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 options you could have that are principal guaranteed or “safe money” that you can have as alternate to bonds or funds. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good day everyone and welcome again to Decker Talk Radio’s Protect Your Retirement. You’re listening to Brian Decker and Mike Decker from Decker Retirement Planning. Calling you today, we’re going to be talking about principal guaranteed accounts, long term care and more. But first, before we get started here, let’s talk about market news. Brian, what’s going on with the markets today?
BRIAN: Lots of information. This is probably going to be 10 or 15 minutes on the stock market. I find this so interesting, Mike. First of all, for Decker Talk Radio listeners, in 1999, the peak of the market, price earnings ratios were never higher. The valuations of the markets in all of the history of the stock markets were never higher than 1999.
BRIAN: Number two valuation in the stock markets is right now. We have a higher valuation than 1929, higher than at any point except for 1999. Here’s the similarities. Number one, in 1999, the fed was hiking rates because they were worried about inflation pressures that were present. The economic growth was improving, by the way, Mike, tell me if you see any parallels to today. Interest and inflation rates were rising, earnings were rising, through the use of quote-unquote “new metrics,” share buybacks, mergers and acquisition sprees.
BRIAN: Who can forget the great markets in 1999, of companies like Enron, Worldcom, Global Crossing. By the way, all three of those companies are gone. Margin debt leverage was at the highest level ever on record. Stock market was beginning to go parabolic, as exuberance exploded to it. Now it’s a can’t-lose market. And the most speculative asset of choice? Dot com stocks. So that was 1999. 2007, the next peak of the market. Here’s what was happening; tell me if this rings a bell.
BRIAN: The fed was hiking rates, ’cause they were worried about inflationary pressures, the economy was growing and improving, interest rates and inflation were rising, debt and leverage provided a massive buying binge in real estate, creating a wealth effect for consumers and high valuations were justified because of the quote-unquote “Goldilocks economy,” is what we called it. Margin debt leverage was at the highest level on record, stock market was beginning to go parabolic, as exuberance exploded in a can’t-lose market. The speculative asset of choice? Real estate.
BRIAN: In 2017 slash 18, right now, here’s where we are. The fed is hiking interest rates, as worries about inflation pressures are present, economic growth is improving because of three hurricanes and two wildfires last year, interest rates and inflation are rising, earnings are rising through the use of new metrics, share buybacks and mergers and acquisition sprees, margin debt leverage is at the highest level ever, surpassing by the way 2007 and 1999.
BRIAN: Stock market beginning to go parabolic as exuberance exploding into a quote-unquote “can’t-lose market.” The speculative asset of choice? What would you say, Mike? It rhymes with Mitcoin.
MIKE: Bitcoin? Yeah, Bitcoin.
BRIAN: Bitcoin. Yeah.
MIKE: And all the other, do you know there’s over a thousand cryptocurrencies that are out there doing quote-unquote “well,” or gaining assets?
BRIAN: No I…
MIKE: Isn’t that crazy?
BRIAN: I didn’t know that. A thousand, wow.
MIKE: If you want to go to Wikipedia and look up cryptocurrency, it’ll show you a list of all the cryptocurrencies. Now everyone’s getting in on the bandwagon of this fake money, or cryptocurrency or whatever you want to call it.
BRIAN: But right now Mike, my point is this: we’re a math-based firm, Decker Retirement Planning. We know that we’re in stratospheric valuations and the market direction is high. All that seems good, it looks like a can’t-lose market. We have a two-sided strategy in our markets. For the risk clients that we manage money, we have six managers, three of them have a two-sided strategy on the stock market. They made money in 2000, ’01, ’02, when the markets lost 50 percent, they made money in ’03 to ’07.
BRIAN: They made money collectively in ’08, and they have made money every year, well, every year in the last 17 years. Collectively these three stock or equity managers have made money, because it’s a two-sided model. It’s a computer algorithm. Three of our six managers have nothing to do with stocks. Three of our managers are invested in assets that go up in value when the markets get creamed. Gold, silver, treasury bonds, and oil. We have two-sided strategies with gold, silver, treasury bonds, and oil.
BRIAN: Average annual returns for all the six managers combined, net of fees is 16 and half percent. So we use them and our clients are not worried about the markets giving back 30, 40, 50 percent of the gains since March of 2009, the bottom of the markets. Valuations, when I go back to 1999, 2007, and right now, valuations in all three cases exceed the long term market peaks of 25 times reported earnings, investor confidence is pushing extremes in all three cases…
BRIAN: …deviations from long-term means and stock prices, rising relative strength, moving averages, the markets were pointed in a higher direction. This brings up very important investment guidelines I’ve learned in the last 32 years that I’d been doing this. Number one, investing is not a competition. There’s no prizes for winning, but there’s severe penalties for losing. Number two, emotions should have no place in investing. Mike, we’ve told our clients for decades that there’s two emotions that keep human beings from being able to make money long-term in the stock markets.
BRIAN: They are…
MIKE: Oh, it’s greed and fear.
BRIAN: Yep. Fear and greed. Those are the two emotions that keep human beings from doing the right thing. That’s why none of our managers are human beings. They’re all investment algorithms. Computer algorithms have produced the highest gains. They’ve been beating all the managers for more than, gosh, 15, 20 years now. The next thing I want to point out is, the only investments that you can buy and hold are those that provide an income stream with a return of principal function.
BRIAN: That’s very important, foundational to the planning we do at Decker Retirement Planning, is that the money that is part of your income, part of your portfolio; let me go back a step. People working for 30, 40, 50 years, and they produce a nest egg that produces income from assets for the rest of their life, that portfolio income plus social security, plus any pension or rent or real estate, provide incomes. That’s the new paychecks after you retire.
BRIAN: After you take that last paycheck, your new paychecks are going to come from your portfolio, number one, social security, number two, and any pension or rent or real estate. Foundational, critically foundational. The keystone to our income planning is that we have laddered principal guaranteed accounts that we’re gonna talk about today, that provide an income stream so when the markets tank every seven or eight years, like they have forever, there’s a-by the way, we’re in year nine of the seven-eight year market cycle.
BRIAN: 2008, 2001, 2002, that was a 50 percent drop. Seven years before that was 1994, market struggled then, and seven years before that was 1987, Black Monday, that was a 30 percent drop, peak to trough, 22 of that was on Black Monday, October 19. Seven years before that was 1980, ’80 to ’82 was a two-year 46 percent bear market. Seven years before that was ’73-’74. That was a drop of 42 percent. Seven years before that was ’66-’67, bear market.
BRIAN: That was a drop of over 40 percent, and it keeps going. So we are due, the seven-eight year market cycle, we are due for a hit. Our clients, we have experience in this, we’ve had clients go through 2008, our clients received their income from principal guaranteed accounts that are laddered, so bucket one is for the first five years that provides income, bucket two grows for five years, pays for year six through 10, bucket three grows for 10 years, pays for years 11 through 20, so when the market gets creamed in the next 20 years, usually historically every seven or eight years, so three more 2008s, our clients will not even feel it.
BRIAN: Not in their principal guaranteed accounts. They will not lose a dime. It’s very, very important you know that the advice you’re getting from bankers and brokers, but by the way are not fiduciaries, they’re telling you to stay fully invested, that you can’t time the markets, be a long-term investor. None of that makes any sense. When you’re retired you cannot, you cannot mathematically handle another 30 or 40 percent hit every seven or eight years. When you’re retired you can’t do that. And then you’re drawing on that money on top of that.
BRIAN: So mathematically you’re committing financial suicide by following the advice of your banker and broker, because when you draw income from fluctuating accounts, you’re compromising the gains when the markets go up, and you’re accentuating the losses when the markets go down. You’re committing financial suicide by doing that. Okay, back to this list that’s describing where we are right now. The rules of investments should be that market valuations, when you’re at extremes, should give you a caution.
BRIAN: We are at market extreme valuations right now. Fundamentals in economics drive long-term investment decisions. Fear and greed drive short-term trading. No what type of investor you are, and determine the basis of your strategy. Investment is about discipline and patience. If you lack either one, it can be destructive to your investment goals. There’s no value in daily media commentary. Turn off the television. Save yourself the mental capital.
BRIAN: And investing is no different than gambling when you are doing something that you don’t understand. Both are guesses about future outcomes based on probabilities. The winner is the one who knows when to fold or protect capital, and when to go all in. I don’t know when that timing is. That’s why we use mathematical computer algorithms that have been very, very good in timing the trends of the market. The market’s a two-sided market: it goes up and down. It makes no sense to have a one-sided strategy in a two-sided market.
BRIAN: Last one, Mike, is no investment strategy works all the time. The trick is knowing the difference between a bad investment strategy and one that’s temporarily out of favor. That’s why with the six computer algorithms that we use, we use weighting, we weight the managers heavy, we overweight when they’re killing it, we underweight when they’re struggling, and we zero them out when they’re actually losing money. So as an investment manager, I’m neither bullish nor bearish; I simply view the world through a mathematical lens of statistics and probabilities. My job is to manage the inherent risk of investment capital.
BRIAN: If I protect investment capital in the short-term, the long-term capital appreciating takes care of itself. Here’s another fact, Mike, and this will probably surprise you. Here is today the second full week of January, and already the S&P 500 targets are surpassing year-end, calendar year 2018 targets, for some investment firms. The S&P right now factually is the most overbought with the exception of 1999.
BRIAN: Global stock markets started off this year with a bang, the US stock markets exploded to record highs, foreign stock markets hit records, new records in North America, Europe, Asia, all undeveloped and emerging markets, so what’s not to like? Well, there’s just one thing, one problem: stocks are stretched on a historical level. Kind of beating this dead horse. May not be a problem in the moment, but could come back later in the year if things start to go wrong. Let’s look at how much they’re stretched. Relative strength, we’re at the top part of the bars.
BRIAN: The last two times this happened was in 2006, 2007, when the markets pulled back seven to 10 percent; seven percent and 10 percent, respectively. I wish people would ask the question, what would your portfolio look like if there was a North Korea strike? We strike them, they strike us. Are you ready for that? It’s not a silly question anymore. What would your portfolio look like? In my opinion there’s two risks in 2018, two risks that we’ll call Trump risks.
BRIAN: First risk is the possibility of a North Korea strike, and the other is a risk for tariffs, to try to get the trade balanced. Right now commodities are very cheap. Every else, real estate, bond stocks, everything else is expensive. Commodities right now are very cheap. Gold may be bottoming-by the way, that’s why we’ve made a lot of money, Mike, this week, for our clients, the bonds is down in price, up in yield, so we are short bonds, we’re up in long gold and silver for…
BRIAN: …gosh, probably a couple months, and we’ve caught this huge gain. Gold may be bottoming, it’s breaking out to new highs, since at least the last couple years. So anyhow, Mike, that’s the end of the market news. I wanted to bring people up to date on that. And now let’s jump into the segments that we do, Mike, are to be connected. If someone is interested in hearing market information that we update each week, [COUGH] or they want to dial back and get a piece of…
BRIAN: …something that we’ve talked about, because we cover things sequentially in the planning process that we do at Decker Retirement Planning. Mike, what would they do? How would they get past information?
MIKE: Well for past information, we do post it as a podcast on iTunes. Just search via the podcast, not the general search. If you don’t know how to do podcasts, ask a friend or a grandson or someone like that that can help you with that. Or Google Play as well. But you can also go to Decker Retirement Planning dot com, and the tab “Radio Show,” you can go there and every show is recorded and posted on there, so you can listen to it literally for days…
MIKE: …as each show is about an hour long, and we’ve been doing this show for quite some time now. About, what is that, a year and half, two years almost? For “Protect Your Retirement.” We do broadcast KVI 570, or KNRS 105.9. But yeah, Brian, a quick sneak-peak for a moment as we talk about principal guaranteed accounts.
BRIAN: I just went through about how extended the markets are, and the bankers and brokers are telling everyone, stay the course, you don’t need any parachutes, the plane, even though we’re out of fuel, we’re looking good.
MIKE: The Titanic can’t sink, right?
BRIAN: Right, the Titanic can’t sink. So we use two-sided strategies that are created to make money in up or down markets.
BRIAN: What we do as fiduciaries to our clients at Decker Retirement Planning, is we go out to all the databases, like the Wilshire database, largest database of money managers in the world; Morning Star database, largest database of mutual funds in the world; and Timer, Track, and Theta. And we want to know who is producing the highest net of fee returns out there. We’re an independent company, we’re fiduciaries to our clients, we use those six managers.
BRIAN: Now every time I do this, I get around 60 or 70 managers that are mathematically beating us. Number one, yes they’re beating us, but they’re closed to new investors. I can’t work with them, they’re not taking any new money. Number two, they’re hedge funds. We’re not gonna put any retirement money in a hedge fund, because the way that they’re paid has them taking risks that we don’t feel comfortable with. Let me give you a scenario.
BRIAN: Let’s say that, Mike, you and I are managing a hedge fund, we get paid one percent that keeps the lights on, but we get paid two and 20 if we can get the account [CLEARS THROAT] performance above 2 percent, we get 20 percent of those gains above 2 percent. So what that means is let’s say that we’re ending the year 2017, November 1, we’re down 10 percent for some reason, not true of last year, but for some reason let’s say that we’re down 10 percent. Guess what we’re gonna do every single time.
BRIAN: We are going to goose the portfolio with options, futures, leverage and derivatives, to get that sucker up there, because we want to make sure that that portfolio pays us out two and 20. If we blow the portfolio up, and you read about in the papers, it’s not uncommon to hear hedge funds that blow up, if we blow the portfolio up, ah, we can always start another one. So we don’t feel comfortable as fiduciaries to our clients to recommend hedge funds for retirement money. Third, yes, this group is beating our managers, but their minimum, per account minimum, is three or four or five million dollars.
BRIAN: That’s hard to diversify. And then the last one is called high beta stocks. High beta stocks and managers that, in the good years, they go way up. In the bad years they go way down. For example, CGM Focus and the Bruce fund are two mutual funds that fall in this category, that mathematically deserve to be on our platform, but we can’t use them because in 2008, the last draw down, they lost over 40 percent, they both did. So what’s left, the six managers we’re using, net of fees, is averaging over 16 and a half percent combined.
BRIAN: Those are the best managers we can find. They have two-sided strategies, and we use them for our risk account. So Mike, here’s where I want to make an offer for people to come in. If they don’t have a strategy for the downside, and it’s buy and hold, and they’re listening to the bankers and brokers and they took a bruising in ’08, and they still remember that, that is no strategy. That’s a deer in the headlights, do nothing, ride it out, take the hit strategy that you can do in your 20s, 30s, and 40s. You can’t do that when you’re over 55 years old, in our opinion.
BRIAN: All right. So now we’re gonna talk about long-term care. Long-term care is a very sensitive topic for married couples.
BRIAN: The definition of long-term care is that one spouse can bankrupt another spouse due to healthcare costs. We are fiduciaries to our clients; we’re licensed to sell long-term care. Mike, do you know of any long-term care that we’ve ever sold in the history of our company?
MIKE: I can’t think of anyone.
BRIAN: Okay. Let me tell you why. There’s a statistic out there that we feel is deceptive, that the traditional long-term care industry trots out, and that is this. That 70 percent of Americans will spend time in a long-term care facility.
BRIAN: Write this down, go to your computer, and you will see, if you Google, and you use the, well, this census. Go to the US Census, and ask the question, How many Americans statistically spend time in a long-term care facility. The statistic is 12 percent. So what’s the discrepancy? Traditional long-term care, deceptively, in our opinion, counts even one day in hospice as spending time in a long-term care facility.
BRIAN: So if you strip out 30 days or less of hospice, that statistic drops incredibly fast. Now you have options. Because we are fiduciaries to our clients, and we are math-based and independent, we want to hope for the best but plan for the worst. So let’s take you through a scenario that you people that are over 55 I bet have seen, and it’s sad. Let’s go through the journey together. The most difficult situation financially, when it comes to long-term care, is a healthy body with Alzheimer’s.
BRIAN: Now we’re talking a very difficult journey. That’s the toughest combination that we’ve seen. So the first, I always through the guy under the bus, let’s say that John and Jane, they’re married. John is diagnosed with Alzheimer’s dementia. The first third of this journey is not gonna cost them anything. It’s gonna be all on the back of Jane, where there’s emotional cost, but not financial cost. Jane is taking care of John for the first third of this journey. The second third of this journey is where it’s more than Jane can handle; now John needs in-home care.
BRIAN: In-home care is not 10,000 dollars a month right out of the box, it’s around 1500 dollars a month and it goes up from there, as you need more and more services, more and more help. At some point, that’s the second third of this journey, at some point, John dresses up in his suit and tie, goes out to board meetings, wanders out in the neighborhoods and the freeways at two in the morning, now John is endangering himself. It’s more than anyone can handle, and so now John needs full-time care. Now it is 10,000 a month. Sadly, tragically, this final third of this journey is measured in 18 months, 24 months.
BRIAN: So 10,000 times 24. Do you have 250,000 dollars? So let’s talk about that. Do you have 250,000? Most people that we do the planning with have it two different ways. They have it in a paid off home, or in the equity in their home. So if they had to, they could self-finance, and remember, there’s a 12 percent, according to the US Censuses, there’s a 12 percent risk that you’re gonna spend time in a long-term care facility. Not 70 percent. So you have it in the equity of your home.
BRIAN: Or secondly, in the planning that we do for our clients, we create a buffer for long-term care and inflation protection in the risk accounts that we handle. So typically there’s five different ways, actually there’s six, I’ll cover all six. There’s six different options that you have for funding your long-term care risk. Number one is self-financing, that’s what we just talked about.
BRIAN: That’s what we as Decker Retirement Planning planners do, is that we recommend what’s best for our client, and the client will end up making their own decision. But we go through how they have the opportunity to self-finance that risk. Second option, by the way, the tragic saying that we have for long-term care is, if you need it, you can’t afford it, if you don’t need it, you can afford it. Can, C-A-N. So when it comes to the first option, option one is to self-finance.
BRIAN: Option two is probably the most common, and that is traditional long-term care. If you’re going to get a policy, it’s typically in this category, it’s called traditional long-term care. This is where, in your healthy years, you take out a policy, and for years pay into what is called guaranteed level premium. Mike, are they guaranteed level?
MIKE: No. [LAUGH]
BRIAN: What? They’re called guaranteed level premiums, it says right here.
MIKE: Well you gotta read the fine print on how that actually works.
BRIAN: Right. And so what we see is in your late 60s early 70s, you get what we call the letter. The letter informs you from the insurance commission of your state, that your premiums have just gone up 60 percent. Why 60 percent? ‘Cause that’s the maximum allowed, and that tranche of insurance recipients of traditional long-term care have been just allowed to jack up the price 60 percent. Now here’s what the insurance companies hope you do: they hope you cancel. So they keep 15 or 20 years of premium, and now they have zero risk.
BRIAN: Or, plan B, also benefits to traditional long-term care insurance companies, that’s where you cut your benefit in half to try to keep the premiums the same. Now the insurance company still benefits because they’re getting paid the same for half the risk. So we want to inform you that if you want traditional long-term care, that this is ahead, and guaranteed level premiums do not, do not mean that they will not raise the premiums on you. So we as fiduciaries to our clients want to make sure you know that.
BRIAN: Now if you have it, keep it. We’ll plan around it, we want to make sure that you don’t panic and cancel your benefits. So if our clients come to us and they have it, we plan around it. The third option is where an insurance company representative gets a hold of you and points out factually that, you know, John, Jane, if you get hit by a bus, all your premiums to long-term care go down the drain.
BRIAN: So what you should do is you should buy a whole life policy or universal life policy, put a long-term care rider on it. Now you get your death benefit, or your long-term care benefit, guaranteed. Guaranteed. The problem we want to point out is, that is very expensive. It’s typically a thousand dollars a month per person for life. So we want to point out that primarily it’s very important to make sure that you have cash flow to enjoy your golden years in retirement.
BRIAN: If you get talked into a traditional long-term care policy, where you have 12 percent chances of using it on the long-term care side, I don’t know that we’re doing you a favor in doing the right thing. So we want to point that out, that you can have your cash flow in this case, and cover your long-term care risk out of pocket, instead of cutting into your cash flow during retirement years. The next one is one that we actually do recommend when we see cases of people that do need traditional long-term care, and they can’t afford it.
BRIAN: It’s called, oh my gosh, Mike, I’m having a brain freeze here. It’s called, well I’ll describe it. I’ll think of the name in a second. It’s where you pay into-it’s called asset-based long-term care. This is where you pay into a fund over ten years, you save up, say 10,000 a year for ten years, so that you have 100,000 in the account. When you die, this is per person by the way, when you die, you get about 2X death benefit.
BRIAN: If you go into a facility, you get 3 to 4X long-term care benefits. If you change your mind, it’s liquid, you can just take all that money back. The problem is there’s a lot of people who have a difficult time saving 10,000 dollars a year per person for ten years. Again it’s a cash flow issue. And we would rather have you have your cash flow in your retirement years, and be able to self-finance that risk separately. The last one, I always save the worst for last; the last two are ugly.
BRIAN: The number five option is called a safe harbor trust. Safe harbor trust is where you’re freaked out about the 70 percent statistic that the long-term care industry trots out, and so you call a sibling, a brother or sister, and you say, hey brother John, I’m gonna move all our assets in your name under the safe harbor trust, so that we can avoid any financial hits from either one of us taking the long-term care journey.
BRIAN: And so after that person passes away, we’ll have all those assets come back, we’ll have the taxpayer pay for our long-term care costs, and then we’ll be able to survive after the one spouse passes. Well the IRS got in front of this, and they put in a clawback provision that says that if you’re diagnosed with Alzheimer’s or dementia within five years of creating and funding this safe harbor trust, they can claw those funds back, and you don’t get to have taxpayers pay for your healthcare costs. But the bigger problem is this.
BRIAN: Your sibling John can call you up from Cabo San Lucas one day and say, hey sis, hey bro, we really like these assets you gave us, and we decided to keep them. They legally can do that, ’cause it’s in their name. So we don’t recommend safe harbor trusts. Finally, tragically, this is the most difficult. The people who can’t afford long-term care deal with it this way. It’s just divorce. Now that the spouse doesn’t even recognize the other, divorces happen for financial survival.
BRIAN: So those are the six options. Mike, this would be a good point that if someone is very concerned about the risk that they have with long-term care, ’cause this is a big deal, they can call in, and we can set them up with a planner that can help them.
MIKE: Let’s do it. You owe it to yourself, the lifetime you spent working and saving, to get these ducks in a row. So if you’re 55 years or older, and have at least 300,000 of investable assets, call right now: 1-800-261-9446. That number one more time is 1-800-261-9446.
MIKE: And when you call in, they’ll gather your information, and then on Monday we will reach out to schedule a visit that works for you, either in our Seattle office, our Kirkland office, or our Salt Lake City office. You’re listening to Protect Your Retirement, from Decker Talk Radio, on KVI 570 in the greater Seattle area, or KNRS 105.9 in the greater Salt Lake area. Brian this is great information, let’s keep going though, we still have another, oh, 20-some minutes to cram in…
BRIAN: Yep, we’re gonna talk about principal guaranteed bucket options. So any portfolio in retirement, Mike, has three parts.
BRIAN: Cash, ’cause you need emergency cash, you need liquidity for emergencies, paying your bills, whatever.
MIKE: Mm-hmm.
BRIAN: And on the cash side, we try to optimize… You can get 1.4, 1.5 percent in the money markets accounts from online accounts from Goldman Sachs, CIT, Charlie Iceberg Thomas, CIT, Capital One, Synchrony, and Ally.
BRIAN: Those are the five that we most commonly recommend for clients to look at, and to see if its a fit, but we want mathematically our clients to know that out there, there’s 1.4, 1.5 percent money markets right now today. That’s how we optimize their cash. Now, there’s three parts to your portfolio, one is cash, two is safe money, and three is risk money. Now we as fiduciaries want to make sure that our clients know all the different principal guaranteed accounts out there, and which ones are best for them.
BRIAN: Before we get into the, I think there’s 10 of them, we’ll go through 10; and by the way, this is important because we don’t want our planning clients to go through with Decker Retirement Planning, and then find out that, darn, they find out from a friend that there was something out there that we didn’t cover. We promise our clients that we cover everything that’s out there, so that we can see if those are a fit or not for our clients. So when it comes to principle guarantees, let’s talk about the integrity of the guarantee itself first.
BRIAN: And basically there’s three different types of guarantees out there. And I’m gonna start three-two-one. The lowest guarantee that we don’t recommend anymore is called a corporate guarantee. Corporate guarantee is where you have, from municipal bonds, Ambac, FGIC, MGIC, those three companies are the big boys, and they step in and guarantee municipal bond payments, so there’s no credit risk. Well, before 2008, we were fine with this.
BRIAN: After 2008, with all the pension obligations that the states have taken on, they’re dragging municipalities into this, and right now, today, on average, there’s about 17 cents on the dollar coverage of huge exposure that’s out there. We as fiduciaries to our clients at Decker Retirement Planning, we are uncomfortable with the amount of exposure that these companies have. Now we’re not saying that all municipal bonds are gonna go broke, we’re not. We’re not saying that.
BRIAN: But we are saying that we are uncomfortable that the train wreck, the day of reckoning that has to come to payback all these pension obligations that the states have taken on, we’re uncomfortable with that. And we want to steer clear and make sure that our clients have no part in that train wreck that day of reckoning, when that does finally happen. So we do not recommend municipal bonds because of the credit risk, and the lack of assets…
BRIAN: …and the uncomfortably high exposure that the big corporations have in the credit risk situation for municipal bonds.
MIKE: Hey Brian?
BRIAN: Yes?
MIKE: What should someone do if they have a municipal bond?
BRIAN: Okay good, we’ve been giving this advice for years. There’s a very easy way that they can assess what their credit risk is, and that is simply looking at their statements from their bankers and brokers on their municipal bonds, and see if the price of their bonds has dropped below zero. Now obviously if you have a zero coupon bond, disregard this.
BRIAN: But if you’ve got a three, four, five percent coupon bond, with today’s low interest rates, it should be trading, depending on the maturity, it should be trading around 109, 112, somewhere in there. If in today’s low interest rates, your bond drops below zero, that’s a red flag. I’m sorry, drops below par. Par is 100 point 00, and if it drops below par, trades at 99, 98, 97, or below, that’s a red flag. We hope you pick up the phone and sell it.
BRIAN: Don’t call the banker or broker that sold you the bond, because they’ll justify why they sold it to you, telling you that everything is okay. We’ve been down this road so many times with other clients. We hope you pick up the phone and sell it. Now the last time that there was a major implosion was four, five years ago, clients started to see on their statements Puerto Rican issues dropping below par. We told them to sell it. Remember, this is their safe money. We told them to sell it, now the cows are out of the barn, to use that expression.
BRIAN: Puerto Rico’s broke, and those bonds are trading at 20, 25 cents on the dollar, so we want to make sure that you know that right now today, municipal bond municipalities trading below par, are occurring in the northeast, New Jersey, Connecticut, Rhode Island, Vermont, New York, Illinois, and California. California municipalities, if you’ve got one that’s trading below par, you can save yourself many thousands of dollars and protect your principal by following this advice that we’re telling you.
BRIAN: And that is if you’ve got municipal bonds that are dropping below par, 100.00, that you just sell them. So that’s the third. There’s three different guarantees, the lowest in our opinion is the corporate guarantee. The next highest is what we call an assumed guarantee. Assumed guarantees are guarantees from FDIC. These are CDs. There’s no account there to bail out banks, it’s just on an as-needed basis, congress decides who they’re gonna bail out with the taxpayer money, our money. We’re totally fine with FDIC or the assumed guarantee.
BRIAN: It’s just that the problem is right now, the 10-year CD rate, seven to 10 years, is around 2.6 percent. It’s pretty low, not the greatest. The highest guarantee that we are comfortable with, the highest guarantee is called a reserved guarantee. Reserved guarantees have three parts. Number one, when you place funds with banks or insurance companies that have reserve guarantees, if you put 100,000 in something that, say, is in a reserved guarantee, they have to reserve five percent of their own money…
BRIAN: …on top of your hundred thousand, they have to keep those funds separate from the corporate shell, so if the company goes under, those funds are kept separate, they’re invested in short-term instruments like commercial paper, overnight, bankers’ acceptances, and this is very important, quarterly, a third party, usually the CPA firm audits these with criminal liability, by the way, if they fraudulently sign off that these reserves are intact and fine, mark to market, and they’re not, those people go to jail.
BRIAN: So the first layer of protection is the five percent reserve, kept separate, short-term invested, overnight, with quarterly third parties verifying those reserves are there, mark to market and sufficient. That’s the first layer of protection. The second layer of protection is on the state level. The states, they take a piece of these transactions and have a backup fund that is there and exists to make you whole,…
BRIAN: …if an insurance company or a bank were to go under, these act as a backup. And third and final, is the states require a cross-licensing, a cross-insurance consortium agreement to be signed so that the states and the insurance companies and the banks, if one of them went down, the others are there to cross-insure each other. So those are the three layers of protection. They exist, that in our opinion are the highest returning principal guaranteed accounts out there.
BRIAN: It’s called a reserve guarantee. I should bring up something on custodial relationships. Mike, do you remember the guy named Bernie Madoff?
MIKE: Oh yeah. Wasn’t that, or is it considered the biggest Ponzi scheme, practically that’s ever happened? I mean, that’s basically what it was.
BRIAN: Right, right. So Bernie Madoff was, and we’re giving valuable information out here to Decker Talk Radio listeners, Bernie Madoff a self-custodied operator.
BRIAN: What that means is, if you wanted to do business with Bernie, you had to write him a check. He had access to your money, he created his own statements. This is the ultimate fox guarding the hen house type of situation. He had access to your money, he decided what returns you got, and he created his own statements. All of that should be illegal. I lay that at the feet of the SCC to allow any self-custodied operators, that’s a travesty.
BRIAN: We in contrast, being fiduciaries at Decker Retirement Planning, we have a custodial relationship with our clients. When we finish the planning and clients transfer assets from banks and brokerage accounts to fund their accounts, we use TD Ameritrade as our custodian. TD Ameritrade acts as custodian, and grants us no withdrawal power; we don’t have any ability to withdraw, neither does the husband, he doesn’t have any withdrawal power on his wife’s IRA, or her retirement accounts.
BRIAN: So TD Ameritrade, in our custodial relationship, guards your funds, acts as the Fort Knox over your account, so you can have peace of mind that we at Decker Retirement Planning could never do to you what Bernie Madoff did to his clients. So this is very important. TD Ameritrade generates the statements, not us.
BRIAN: TD Ameritrade is there to make you whole through SIPC, if for some reason your accounts are compromised in any way. So this is very, very important that you have peace of mind when it comes to the different types of guarantees out there, and the different types of relationships with clients, there’s a vast difference out there. We recommend for our clients that everyone have a custodial relationship, number one, with a fiduciary, number two, and where their safe money is invested in reserve guaranteed types of investments.
BRIAN: Okay, having said all of that, Mike, we’re down to 10 minutes or less on covering the different guaranteed investments out there. So I’m sure this is just gonna bleed into the next week. Okay, CDs, municipals, corporates, government agencies, which are Sally Mae, Freddie Mac, Fannie Mae, government treasury bonds and fixed annuities. By the way, fixed annuities is just a CD from a bank, or from an insurance company. So before 2008, our job was easy. We just plugged in CDs. You’d get five percent on a five-year CD, seven percent on a ten-year.
BRIAN: Now it’s much more difficult. Now you could invest in CDs, municipal bonds, corporate bonds, government agency bonds, government treasury bonds or fixed annuities, for your safe money. But I want to give you some rates. Right now, the seven to ten-year rate on a CD is about 2.6 percent, municipal bonds 2.5 percent, corporate bonds 2.6 percent, government agencies 2.4 percent, government treasury bonds on a ten-year is almost 2.5 percent, and fixed annuities is around 2.3 percent.
BRIAN: So let’s say that the fixed rate for individual locking in type of returns, fixed investment, is around 2.5, 2.6 percent. Are there better options our there? Yes. So let’s continue. We’re just fiduciaries; we want to give you the information. You could use CDs if you want, but 2.6 percent mathematically is not the best rate of return out there anymore. Savings account, we talked about those, 1.4, 1.5 percent through Goldman Sachs, CIT, Capital One,…
BRIAN: …Ally, Synchrony, there’s a lot of good money market accounts out there that are returning more than zero, which is what most people are getting. Personal pensions, it’s another option, in years past, before 2008, we would call the bank or the insurance company and find out on our bucket one, how much they could get on a personal pension. A personal pension is where we would take 250 thousand and use that as a source of funds from the portfolio for that first five years of investing. We’d call the bank or the insurance company and we’d get three or four percent on that money.
BRIAN: Now it’s 0.4 percent. We don’t use it. We don’t. The next two is where I’d like to spend more time, but we only have seven minutes. Life insurance, if anyone tells you that life insurance is a good investment because of cash value, in our opinion they’re selling you life insurance. Now I’m gonna come back to that, there is something different that’s attached to life insurance we’ll talk about. But I want to talk about equity-indexed accounts, or equity-linked CDs.
BRIAN: Equity-indexed accounts if they’re offered from an insurance company, or equity-linked CDs if they’re from a bank, are out there, and here’s how they work generically. Generically, you put 100,000 in an equity-indexed account, and when the markets go down, you don’t make any money, but you don’t lose any money. So in 2001 and ’02, when the markets lost 50 percent, the good news is you didn’t lose any money, but the bad news is you didn’t make any either.
BRIAN: So in 2003 through 2007, when the markets doubled every year, with an equity-indexed account, you made about 60 percent of the market gain. Now every year, when the markets go up, you lock in that gain so when the markets go down, you don’t give up the previous year; you have a new basis from which the markets cannot take that away. Then in 2008, when the markets get creamed, you don’t make a dime but you don’t lose a dime. And then from 2009 forward, you make about 60 percent of the market’s gain.
BRIAN: Now we like these, but I want to give a very important caveat to these. We’re a math-based firm. Just like I said in the beginning of the program at Decker Retirement Planning, we have a relationship with a third party firm that on a weekly basis goes through the hundreds of different equity-indexed accounts and equity-linked CDs, and there’s only three of them that we would recommend.
BRIAN: Because most all the other equity-indexed accounts and equity-linked CDs are rendered not competitive because of high fees and because of low caps. Let me give an example: high fees, it’s very typical for these large insurance companies that, gosh I could tell stories on this, that last year with the S&P up 20 percent, this company boasted a six percent return, but, ah, there was another three percent in fees.
BRIAN: The client netted three percent in a very good year. We wouldn’t recommend that. The average annual returns, when you factor in the negative years in the markets, or zero returns in the account, they’re less than what a CD would return, so we would not recommend that. We want to point out that high fees render most of these equity-indexed accounts and equity-linked CDs not competitive. Let’s talk about low caps. This is also an industry-wide problem.
BRIAN: So they boast that you get all the gain of the S&P up to five percent. Well again, when you factor in negative returns, where you have some zeroes in there, when you run zeroes in there for years when the markets are negative, again, you’re down to levels where you might as well do a CD. So because we are a math-based firm, independent and fiduciaries at Decker Retirement Planning, there’s only three equity-linked CDs or equity-indexed accounts that we would recommend.
BRIAN: By the way, none of them are equity-linked CDs. The banks in our opinion are not competitive in this space. Equity-indexed accounts, the top returning one that we use has averaged around 6.4 percent for the last ten years, it would have made money in 2008, and net of fees, anything over six, there’s only three of them that we can find that are out there. So we use them for our clients. Instead of getting 2.6 percent, we use the ones that have averaged around 6.2, 6.4 percent.
BRIAN: So again we’re math-based. If people don’t know that they can get 6.2, 6.4 percent average annual returns for equity-indexed accounts, they should come in and talk to us.
MIKE: Alright, have a great week everyone, we’ll talk to you soon.
