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 is part one of a two part series focusing on the problems people face in retirement that they may not know about. The comments of Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good morning, everyone. This is Mike Decker and Brian Decker with another edition of Decker Talk Radio’s Protect Your Retirement. Brian Decker from Decker Retirement Planning out of Kirkland and Seattle up there in Washington. And a licensed fiduciary. And we’re going to be covering specifically today problems in retirement. Now I know that’s a very general statement so Brian, specifically what are we covering here in retirement? Are we covering the financial, the health? What are we going to focus on today?
BRIAN: We’re going to talk about everything. Decker Talk Radio listeners, this program which is commercial free, we as fiduciaries at Decker Retirement Planning in Kirkland and Seattle, we’re going to talk about a list of 22 different problems that you could and probably will face in retirement. So Mike, can we jump right in?
MIKE: Let’s do it. Let’s jump right in.
BRIAN: Okay, the top of the list is how much income do you need at retirement? How do you calculate that? How do you know? And, how can you be sure on getting that amount of income for the rest of your life?
BRIAN: This is number one the sine qua non top of the list biggest issue in retirement. You’ve got to know how much-let’s start with how much. How much do you need? Do you think that when you retire you’re going to receiving less or you need less income? No. We typically factor in a 20 percent increase because when we’re at work we’re doing things, we’re busy, we’re not spending money. When we’re not at work we’re going to want to do things and doing things usually costs money.
BRIAN: So we watch to see what your pre-retirement income is and then we see how much income you can draw and let’s stop there for a second. In factoring how much income you need in retirement, take your current bills, if you haven’t retired yet. Look at net what you’re receiving. And look at what you’re spending net of tax. And typically add 20 percent. That’s how much typically we see clients needing in retirement.
BRIAN: Of course you don’t have any college education expenses. Of course you’re going to have less business type expenses. You zero that out. But you’re going to have more travel and entertainment expenses. These are the years that you’ve saved for. So when we talk about how much income do you want at retirement start with a budget and add 20 percent just like we talked about number one. Number two now let’s find out if you can retire. When you look at how much income you can draw from your portfolio, I’ll talk about what we do. But before we do I want to warn you. This is a big major warning.
BRIAN: If you’re using a banker broker model with a pie chart where all your money is at risk. You’ve got a buy and hold strategy where you get whacked in the stock market every seven or eight years and you’re drawing income from a fluctuating account, which is financial suicide, because mathematically you’re compromising the gains when the markets go up. You’re accentuating the losses when the markets go down. And you are committing financial suicide by doing that.
BRIAN: We want to warn you that the four percent rule which is the typical distribution strategy with the banks and brokers in my opinion, and I know Mike shares this opinion, in our opinion as a company, the four percent rule distribution strategy that the banks and brokers use is the most toxic financial strategy out there. Superlative is the most toxic financial strategy out there and in my opinion is responsible for destroying more people’s retirement than any other piece of financial advice.
BRIAN: So let’s look at this mathematically. Our firm, we’re an independent firm. Number one. We’re fiduciaries meaning we’re required by law to put our client’s best interest before our company’s best interest, number two. And our approach is mathematical, number three. Forget about opinions. We don’t care what people like or don’t like. We put a calculator to net of fee returns and to strategies. So let’s do the same thing with the four percent rule. Let’s say that the four percent rule, Decker Talk Radio listeners, let’s say that you get to retire January one of 2000.
BRIAN: Why January one of 2000? Because markets cycle. There’s something called the 18 year market cycle. 100 years of the Dow Jones has the stock market going up about eight and a half average annual return for the last 100 years. However it doesn’t trend up, it cycles. And what we mean by that is there’s something called the 18 year cycle chart. Stock market cycle.
BRIAN: 1946 to 1964, 18 year bull market. 1964 to 1982, 18 years of flat choppy markets where the stock market went absolutely nowhere in that 18 years. ’82 to 2000, the biggest bull market we’ve ever had. Since January one of 2000 the markets have been fairly flat. Average annual returns are around four percent. So let’s say that you retire and you’re going to use the four percent rule.
BRIAN: If you’re using the four percent rule in an 18 year bull market you’re good. We’ll admit that. You’re fine. But what if, and mathematically the chances are very high, you retire in a flat market cycle? If you do here is what happens. Let’s give you four million dollars January one of 2000 and watch what happens. Bad new… Good news is you get to retire January one of 2000. Bad news is stock markets go down 2000, ’01 and ’02 so 50 percent drop.
BRIAN: But you’d lose more than that because you’re drawing four percent a year from your assets to live on per the instructions of the banks and brokers. So you’re down 62 percent going into 2003. But the good news is markets recover and they double from ’03 to ’07 but you don’t get all that because you’re drawing four percent in ’03, ’04, ’05, ’06, and ’07. Then you take that hit in ’08, down 37 percent. Plus a four percent on top of that. And you’re done. You have lost so much money that you cannot financially recover from those kinds of losses and you have to go back to work.
BRIAN: Proof that what I’m telling you is fact is all the gray haired people that you saw. And you saw them. We did too. That went back to work in ’09. They were back at banks. They were back at fast food and Wal-Mart. We saw them by the millions because the four percent rule destroyed their retirement. William Bengen, the creator of the four percent rule came out in 2009 and publicly retracted it saying it doesn’t work in flat market cycle, not when rates are this low. Quote he doesn’t use them.
BRIAN: He doesn’t use the rule and he called it dangerous when rates are this low. In fact we have these quotes on our website. Www.DeckerRetirementPlanning.com. We have lots of articles that talk about how the banker broker model can hurt you in retirement. This is one specific article on the four percent rule. So we want to warn you that in calculating how much income you can draw in retirement, if you’re drawing income from a fluctuating account that is strike one, two, and three right there. That can hurt you in retirement and send you back to work.
BRIAN: You’ll have to sell your home, move in with the kids. You will have to go to a plan B. So how do we do it? We have our clients drawing income from principal guaranteed laddered maturity accounts. So if the stock market’s going up or down, if the economy is going up or down, if the interest rates are going up or down, it does not affect or hurt our clients. In 2008 when the markets were down 37 percent, the clients that we have that did the planning, they didn’t have to go back to work. They didn’t even have to change their travel plans.
BRIAN: They were unaffected. This is very important. This is called distribution planning and is the top of the list to make sure that your income is set. And that it’s coming from principal guaranteed accounts. Now let me get to the third point. So number one, how much do you need? You’ve gotta figure that out from a budget. And you take how much you needed and spent pre retirement net of tax add 20 percent to that and that’s typically what you need in retirement.
BRIAN: Next thing we want to talk about is how much you can spend. So we do the calculations. I told you our practice is very mathematical. We take the assets that you’ve got and we include all of our income sources. So your pension, your social security, income from your assets, any rental real estate. We total it up, minus taxes, gives you annual and monthly income with a three percent COLA, cost of living adjustment to age 100. And we do the math.
BRIAN: We do the calculations to find out with the assets that you’ve got how much you can draw, not how much you want to draw. We call this the max income strategy. And, Decker Talk Radio listeners, if you haven’t done these calculations you are guessing.
BRIAN: Okay, number one of the 22 problems, potential problems, that you’ll meet in retirement is how much income you need, how much income you can draw, the proper strategy to draw that income and finally one more thing on annual income. The greatest generation that went through the great depression, they were taught culturally in their DNA to save money and they thought and felt that it was almost irresponsible to spend money.
BRIAN: So after 40 years of having the mentality of saving, scrimping, and being frugal, many of our clients have to adjust their mindset to think and know that it’s okay to spend money. Your new paycheck for the rest of your life is not W2 paycheck from the company. No, that stopped when you quit and you stopped working in retirement. It’s not a 1099 from your startup. It is from your investments. It’s okay to spend money as long as you know that you’re not spending too much.
BRIAN: The number one fear in retirement, the number one fear, since 2008 is running out of money before you die. So you’ve got to know how much money you can draw. There’s a great saying that as long as your income is sufficient, all other problems seem small. If you have the income you need and want for the rest of your life that solves a lot of problems.
BRIAN: So income is number one on our list of potential problems in retirement. Making sure you know how much you need, making sure your assets can generate it, and making sure that mentally you know that it’s okay to spend money in retirement. Okay, now let’s talk about number two. Number two, the second biggest problem in our opinion in retirement is inflation protection. Inflation recently has averaged around two and a half, three percent according to the CPI, the consumer price index. Recently, meaning in the last five years, it’s below two percent.
BRIAN: Inflation has been very low. However for the models that we show clients it’s typically around three percent to 1.7. We work with clients to give them a COLA, cost of living adjustment. Our clients have five different layers of protection when it comes to inflation. The risk of inflation in retirement is, after working 40 years, the retiring generation now may live in retirement longer than they worked. It’s the first generation where they can spend more years in retirement than they worked.
BRIAN: Medical science is keeping us living longer which is a two edged sword. The good news is you have more longevity. The good news also is you have a higher quality of life. That’s fantastic news. The bad news is now you’ve gotta have your assets fund you longer. So mortality rate or not mortality rate, the average I think for males it’s around 86, females is 88. It’s continuing to get longer.
BRIAN: But we want to make sure that you have inflation protection so what you’re drawing from income now is going to need to be escalated so that 20 years from now, 30 years from now that you’re able to meet those needs with inflation. Okay, I remember when I could fill up my gas tank. This was in the 70s for… I had a motorcycle. I could fill it up for 75 cents.
BRIAN: I had a three gallon tank. And 25 cents a gallon. I remember when cars were 1800, 2500 dollars. I remember when houses were 15 to 20,000 dollars. So inflation is number two on our list. So we have five different ways that we protect you from inflation at Decker Retirement Planning. Number one, we put in a COLA, cost of living adjustment. We’ve talked about that. Number two, we put into your plan the discussion, and this is a very awkward discussion, but we talk to you about any inheritance.
BRIAN: I know. It’s very awkward to talk about you inheriting money, cashing in on your parents’ death. I know. But if we are… we want to be accurate and conservative so if your parents do have assets we want to estimate low and we want them to live forever and spend all their money. Yes, yes, yes. But we want to estimate low and we want to estimate long on the years side but we do want to include in your income plan any income coming from inheritance.
BRIAN: That’s number two. Number three is your real estate. If you have a… if you own your home and you have other rental real estate, real estate acts as a very efficient inflation hedge because hard assets go up in value when we have inflation. And it acts as a very good inflation hedge. In the income planning we do at Decker Retirement Planning a residence in our opinion should not be in the income plan.
BRIAN: I just find this totally frustrating that our competitors will have you put your house in your income plan as a reverse mortgage. In our opinion a reverse mortgage is very very last on the list as a worst case scenario. None of our clients have their home as part of their income plan. Their home is separate. Their home is sacred. Their home is not a part of their income plan. But we use their real estate as a hedge in the following way.
BRIAN: It acts as an inflation hedge. Number four, when you get in your early, early 80s typically, you’re not interested or as interested in gardening and the stairs and all that. And you do what’s called a downsize. When you downsize your home you sell the big house for X. You buy a condo in a retirement community for Y. X is bigger than Y and we reinvest that money into your plan so that there’s an injection of capital.
BRIAN: It factually actually is going to happen in most cases so we include it in the plan as part of your inflation hedge. Number five and the last part of your inflation protection is your risk account with us. Your growth account. Your growth account we’re assuming is six percent average annual return when in fact in the last 17 years net of fees they’ve average 16 percent. We expect that in 20 years you won’t have 700,000 there. You’ll probably have twice that.
BRIAN: So in 20, 25 years between the equity in your home, the downsize, and the inheritance, plus the extra that’s in your risk account you have a substantial addition that we call inflation protection in your income plan. This is very important. At Decker Retirement Planning we’ve got to make sure as fiduciaries to our clients that you’re protected from inflation. We use a calculator. We use common sense and our clients, if they do have a problem we need to tell them that they do. Our clients do not have a problem with inflation protection because of the strategies we put in place.
BRIAN: So that’s number two. Number three is the stock market crash. Stock market crashes every seven or eight years and is in my opinion a bigger problem in destroying people’s retirement plan, even bigger than inflation. Markets crash every seven or eight years. So 2008 the markets from October of ’07 to March of ’09 were down 55 percent. Seven years before that was 2001. Twin Towers went down. That was the middle of a three year tech bubble burst.
BRIAN: 50 percent drop in the market. Seven years before that was 1994. Iraq had invaded Kuwait. Interest rates were up. There was… the economy as in recession and the stock markets struggled. Seven years before that was 1987, black Monday, October 19th. One day drop of 30 percent. Seven years before that, 1980. ’80 to ’82 was sky high interest rates.
BRIAN: Stock market was down over 40 percent. ’73, seven years before that, 1973, ’74, bear market was a 44 percent drop. Seven years before that was ’66, ’67 bear market with over a 40 percent drop. And ladies and gentlemen, it keeps going. Seven years plus the bottom of the market, March of ’09 takes you to year 2016. Our point is we are now in year nine if we start… if we go away from 2008.
BRIAN: We’re in year nine of a typical seven, eight year market cycle. The longest growth cycle we’ve ever had in the stock market without a 20 percent, at least a 20 percent correction was 10 years. So we want to warn you that when it comes to stock market protection, do you have a plan? If your plan is to listen to your banker and broker and tell you to ride it out, to hold on, to be a long term investor, no one can guess the markets. All of that is code for, and I hate to be so blunt, “Leave your money with me. Don’t bother me. This is how I get paid. I get paid by keeping you at risk.”
BRIAN: We’re fiduciaries. We owe you the blatant truth for the banker, broker model. You shouldn’t have all your money at risk. That’s common sense. When you’re retired you shouldn’t have all your money at risk. And if your banker and broker is being a fiduciary to you, they should be doing what we do. When it comes to your risk money we go a couple times a year we go to the Morningstar Database and the Wilshire Database. So the Morningstar Database is the largest database of mutual funds in the world.
BRIAN: Wilshire Database is the largest database of money managers in the world. And we look at these, used to be every quarter. Now it’s at least a couple times a year and we want to know if anyone, these money managers and mutual funds, if they’re beating the six managers that we have. because if they’re beating us… And I’m not talking about beating us last week, last week, last month, last year. I’m talking about at least since before 2008.
BRIAN: Our managers have to have actual net of fees returns, client account returns to show and demonstrate that they can protect capital in a down market. And attract with the S&P in an up market. Those are the two yardsticks that we measure up against the money managers that we use. Let me repeat. Two mission statements for our risk models. Track with the S&P when the markets go up and protect principal when the markets go down. These are very high yardsticks. 85 percent of money managers and mutual funds every year underperform the S&P according to Vanguard.
BRIAN: So what we’re looking for is the tiny minority that can even track with the S&P when the markets go up. And who do you know, Decker Talk Radio listeners, who do you know that eat the markets in 2008? I’m sorry, not beat the markets, made money. Who do you know that made money in 2008? Those are the managers that we are looking for and the models that we use for our clients made money in 2000, ’01, and ’02 when the markets were down 50 percent. When the markets grew from ’03 to ’07 and the markets doubled, these managers at least did that.
BRIAN: Then when the markets got creamed in ’08, our models cumulatively made money. And then when the markets are up over 150 percent from of ’09 to present, these models have at least done that. Your banker and broker is not doing these searches like we are. We have a mathematical approach and we’re using the top returning risk accounts that are out there.
BRIAN: And Mike, this would be a good time. Well let me give you a few more statistics and then we’ll invite people to come in and we will show you the managers that we’re using. So if you put 100,000 dollars January one of 2000 in the S&P with dividends reinvested, you’ve had about 220,000 dollars. Average annual return is four and a half percent. If you put 100,000 in our managers, the managers that we use, 100,000 grows to over 900,000. Average annual return is 16 and a half percent.
BRIAN: Your bankers and brokers aren’t using what’s in your best interest. They’re using what they get paid the most to use typically. So we want to warn you that when the markets are in a late market cycle like we are right now, do you have downside protection? Our clients do.
BRIAN: Every time I do this audit where we look at Wilshire Database, the Morningstar Database where we look at timer track in theta where we’re looking at trying to find managers that beat us. We do. We get about 60 or 70 that every time we do this audit. We get about 60 or 70 that legitimately beat us. But they fall into four categories. Number one, yes, they’re beating us. But they’re closed to new investors. I can’t work with that. Can’t use that. Number two, yes they’re beating us but they’re hedge funds and we’re not going to put any of our retired clients in a hedge fund. For obvious reasons.
BRIAN: That kind of volatility has no place with a retired client. Number three, yes, they’re beating us and this is the biggest category, their per account minimum is over five million or such. And I can’t diversify that. And number four or the last final category is yes, they’re beating us but they’re high beta accounts. In the good years they scream to the upside. In the bad years they just crater. There’s two mutual funds that mathematically belong on our platform. The Bruce Fund and CGM Focus. We can’t use them because of category number four. They lost over 40 percent in 2008.
BRIAN: And we’re not going to do that to our clients. So what’s left, the six managers we have are four two-sided models. Here’s what I mean by two-sided models. When the markets go up you track with the S&P. When the markets go down they do one of two of things… one of three things. They can go to cash. They can be sector rotators, meaning that they’ll buy whatever’s in the sectors that are going up. Like in 2008, gold treasury bonds in the U.S. dollar went up. And so did the VIX. Those four categories.
BRIAN: So there are models that made money in 2008 because they rotated in to whatever was going up. In 2000, ’01 and ’02 when the markets went down, the models that we had that made money in 2000, ’01 and ’02, there were a lot of sectors that were doing well. Real estate, the energy sector, healthcare, biotech, gold, silver, the precious metals. Hundreds of stocks kept going up allowing these managers, sector rotators, to rotate into whatever’s going up, allowing them to make money and not lose money.
BRIAN: The third and final group of how they protect client capital in a down market is they will go short, allowing them to make money as the markets go down. Now let’s use common sense, Decker Talk Radio listeners. This is common sense. Your banker and broker has a one-sided strategy in a two-sided market. Meaning markets are two-sided. They go up and they go down. It’s a two-sided market.
BRIAN: Your banker and broker has a one-sided strategy in a two-sided market, meaning that when the markets go up you’ll make money. When the markets go down you will lose money. And when you lose 20, 30 percent when you’re retired, how do you make that up? You wait four years to break even and you’re drawing income during that four year period and that, my friends, is a recipe for financial suicide. I hope this is making common sense to you. We have a two-sided strategy in a two-sided market.
BRIAN: So let’s talk about risk. Risk is a mathematical discussion. It’s an opinion. It’s mathematical. Risk is measured by volatility. But there’s two types of volatility. There’s the good kind and the bad kind. Good kind of volatility is upside volatility. That’s making money you want. All of that you can get. We at Decker Talk… at Decker Retirement Planning, we measure risk as downside volatility which is equal to losing money.
BRIAN: The managers that we have, the six managers we have in place collectively have not lost money in 17 years.
MIKE: And Brian, you said you are transparent. I mean as transparent as you’re showing the sheets of the mangers that we’re using, right?
BRIAN: Yeah, we show the name of the manager, their track record. We show them because these managers aren’t going to work with individual people. They work through advisors. So if someone were to say, “Wow, I know what I’m going to do. I’m going to call this manager directly.” Well…
MIKE: [LAUGH]
BRIAN: …the manager would rather [LAUGH] the manager would rather work with 50 advisors each with 500 clients than 25,000 individuals calling them all the time.
BRIAN: So that’s just how it works. So if anyone were to go directly to these managers they’d be turned down or they’d be charged much more than dealing with us directly. So we feel very comfortable with the transparency that we offer. All right. So when we talk about the 22 problems that clients face in retirement we’re on number three and we’re already 42 minutes into the program. Number one was how much income do you want in retirement. Number two is inflation protection. Number three is stock market crashes, which is in my opinion the biggest destroyer of people’s retirement, bigger than inflation.
BRIAN: All right, number four. How much income is lost at the death of either spouse? This is a big deal, particularly… And it’s an awkward conversation to have but we have it with our clients. Husband and wife need to know financially what the loss is. Typically if there is a husband and wife and we usually kill off the husband first. If he has a… if they’re in retirement we tell the wife the worst time to lose your husband is today.
BRIAN: So if he were to drop dead today emotionally you would be a wreck. Let’s see how you would be financially. And we run the numbers. Is his pension survivable? Meaning that does it transfer to his wife? How much income is lost there? On the social security the surviving spouse gets the higher of the two social securities. But that means that there will be a drop off in one of the spouses’ income.
BRIAN: So we total up what the monthly difference is in income, net of tax, and we ask, we say to the surviving spouse, the wife in this case, look you just lost your husband. You still have the house. You still have your investable funds. You still have the higher of the two social securities. Instead of living on 7,000 a month, you would have to live on 5,000 a month. Can you do that?
BRIAN: Now remember, you still have a paid off home. You could sell it and you could downsize early. Can you do this? And we have that very important discussion at Decker Retirement Planning in Seattle and in Kirkland, we have that discussion so there’s peace of mind that if worst case happened that financially… we know that emotionally they would be a disaster, but financially we want to make sure that they’re fine.
BRIAN: Then we after we kill off the one spouse we talk about the… And we switch it. Now we tell the husband the worst time to lose your wife financially is today. So she drops dead. You still have the house. You still have your assets. You still have your income and pension. But you lose her social security. You were planning on living on 7,000 a month. Now you’d have to live on 5,000 a month. Can you do that? We have that very very important discussion.
BRIAN: If there are pensions that die with a spouse the loss of a pension plus one social security is typically a lot of money. That’s when we talk about income replacement for the surviving spouse through life insurance. We want to make sure that they’re protected in their income. If it’s a short term patch we use very inexpensive term insurance. If it’s a long term situation we want to make sure that there’s never a loss of coverage. So we use a non term more universal or whole life insurance.
BRIAN: But we make sure that the spouse is covered in case worst case scenario of losing a spouse and making sure that we’re hoping for the best but planning for the worst. Okay, the next question. The next discussion that we have potential problems in retirement is what percent of your money needs to be at risk? How much should be at cash, how much should be safe, and how much should be at risk?
BRIAN: Most all the people that at Decker Retirement Planning come in with a banker broker model where all, A-L-L, all of their money is at risk. I just find that galling. That should be against the law. It’s financial malpractice to have someone in retirement where all of their money is at risk. And here’s what I mean by all of their money is at risk. They tell you that your safe money is in bond funds. Bonds or bond funds.
BRIAN: Well when interest rates are at or near 100 year lows, like they are now, when interest rates go up mathematically bond funds lose money. It is a fact just like two plus two is four. You lose money when interest rates go up. So now that interest rates are at all time record lows or near that, interest rate risk, the risk of losing money in your bond funds is at all time record highs. And your bankers and brokers are telling you that that’s where they’ll put your safe money.
BRIAN: That’s nonsense on two counts. One is you’re not paid hardly anything on that safe money. They’re not acting as fiduciary and maximizing your return on those. It’s just how they get paid. They don’t get paid any management fees or oversight fees on CDs, treasuries, corporates, agencies, municipals, or fixed safe investments. That’s why they have you all at risk. But this makes no sense. You should have cash. You should have safe money. And then when it comes to your risk money, your stock market exposed money, people in their 60s, 70s, and 80s have a ridiculous amount of money at risk.
BRIAN: Now investors have a very short term… they have a very short term memory. And they think that they’re doing great right now. They’ve forgotten at this point about what happened in 2008. We would tell you that we had stocks like Microsoft go down to 17 dollars a share. We had Amazon go to down to eight dollars a share. We had Starbucks go down… No, Amazon went down to 12 dollars a share. Starbucks went down to eight dollars a share. People have forgotten this.
BRIAN: They have forgotten that stocks go down that much. How much risk should you be taking? At Decker Retirement Planning at Seattle and Kirkland, we do the math to see how much you should have at risk. And usually it’s about 25 percent. 25 percent of your money is all you need to have at risk. 75 percent of your money shouldn’t have any risk. 75 percent of your money is a combination of whatever you have in emergency cash plus the first 20 years of income should not have any risk.
BRIAN: So that startles people. You are so used to having all your money at risk that you think that we’re the ones that are stupid to have only 25 percent. Let us come in and show… Come on in, we’ll show you that we’re on the right side of common sense and logic here. You’re taking way too much risk with the banker broker model. So we do the math and find out how much money you should have at risk. And there are some clients, I would say 15 to 20 percent of our clients they have X amount of assets that generates Y amount of monthly income.
BRIAN: Let’s say that they can generate 12,000 dollars a month. And they go oh I could never spend that. I’ve traveled as much as I want to. I’m going out to dinner as much as I want. I could really only spend 7,000 dollars a month. Well, then we create legacy money. Money that you control your whole life but you probably won’t use or spend in your life. It’s invested differently. The strategy we use is different. But that money doesn’t need to be at risk. That money can be at risk but it doesn’t need to be.
BRIAN: And we segregate and separate that money into a legacy column. Legacy money on how to invest that we ask you this question. Would you be bothered more by being in the stock market and losing 30 percent or being out of the stock market and seeing it go up 30 percent without you? That gives us a good idea of for risk assessment on how they should invest that money.
BRIAN: But when it comes to legacy money they can be all at risk. They can have no risk or any combination in between that. But we mathematically approach the legacy money to minimize the risk that clients have. All right. Mike, I want to make sure that we’re tracking okay.
MIKE: Yeah. So we’re at 44 minutes so far with the show so we got about 10, 12 minutes left in this show.
BRIAN: Sounds good. There is no way I’m going to cover all this. I just realized that. All right. So we’ve talked about the biggest problems in retirement. We talked about how much income in you need in retirement, how to calculate how much you need, how much your estate can generate. We talked about inflation protection, protection against stock market crashes, how much income is lost at the death of a spouse, how much risk you should have.
BRIAN: And then we talk about as fiduciaries we look at you and say do you want us to even manage your risk money? At Decker Retirement Planning we give you the option. You can manage it or you can have us manage it. I’m smiling because [LAUGH] some people love to manage their money. It’s not about rate of return. They love the entertainment, the excitement that investing in the stock market brings. And we partner with our clients so that during the up years, those are no brainers. You can throw darts.
BRIAN: Remember in the 90s, I don’t know if you remember this Mike, but in the 90s CNBC had monkeys throwing darts at the Wall Street Journal and they were outperforming some of the best managers. So in an up market anyone can make money. We want to protect you in the down market. So now is the time that we would and our clients want us to help them transfer assets over the next couple years, over the next down cycle and then we’ll turn them back to clients and have them manage it. We just want to make sure that you’re protected on the downside.
BRIAN: Okay. This next one is what percentage of your assets are in retirement and nonretirement category. How much is in IRAs, Roths, SEPs, retirement vehicles and how much is nonretirement? This is huge, huge, huge because it’s part of our tax strategy. When it comes to tax strategy this is called segmentation. We put the assets… When you take 1,000 dollars out of your Bank of America account, your individual or your joint account, you’re not taxed on that money.
BRIAN: It’s already taxed money. It’s called nonqualified money. When you take 1,000 dollars out of your IRA, you’re taxed on it as… 1,000 dollars is taxed as income. So what we do if you can picture the first, the front part of your plan where you’re drawing income for the first five and 10 years we put your nonqualified already taxed money in the front part of the plan.
BRIAN: And we put your Roth money in the back of the plan, and your IRA money in the back of the plan, meaning those are longer term accounts. Here’s why we do it that way. Because in the first 10 years when you’re drawing already taxed money as income your AGI, your adjusted gross income goes way down. The taxes you owe on social security go way down. Because you’re not taxed on drawing money that you’ve already been taxed on.
BRIAN: And that creates a 10 year window for us to do something very important in your plan. In your risk account where you’ve got 25 percent of your money that’s growing the most of… that has the highest growth returns of all of you buckets, that’s where we convert your IRA to a Roth. Not all at once. But if we take 372,000 dollars of your IRA and in 20 years re-grow it to 1.2 million would you be happy with us?
BRIAN: And a lot of people would say that’s a stupid question. Of course we’d be happy with you. But actually when it comes to taxes you wouldn’t because you could have paid tax on 372,000 but now in your mid to late 80s you’re paying tax on 1.2 million and with required minimum distributions we’d put you in the top tax brackets and you’re paying taxes on 1.2 million when you shouldn’t have to. You had a chance to pay taxes on 372,000.
BRIAN: So what we do is we convert your IRAs to Roths over five to seven years. During the 10 year period where we brought your adjusted gross income way down. And this allows us to significantly, typically six figures in tax less than what you would owe if you do nothing. Bankers and brokers typically have no clue on how much money you should convert from an IRA to a Roth. We know mathematically to the dollar how much you should convert from an IRA to a Roth. It shouldn’t be in your emergency cash or buckets one two or three.
BRIAN: Those returns are too low and you’re taking the money too soon. An IRA, a Roth IRA is golden account for three reasons. It grows tax free, number one. It sends back distributions back to you tax free, number two. And it transfers to your beneficiaries tax free, number three. We love the Roth IRA. It’s part of the planning that we do. And it’s a big problem in retirement because it’s typically ignored by bankers and brokers.
BRIAN: And if your assets grow like we hope that they do you have a bigger tax problem because your financial advisor never did anything proactive to minimize your taxes on the IRA to Roth conversion.
MIKE: Hey, Brian, can I interrupt here for just a moment?
BRIAN: Yep.
MIKE: Something that’s important because a lot of Decker Talk Radio listeners are going to be talking to their advisor after this show, if your advisor isn’t being upfront and saying this is a strategy we want to do, then it’s an apologetic redoing of their plan to say oh sorry we forgot. I mean you should be working with someone that’s proactive, aware of these difference strategies and aware on how to manage money in retirement.
MIKE: It’s just a different mindset all together. Would you say that’s about right, Brian? You don’t [OVERLAP] advisor.
BRIAN: Oh yeah. That’s a… Yeah, that’s a good point.
MIKE: You don’t want… [LAUGH]
BRIAN: That’s a good point, Mike.
MIKE: What’s the point of having a… Yeah, what’s the point of having an advisor if you’re the one coaching him on how to do his job?
BRIAN: Right. So yeah I heard on Decker Talk Radio that we should convert the IRA to a Roth. Why don’t we do that? The advisor. Oh yeah, let’s do that. Well how much should we do? Well how about if we do this? [LAUGH] So when I had a knee surgery earlier this year I didn’t go to a dentist even though dentists are good people.
BRIAN: It’s not that bankers and brokers are bad people. They’re just not trained to do what we do. We are specialists in what we do. We are specialists in retirement. We are not interested in managing your money in your 20s, 30s, and 40s. We specialize in retirement planning and retirement money management. That is what we do. So we just covered a huge tax saving strategy. And taxes are a potential problem in retirement.
BRIAN: The other is the Roth conversion and what we call segmenting and placement of your assets. Your retirement assets and your nonretirement assets. The next thing… and Mike, we only probably have time for one more. We talked about Roth conversion. Required minimum distributions. Will you spend them or will you save them? RMDs at 70 and a half you’re required to start taking a certain amount of money from your IRA. So you’ve taken a lifetime to build up your IRA.
BRIAN: It’s grown tax deferred. Now the IRS wants to make sure that you’re taxed on it. So they will take your 1231 16 value, previous year end value of your IRAs, all of them combined. And depending on your age will produce a divisor and divide it into that. It will give you a dollar amount called that’s the required minimum distribution from your IRA. If you take less than that there’s a 50 percent penalty. So this is something that gets the attention of people in retirement.
BRIAN: We… And it’s stressful for people in retirement because they deal with this every year. Our clients don’t stress on that because we have automatically built into their income any required minimum distributions, number one. And number two, we’re proactive in trying to minimize required minimum distributions because we convert the IRA to a Roth. Mike, dang, I’m running… Do we have a couple more minutes or are we almost out of time?
MIKE: We’ve got a minute and a half left so we should probably start wrapping this up. But let me do a quick plug, Brian, for those that are tuning in.
MIKE: We do have a number of articles that go over these topics at our website, go to www.DeckerRetirementPlanning.com and reach out to us. We would love to visit with you if you have questions or different information that you’d like us to cover on the show. We love talking to our listeners. They come into the office. We have great conversations with them. And we love being in touch with all that are preparing for retirement or currently retired as it’s applicable to all.
MIKE: So, Brian, do you have any last few things before we wrap up the rest of the show?
BRIAN: No, I hope people give us a call, come in and see with their own eyes the contrast of the common sense mathematical approach that we have to retirement planning and put that side by side with the plan they’ve got from their banker or broker. Because like you said, Mike, chances are they’re taking way too much risk.
