I want to talk about this for a second. Stock market risk is the risk that every seven or eight years your portfolio gets hammered. Every seven or eight years, the markets have been getting preened.
BRIAN: From October of 07 to March of 09, the stock market dropped more than 50%. Seven years before that was 2001. Twin Towers went down. It was the middle of a three-year bear market. That tech bubble burst. That was over a 50% drop. Seven years before that was 1994. Iraq had invaded Kuwait. The interest rates spiked.
BRIAN: The stock market struggled. The economy was in recession. Seven years before that was 1987, Black Monday, October 19th. That was a 30% drop, 22 of that in one day. Seven years before that was 1980. The recession of 80 to 82 and the stock market drop from 80 to 82, 46% drop. Seven years before that was 73-74 bear market, 42% drop.
BRIAN: Seven years before that was the 66-67 bear market, over a 40% drop, and it keeps going. This has been going on for many decades. Markets bottom March of 2009. We are due. We’re in year nine of a seven, eight year market cycle. Second longest advance, and by the way, speaking of valuations, this is scary true.
BRIAN: The stock market’s trading right now today at 25 times trailing earnings, trailing 12 months earnings. So here’s what that means. There’s only been two times that the stock market has been valued with trailing 25 price earnings ratios. One was 1929. Remember how that worked, Mike? Do you remember what happened after 1929?
MIKE: It’s probably the most famous depression we’ve had, the Great Depression, which was terrible for the nation.
BRIAN: Right.
MIKE: I mean, that really hung up a lot of people. But that’s not the worst one, isn’t it?
BRIAN: Yeah, huge stock market crash, and then the second time we hit 25 times earnings was 1999 where we had a 50% drop over the next three years. Here’s what’s staggering. In all the history of our stock market, the stock market, once it hit 25 times trailing earnings, has never had a 10-year period going forward from that point where the stock market has made money.
BRIAN: Not one time, not ever. We’re there right now and retirees, I guess, are expecting that this time it’s different. They’re expecting that something that’s never happened before in history is going to happen again. So our clients don’t have to worry about that because of what we’re gonna talk about right now. Any portfolio in retirement should have three components. One is cash.
BRIAN: We’ll talk about that today. Two is your safe money, and three is your risk money. Now, we use the bucket approach. Bucket one, two, and three is responsible for your income for the first 20 years of your retirement. This is very, very important. That means that when the markets crash every seven or eight years, our clients don’t even have to change travel plans.
BRIAN: But most of you out there, if you haven’t put together principal guaranteed accounts and drawing income from principal guaranteed accounts, most people are gonna have a life-changing event when the markets turn lower again. Like I said that we’re a math-based firm. Listen to this. When you draw income from a fluctuating account, you are compromising the gains as the markets go up because you’re pulling money out, and you’re accentuating losses as the markets go down.
BRIAN: And you’re committing financial suicide by doing that. Again, we’re a math-based firm and so our approach on principal guaranteed accounts are three-fold. Number one, that they are guaranteed. Number two, that they can distribute monthly income, and number three, common sense, best yield. We want the best return coming from these different options. So let’s talk a little bit about the integrity of the guarantee itself. And what I like to bring up also is we talk about the principal guaranteed is the integrity of the firm itself.
BRIAN: So I’m gonna talk about Bernie Madoff. Mike, do you remember Bernie Madoff?
MIKE: Oh, yeah. Who doesn’t?
BRIAN: Yeah.
MIKE: I mean, he was a big deal in a bad way.
BRIAN: Biggest scammer in the world. So he’s in jail for the rest of his life. Bernie Madoff was a self-custodied operator. That means that he had access to your funds. That means that when you wanted to do business with Bernie, you wrote a check to Bernie Madoff. He created his own statements and he had access to your funds.
BRIAN: All of that should be illegal. It should be illegal. We, on the other hand, in contrast, have a custodial relationship with our clients. Here’s what that means. We as TD Ameritrade, as a custodian for our clients, when our clients say, “Let’s do this,” and they accept that they want to do their plan, we fund the plan, we transfer accounts from Schwab or Fidelity or Vanguard, or where your broker is at UBS or Merrill Lynch, or whatever, those accounts transfer not to Decker Retirement Planning.
BRIAN: No, they’re transferred to TD Ameritrade. TD Ameritrade acts as the Fort Knox over our client funds. They are a custodian and do not allow access to even the spouse of someone’s IRA. They have no withdrawal access. The only person that has withdrawal access is the individual. If your account is compromised in any way, TD Ameritrade is on the hook to make you whole.
BRIAN: So unlike Bernie Madoff, where he was a self-custodied operator creating his own statements and withdrawal access to your account, we have no withdrawal access on your account except for withdrawing fees, and we have trading access, but we have no way that we could do to you what Bernie did to his clients. TD Ameritrade, our custodian, provides monthly statements, not Decker Retirement Planning.
BRIAN: So we’re quite different. So when we talk about the integrity of the company, we point out your custodial relationship. The next thing we want to do is talk about the integrity of the guarantee itself. There’s three types of guarantees out there, basically. Number one, I’m gonna do that one that we don’t like. I’ll call that number three, and then I’ll go to two and then the number one that we actually do like.
BRIAN: The third guarantee that we don’t like is called a corporate guarantee. This is specific to municipal bonds. So Ambac, FGIC, MGIC, those are the three big corporate bond insurers. And we were fine with municipal bonds before 2008, but after 2008 the states have been taking on pension obligations they can’t possibly pay back.
BRIAN: And they’re tying in municipality debt to that eventual train wreck of accountability where at some point these states have to come clean and recognize that they cannot pay their debts. And at that point there’ll be a restructuring and far too many municipalities will be drug into that. This is called credit risk. Credit risk is the risk that your municipal bonds, when they come due, will not be able to give you all of the principal back.
BRIAN: so this is a problem that we address actually by staying clear of municipal bonds since 2008. We have not purchased a municipal bond for a client since 2008. Rates are down and credit risk has gone skyrocketing. There is one state out of 50 that hasn’t taken on pension obligations they can’t possibly pay back, and that’s South Dakota. All the other states are in the red and have taken on pension obligations that they cannot possibly pay back.
BRIAN: Now here’s a freebie. At Decker Talk Radio we want to give you a very important point. If you do have municipal bonds, here’s a very easy way to watch and be very careful to guard the principal that you have in your municipal bonds. Now remember, your municipal bonds are your quote unquote safe money. So when interest rates are this low, there’s only one reason that your bond price will break par.
BRIAN: Par on your statements that you get every month is 100.00. When you’ve got a 3, 4, or 5% coupon municipal bond, those should be trading at 109, 112, 115, depending on its maturity. If you see that bond breaking bar and going below 100.00, we hope you pick up the phone and you sell it. Now, this doesn’t apply to zero coupon bonds where your coupon is zero and the bonds accrete to par.
BRIAN: But if you’ve got a 3, 4, or 5% coupon bond and it breaks par, when interest rates are this low, we hope you pick the phone and sell it. Don’t call your broker who sold it to you because they’ll justify, “Oh, everything’s fine.” No, no, no. There’s one reason that your bond will break par when interest rates are this low, and that is when the ability to pay back your principal is eroding. Now, we’ve been giving this advice for over 10 years.
BRIAN: Four years ago the bonds of Puerto Rico started to break par, and clients who listened to us and sold their bonds right away salvaged many, many thousands of dollars because we know today that Puerto Rico is broke. Well, four years ago they started to break par. There were problems. Now the cows are out of the barn and those bonds are trading at around 25 cents on the dollar. Let me give you a heads up that right now today, bonds that are breaking par can be found in Illinois, Connecticut, New Jersey, Rhode Island, the northeast, California.
BRIAN: There are municipalities where those bonds are breaking par right now and we hope that you sell them. So the problem that we have with the corporate guarantee is the state debt, the municipality’s ability to pay back principal, and also Ambac, FGIC, and MGIC, the corporate guarantors, only have about 17 cents on the dollar in assets, hoping, I guess, that all the chickens don’t come home to roost when there’s a problem.
BRIAN: But that’s not how it works. In 2008, all the chickens did come home to roost. These are problems that we can steer clear of by just totally avoiding the municipal bond space and avoiding the corporate guarantors all together. That’s what we advise at Decker Retirement Planning. All right, the next highest guarantee is called an assumed guarantee. It’s FDIC.
BRIAN: FDIC, there’s no money there. It’s just Congress deciding what banks they’re gonna bail out, and they use tax payer money to bail out banks. We’re totally fine with it. These are CDs. So we used CDs, it was a no-brainer, before 2008. We could get 5% on a five year CD, 7% on a 10 year. We plugged that right into our buckets. It was a no-brainer.
BRIAN: Now, rates have plummeted, and we’re gonna talk about all the options. So this is a very important discussion. The highest guarantee in the world is a reserve guarantee. A reserve guarantee, and there’s three parts to it. First off, banks and brokers operate in this space and have what we call reserve guarantees. Step one, or the first layer of protection, is where you invest in these types of investments.
BRIAN: Let’s say you put 100,000 in with a bank or an insurance company. They have to, step one, reserve 5% on top of that. Those funds are kept separate. They’re required to be kept invested in short-term guaranteed investments like commercial paper, bankers’ acceptances, overnights, things like that, and held separate from the company shell so that if the company were to go down, like AIG almost went down in 2008, if the company did go down, those funds are kept separate.
BRIAN: They have a 5% reserve on top of that. They’re invested in short-term overnights, and there’s a third party, usually the CPA firm, that goes around on a quarterly basis and they sign off that those reserves are there, adequate, and marked to market. So if the company shell does go down, those funds are there, kept separate, and are to be protected. That third party verification comes with criminal liability if that third party signs off on assets fraudulently. That’s the first layer of protection. The second layer of protection is at the state level.
BRIAN: At the state level, the states take a piece of all these different investments when they’re invested, and they have a backup fund or a safety fund that can make you whole. If the company were to go down and your funds were compromised in any way, layer number two is at the state level to make you whole. If there is any reason to go to the third level, here’s what’s there. At the third level of protection in a reserved guarantee are a required consortium agreement at the state level to be signed so that all the different banks and insurance companies that invest in these types of investments are to cross-insure each other.
BRIAN: So if one company were to go down, all the different banks or insurance companies that invest in these kinds of investments are there to make you whole. So three layers of protection, the biggest guarantees out there. We as fiduciaries love and embrace a reserve guarantee. That’s what we think is best. So when it comes to the integrity of the guarantee, in our opinion the reserve guarantee offers the highest, strongest guarantee in this country.
BRIAN: Now, can you envision a situation where something could even take this guarantee down, like a country like the United States collapsing or whatever. Yeah, whatever. Then we’re all in big trouble. But we have a saying that if you’re in a crowd running from a bear, you don’t have to outrun the bear. And what we mean by that is we put our clients on very high ground so something would have to be really bad before it affects our clients because at Decker Retirement Planning, our clients are on very high ground.
BRIAN: When it comes to these guarantees, I’ll bring that up as we go through the different investments that are out there. At Decker Retirement Planning we are fiduciaries. We want to make sure that we cover all the different options that are out there. We’re not interested in having a client fund their plan and then six months later someone coming up to them and saying, “Well, did you know about this?”
BRIAN: And they go, “Geez, we didn’t talk about that.” And now there’s anxiety that’s unnecessary. So we want to cover all the different principal guaranteed options. CDs, municipal bonds, corporate bonds, government agencies, government treasuries, fixed annuities, savings accounts, personal pensions, life insurance, equity indexed accounts. We’re gonna talk about all of them right now. So when it comes to advantages and disadvantages, I’m gonna carve out of these 10 the fixed rate investments.
BRIAN: One, two, three, four, five, six. Six of the 10 are fixed rate investments. CDs, certificates of deposit, are a fixed rate obligation of a bank to pay you, the investor, a fixed rate over a fixed period of time. Municipal bonds are a fixed rate obligation of a municipality to pay you a fixed rate over a fixed period of time. Same thing from a corporation for corporate bonds. Same thing for government agencies like Fannie Mae, Freddie Mac, Sallie Mae, and government treasuries and fixed annuities is like a CD from an insurance company, an obligation for an insurance company to pay you a fixed rate over a fixed period of time.
BRIAN: That is the definition of these six. The disadvantage right now is the rate. So the seven to 10 year date for CDs are around 2.5%, municipal bonds 2.6%, corporate bonds 2.5%, government agencies 2%, government treasuries 2.4%, and fixed annuities 2.0%. Those are the approximate rates right now.
BRIAN: As far as alternatives, you could get around 2.5, 2.6% on these fixed rate investments for seven to 10 years. What about the other buckets? So let’s talk about savings accounts. Well, we’ve done our homework. We are fiduciaries to our clients. We’re a math-based firm. Some of our clients, I mentioned there’s three components to anyone’s portfolio in retirement.
BRIAN: Cash, they should have obviously, objectively, factually they should have some cash. We carve out emergency cash for our clients. Everyone has a different level. Typically it’s around 25,000 dollars, and that’s in savings, checking, credit union type of money. Daily, immediate liquidity. Bucket one is also a liquid account. So where are we getting the highest returns for principal guaranteed investments?
BRIAN: We’re getting 1.25, 1.3% from Goldman Sachs, CIT, from Capital One, and Synchrony. Those are places where we’re getting pretty good returns. Gosh, I just cringe when I think that 1.25, 1.3% are the best returns that we can find, but that’s where we are right now in interest rates.
BRIAN: We help clients set those up so that they have a good return on their emergency cash in bucket one. In years past, we used to draw very high returns from personal pensions. Personal pensions is where we would call the bank or the insurance company and say that over five years, 60 months, we’re taking X amount of money out of the client account, and we used to get paid 3 or 4%.
BRIAN: Now we’re getting 0.4%, so we do not recommend personal pensions anymore because the rates are just too low. In our opinion at Decker Retirement Planning, anyone who is telling you that cash value is a good investment is selling you life insurance. That’s our opinion. Cash value takes 15 or 20 years of patience before it even starts to grow in the illustrations that we’ve seen.
BRIAN: So we do not invest in life insurance cash value for our clients, but there is something that I want to make sure Decker Talk Radio listeners know about when it comes to life insurance. I’ll come back to that. The last one on this list to discuss is equity indexed accounts. They’re offered by banks and insurance companies, equity linked CDs if they’re from a bank, equity indexed accounts if they’re from an insurance company.
BRIAN: Here’s how they work. Instead of being fixed rate investments, they’re not, your principal is guaranteed and you capture around 60% of the stock market gain each year. So for example, in 2000, 01, and 02, when the markets lost money, 50% over that three year period, during that three year period you didn’t make any money, but you didn’t lose any money.
BRIAN: Then in 2003 to 2007, the markets doubled and every year you capture around 60% of that gain on the S&P 500. Then when the markets crater in 2008, you don’t lose a dime. Now, every year you have a new basis from which you cannot lose money. So every year your gain from the previous year is locked in. So then the markets get creamed in 08, and then when the market’s up 160% from 09 to present, every year you capture around 60% of that gain.
BRIAN: These have been around a little over 25 years. Having brought this up, I will tell you that we’re a math-based firm again. I keep saying that. Most of these are, in our opinion, useless and not competitive for two reasons: CAPS, C-A-P-S, and fees. So let’s talk about CAPS first.
BRIAN: These equity indexed accounts sound really good until when interest rates are this low, the insurance company or the banks say that yeah, you can make money, but not over 5%. That means that the most you can make, like last year the S&P was up 9% without dividends, 12% with dividends, and you could only make 5%. You’re gonna have some zero years in there, so when you factor in the zero years and the 5% cap, you might as well, in our opinion, buy CDs.
BRIAN: The other factor to make most all of these equity indexed accounts and equity lined CDs be uncompetitive is fees. So fees, let me give you an example. In our opinion, there’s a huge company that has a lot of fees attached to it. I don’t want to say the name of this company, but it’s a favorite for most of the financial planners and brokers out there because they pay the brokers and the bankers the most amount of money.
BRIAN: I had a conversation two years ago with a guy who said to me, looked me in the eye and he goes, “Brian, I put all of my client money in X, Y, Z company,” and I go, “Why would you do that?” He goes, “Well, duh, they pay me the most and if I give enough money to them, then they contribute to my 401K.” And gosh, Decker Talk Radio listeners, I wanted to take a shower after I talked to this guy because he’s supposed to be a fiduciary and he’s not.
BRIAN: Anyone who acts like that is not acting in fiduciary form. We’re a math-based firm and we work with an actuary out of Scottsdale, Arizona. Every Wednesday at 8:00AM we have a conference call where he tells us out of the hundreds of equity indexed accounts from banks and insurance companies, he goes through and out of the hundreds that are out there, we can only recommend three.
BRIAN: Only three out of the hundreds that are out there. These are three with low fees, three that don’t have caps. The highest one has been the best returner for the last two years. It’s a company that last year on a principal guaranteed account, it made over 9% in last year’s market, and is averaging 6.3%, and that’s what we recommend clients use for their buckets two and three.
BRIAN: If you haven’t heard about equity indexed accounts, this is something you should know about. If you do know about equity indexed accounts and you’ve been burned because of caps and fees, that’s another reason to give us a call and come in so we can show you factually, mathematically, what the highest returning principal guaranteed taxable accounts are today, and we’ll give you the names and go through those.
BRIAN: All right, sounds good. All right, so let’s keep going. The equity indexed accounts we typically use in bucket two and half of bucket three where we are factually, mathematically getting the highest returns for principal guaranteed accounts for those two slots for our clients. Now, we reserve the last half of bucket three for the next one that we’re gonna talk about here. These are called indexed universal life, IULs.
BRIAN: Indexed universal life offer the highest returning principal guaranteed account returns, period. These have averaged over 7%. Now, equity indexed accounts, the best of them are averaging 6.3. These are averaging over 7%. These are principal guaranteed, and these are a stripped-down life insurance policy where the death benefit is deemphasized and the growth rate is emphasized.
BRIAN: So for example, the way that these are funded, you fund it over three or four years instead of all at once, and then there’s an agreement between the IRS and the insurance companies that when you pull money out, if you fund it properly, when you pull money out, it’s tax-free because it’s pulled out as a loan. The reason that these are growing so fast is because instead of capturing around 60% of the S&P, you’re capturing over 75%, typically, of the S&P.
BRIAN: This one does have a cap, yes. The worst you can make is 2%, which is by the way almost a CD rate at 2.5. The worst you can make gross is 2%, and the best you can make, some of these options have caps of 17.5% on a principal guaranteed account. Now, these expenses on these accounts are front-end loaded, so there’s a death benefit for the first, typically, four years, and then it drops way off.
BRIAN: What we love about these are four important things: it’s the fastest growing principal guaranteed tax-free account. Number two is the liquidity. After year one you have access to 95% of your liquidity. Number three, these offer very high returns for tax-free income after 10 years, and then number four, again, we’re a math-based firm. If a person is 20, 25 years in retirement and they’re pulling income out of these, when they pass away, they’ve put money in, they’ve drawn income out, and then they get a small death benefit on top of that.
BRIAN: Typically, the IRR, the internal rate of return is over 6%, which is tax-free. Now, 6% tax-free is the tax equivalent for someone in the 25% tax bracket. It’s the tax equivalent of like an 8.1% CD rate. Now, the caveat is this is life insurance and you have to qualify to get it. So if you’re over 75 years old, we wouldn’t recommend it.
BRIAN: If you’re in bad health, you can’t qualify for it. So this is something that we take applications for, we get the actual numbers back, and if we’re hitting the IRRs of 6% or better, then we use it. If not, we don’t use it. We’re fiduciaries to our clients. We’re math-based. We look at the bottom line, net of fee return for all our client options. But if you can qualify for this, which most of our clients do and can, this is a fantastic investment and we want to make sure you know about this.
BRIAN: By the way, why haven’t your bankers and brokers recommended these to you? Question, why haven’t they recommended these to you? It’s because there’s no security commissions offered for these. These guys are not incented to give you information about these because they get paid more for the annual fees that they charge on your pie chart than by recommending these to you. So that’s why.
BRIAN: But these indexed universal lifes, we use these and love to use these for our clients that can qualify. So that’s where we’re getting the highest returns on principal guaranteed accounts. So Mike, we just went through all the options out there, advantages and disadvantages. I’m ready to move on to risk options, but there’s no way in eight minutes that we’re gonna finish.
MIKE: No, and if you’re just tuning in right now, this is Decker Talk Radio’s protect your retirement KVI570 or KNRS 105.9FM. For those just tuning in too, we’re giving a detailed description of investment options and pulling the curtains back on how they actually work for your retirement. You can always catch this show at DeckerRetirementPlanning.com or on iTunes or Google Play. Just search for Protect your Retirement.
MIKE: So Brian, for the next, gosh, eight, nine minutes, should we just start to dive in to the risk options, or should we just wrap up the show with a different topic and then just start full fledged next week?
BRIAN: Gosh, I hate to start this, Mike, and then have to switch over. But let’s talk about risk strategies that I think are laughable, and then we’ll start the risk bucket options.
BRIAN: Some people are thinking that they’ve got their downside protected when it comes to their bucket options on risk, and they go from having all of their money at risk… One of the things that we do at Decker Retirement Planning is we typically only have 25% of their money at risk. That’s important for two reasons. One is they’re taking 75% less risk, huge.
BRIAN: And number two, they’re being charged 75% less in fees. So when clients typically come over to us and they see that we’re not charging them any management fees on their emergency cash or on buckets one, two, or three, which is about 75% of their money, they love that. Fees go way down. And when they see that they’re earning very good returns, like I say, their cash is earning 1.25, 1.3%, their principal guaranteed accounts are earning on average 6.1, 6.2, 6.3, and over 7%.
BRIAN: They are loving it. And then their risk accounts that we’re gonna talk about next week average annual return net of fees of over 16.5%. Clients really love this. So this is something that’s very important that we do for our clients so that we can shrink their risk. When it comes to risk, we have a focus at Decker Retirement Planning on comprehensive risk reduction.
BRIAN: So the way we set up plans is we bring down your interest rate risk to zero because none of the accounts that we use are bond funds. We shrink your stock market risk significantly. There is no stock market risk in your emergency cash, buckets one, two, or three. None, zero, nada. 75% of your portfolio has no stock market risk, meaning that when the markets crash every seven or eight years, this part of your portfolio, 75% approximately, has zero stock market risk.
BRIAN: You have priceless peace of mind. The 25% or so that does have stock market risk, we use a two-sided model, meaning these are trend-following models that do well when the markets go up, and they do well when the markets go down. We have six managers that we’re currently using. Five of the six managers made money in 2008, and they did well in 2000, 01, and 02 as well.
BRIAN: So who do you know, Decker Talk Radio listeners, that made money in 2008? Who do you know that made money in 2000, 01, and 02? These are trend-following models. We’re a math-based firm. We are fiduciaries to our clients. We’ve done our homework, and I’m talking generally. Next week I’m gonna talk specifically about these managers, but here’s how this works. Stock markets are gonna be doing one of three things. The trend will go higher from here, which has never happened, by the way.
BRIAN: We talked at the beginning of this show about how the stock market is currently valued at 25 times earnings, and it’s only been higher twice before, 1929 and 1999, and the 10 years after that, there’s never been a time in the history of our stock market that we’ve hit 25 times earnings on the stock market, and 10 years from now, where anyone made money.
BRIAN: So, for this option number one of the markets to go up from here, it’s never happened before. It could. If so, our clients will be fine. But if the markets trade flat from here, our clients are also fine because of how the equity indexed accounts work. They don’t lose money when the markets go down. They make money when the markets go up. So if the markets are gonna chatter for the next 10 years, we do fine. Our two-sided models do fine with chatter, and the principal guaranteed accounts do fine with chatter.
BRIAN: But listen to this. If the markets go down like they did in 1929 after that in the Great Depression, and if we have a repeat of 2000, 01, 02, then our trend-following models are designed to make money as markets go down, and our principal guaranteed accounts lose nothing. They lose nothing.
BRIAN: If people feel like they’re taking too much risk, we should bring them in, have them talk to one of our planners.
MIKE: Yes, absolutely. So, as we wrap up, a reminder that you can access our radio shows anytime at DeckerRetirementPlanning.com, on the top right corner, you can just click the radio show. We’ve posted every show since the show has started. You can listen to them at your convenience. We also had a client that noticed this and loved it too. We post the transcripts, so if you can’t necessarily have a place to listen to it, you could post up and just read it, which is wonderful. But also, you’ve got on iTunes or Google Play, we post every Friday this show via podcast so you can listen to it at your convenience.
MIKE: That’s just search on any podcast, iTunes or Google Play, posted weekly. And last but not least, we do have events that are coming in, coming around about every three weeks to each location, so you can go to DeckerRetirementPlanning.com for those events. Those are dinner seminars where it’s a fire hose of information where we go through it all live, which is a fun thing. You can schedule that at DeckerRetirementPlanning.com.
MIKE: Everyone, have a great week. Fall is here, hopefully you’re enjoying the settling down in hot chocolate or coffee or whatever your warm drink is, and we’ll talk to you next week. And we’re talking about the risk investment options, so stay tuned. It’s gonna be a good one. Have a great week, everyone.
