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 on Part Three of a multiple part series of problems you may face in retirement.
MIKE: The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good morning everyone. This is Mike Decker and Brian Decker on another addition of Decker Talk Radio’s, “Protect Your Retirement.” Brian Decker from Decker Retirement Planning out of Kirkland, Seattle, and soon to be Salt Lake. That office is actually opening up here in a week, so we’re excited for the next edition for Decker Retirement Planning. But, Brian, before we get started here, we’ve got a new segment. It’s the question of the week. A fun financial question, and Brian, you’ve got a great one to get this new segment started with. What’s our question for today?
BRIAN: Question for today, the stumping question is, what stock is up 49,000 percent since its IPO? So, we’ll give that answer next week, and I wish we had a prize to give out because that’d be fun to award a prize on the air.
MIKE: Oh yeah. Well, we’ll think of something, but, if you have a recommendation or want to give any feedback, just as a reminder for anyone that wants to reach out to us, just email [email protected]. And that will go straight to me, and we’ll incorporate questions, comments into our radio show as well as you can always call in, 1-800-261-9446 if you have questions as well. It’s number 1-800-261-9446, and we’ll take your questions and put them on the air, and address them. This is all about retirement planning and how to help protect your retirement.
MIKE: And this is, for those just tuning it, our third part segment of a three-part series we’ve been doing about the problems in retirement. These are problems that people do face, and Brian you see them all day long, right?
BRIAN: Yeah, by the way-
MIKE: With your clients?
BRIAN: -on that question Mike, $1,000 invested in this stock the day of its IPO is worth 4.9 million dollars now.
MIKE: Don’t you wish you would’ve invested in that right when it came out? [LAUGH]
BRIAN: Yeah, we actually, we actually did, but anyhow, this is interesting-
MIKE: Oh, that’s great.
BRIAN: -and we’ll talk more about it. But, let’s move on. So, at Decker Retirement Planning in Kirkland, Seattle, and Salt Lake, we’re going to talk about step one is when we create the plan, your income plan, the distribution plan that takes the assets that you’ve got. We show the sources of income through pension, income from real estate, social security, and income from your assets.
BRIAN: We plan to age 100, we set aside emergency cash, and we put a 3 percent COLA in on a spreadsheet to age 100. We mathematically calculate how much money you can draw, net of tax, on an annual and monthly income basis for the rest of your life. A pie chart from your bankers and brokers doesn’t do that. So, we have a mathematical approach at Decker Retirement Planning in Kirkland, Seattle and Salt Lake.
BRIAN: And we want to make sure that you have access to this.
BRIAN: Okay, on to our subject for today. This is Part Three of the potential problems that you’ll face in retirement. This is where we will finish up. We have already talked about this, and you can go to our website, www.deckerretirementplanning.com.
BRIAN: And you can pull up the radio show and check the podcast and see the other two segments we’ve done on potential problems in retirement. Talking about income, making sure that you’re drawing the right amount of income, that it’s protected from inflation and stock market crashes, and the death of a spouse and how much risk should you have. We’ve talked about the split in how you invest retirement money as opposed to non-retirement money, qualified versus non-qualified money.
BRIAN: Do you have legacy holdings, what are your tax optimization strategies. Will you spend your required minimum distributions, or save them? We’ve talked about Roth conversions, Dynasty Trusts. We’ve talked about how you want your heirs to receive the money, either through inheritance or a combination of gifting. Will there be money left over for heirs? We talked about bleeding heart, how parents sometimes raise children who are entitled to your money.
BRIAN: We’ve talked about long term care, life insurance, and liability insurance coverage through an umbrella policy. So, Mike, that catches us up on the things that it took two radio segments to cover. At Decker Retirement Planning, we are very thorough in making sure to hammer your plan with the biggest problems that you’ll face in retirement. So, we’re going to finish this up now with today’s radio segment talking about the remaining parts of these problems.
BRIAN: So, the next item that we talk about is drawing income from principal guaranteed accounts. If you draw income from fluctuating accounts, such as the Banker Broker Model, which has you draw money from risk assets from the pie chart. When you do that, when you follow your advice, the advice from your banker and broker, you’re drawing income from fluctuating accounts that, as the accounts go up, you compromise the gains.
BRIAN: And accounts, as account values drop, you accentuate the losses. You’re committing financial suicide by drawing income from fluctuating accounts. We ladder principal guaranteed accounts for our clients, so in contrast to the Banker Broker Model, our clients are drawing income from principal guaranteed accounts where it doesn’t matter if the stock market is up or down, whether interest rates are trending higher or lower, or whether the economy is stronger or weaker.
BRIAN: This is foundational to how we do business at Decker Retirement Planning. That is the main reason why in 2008 when the markets got creamed, that our clients did not have to go back to work. They didn’t have to move in with the kids, they didn’t have to sell their home. They didn’t even have to change their travel plans, because they’re drawing income from principal guaranteed accounts. This is critical. This is by far the most important part of the planning we do.
BRIAN: We want to educate our clients, that if you don’t draw income properly from proper sources, then you greatly compromise the ability of your plan to generate income for the rest of your life. All right, next point is interest rate risk. What is interest rate risk? Interest rate risk [CLEARS THROAT] is the risk of losing principal [CLEARS THROAT] in what bankers and brokers call, tell you is your safe money.
BRIAN: The Banker Broker Model says that using the Rule of 100, if you’re 65 years old, you should have 65 percent of your money in bonds or bond funds which, when rates are at or near all-time record lows, that means, interpreted sarcastically, you should have 65 percent of your money earning almost nothing. That makes no sense to us at Decker Retirement Planning. We want to warn you that that isn’t the bigger issue. The bigger issue is what we’re talking about now, which is interest rate risk.
BRIAN: When interest rates are at or near all-time record lows, which they are now. By the way, in 100 years of 10-year treasury bond yields, the 10-year treasury has only gone below 2 percent twice ever. The last time was last year, the second time was last year when the 10-year went as low as 1.4 percent. We’re now at 2.3 percent, and if interest rates go back to just 4 percent, that would be, which is where we were just not many years ago.
BRIAN: If interest rates on the 10-year treasury just go from 2.3, where they are now, back to four, that would be a hit to principal if close to 20 percent on what banks and brokers are telling you is your safe money. This has happened a few times before. So, for example, in 1994, the 10-year treasury went from 6 to 8 percent in one year, and according to Morningstar, the average bond fund lost 20 percent. In 1999, the 10-year treasury went from about 4 percent to 6 percent in one year.
BRIAN: And there again, the average treasury lost about 17 percent. So, to tell you that your safe money should be in bond funds when interest rates are at or near all-time record lows, is irresponsible and is committing financial malpractice in our opinion. We would remind you that this is mathematical fact that when interest rates go up, you lose money. You lose principal on your bond funds.
BRIAN: So I’m going to say the same thing two different ways. Interest rates are at or near record lows right now, and interest rate risk is at or near record highs right now. Your bond funds, therefore, have never been more at risk than they are right now. And for bankers and brokers to tell you that that’s where you should put your safe money is irresponsible. So, we want to do a community service and make sure that you get this.
BRIAN: That the money that you’re drawing from your portfolio, as interest rates go up that we want to make sure that you don’t lose principal. All right, the next thing has to do with liquidity. Liquidity, we define liquidity as money that can be available next day, no penalty. If all your money was liquid, that means that it wouldn’t be working for you. If all your money is locked up, that’s equally ridiculous. So, we want to warn you at Decker Retirement Planning, that a lot of the financial planners out there will lock you up in annuities.
BRIAN: We want to warn you to not go there. So, what we do and the planning that we have for our clients, is we shoot for around 30 to 40 percent of our client funds, all their investable assets to be liquid. So all the money that’s in your emergency cash, of course, is liquid ’cause those are in bank or money market accounts. Bucket one is also 100 percent liquid.
BRIAN: Buckets two and three, we allow our clients, we don’t allow, we encourage our clients to choose from
MIKE: [LAUGH]
BRIAN: [LAUGH] all the different [LAUGH] principal guaranteed options, and when they do, let’s say that they choose the least risky. Which would allow, not least risky, principal guaranteed, so there’s no principal risk. But, the least liquid. So, in those least liquid accounts their 10 percent a year liquidity for buckets two and three. Let’s assume that that’s what they choose.
BRIAN: There’s 100 percent liquidity for the risk accounts because those are stocks, bonds, ETFs. That typically adds up to around 30, 40 percent of your portfolio that is doing two things. Number one, it’s doing what it’s supposed to. And, number two, it provides liquidity. So, on an account that’s got $1,000,000 in it, there’s three or $400,000 that is next day liquid to you. And for most or all our clients, they tell us that that’s enough liquidity for them for an emergency. All right, when do you want your income from your portfolio to start?
BRIAN: The reason we talk about this, the start date, is because our planning that we do for our clients allows a dynamic income source that you can turn on or off, or up or down, depending on how much income that you need. So, we want to make sure that you have flexibility in the plan. Now, let me contrast what happens when the markets get nailed like 2008.
BRIAN: Where your broker calls you and says, “Hey, John and Jane, you remember we used to draw 4 percent from your portfolio, and we said that we were going to do that for the rest of your life? Well, you know, markets just hammered your portfolio. You’re down 30 percent. We’ve got to go with a 2 percent draw now until we build it back up.” How’s that for flexibility? That’s not flexible at all.
BRIAN: You’re being told that the income that you needed for the rest of your life is no longer available, and that we believe is irresponsible because every seven or eight years, the markets do crash. In fact, we’re right now in year nine of a seven, eight year market cycle. It’s only gone longer one time ever, ever, without a drop in the markets of at least 20 percent. All right, so, another thing we want to talk about is, with the flexibility of when you want your income to start, what if you’re not retired?
BRIAN: Should you, are you a candidate for Decker Retirement Planning to plan for your retirement if you’re five years away from retirement? We would say emphatically, “Yes.” Because what a tragedy for the markets to get creamed right before you retire. Now you can’t retire. Now you’ve taken a 30 percent hit on your money, and your retirement date is pushed out four or five years just to make that back. So what a tragedy.
BRIAN: We want to make sure that you know that if you’re within five years of retirement, you should be doing the planning, and you should know how much money you need so that you can retire with the proper amount. Tell you a quick story. There was a couple that came into the office and they had about 700,000. They were 60 years old, they wanted to retire at 65. They asked their banker how much money they could draw for the rest of their lives, and he said, “Well, $70,000.” They thought to themselves, 10 percent.
BRIAN: How could you possibly? We’re 60 years old. How can we possibly draw 10 percent of principal for the rest of our lives? And, let’s say we live 30 years. That doesn’t make any sense. So, they thank the broker, and they came over to us. We showed them that if they wanted at least $6,000 a month net of taxes, that they needed to raise their principal up to where they would start retirement with a little over $1,000,000.
BRIAN: And we helped them put a plan together so that between now and their retirement, if the markets crashed or interest rates went way up or way down, or the economy went up or down, they were okay. We put a plan together that helped them get to retirement, and then turn on the income so that they could receive the income that they needed and wanted for the rest of their life, with a COLA, with a Cost of Living Adjustment, so that they could have some protection from inflation.
BRIAN: So, when we talk about how much income you want from your portfolio and when you want it to start, we at Decker Retirement Planning in Kirkland, Seattle, and Salt Lake, are mathematical in our approach. We use a spreadsheet and the Banker Broker Model that uses a pie chart, you can’t know how much money you can draw. You’re totally guessing and hoping, I guess, that the markets don’t get creamed. Which is an irrational assumption. All right, the next thing is, on the other items, when do you foresee your slow go years beginning?
BRIAN: And what we talk about by this item is, if you retire at 65, and we want to remind you that you’ve got about 15 years of good healthy travel years. The 80’s are rough on people. Not everyone, but a lot people in the 80’s slow way down. So, if you’ve got a bucket list of things to do, we try to push more income up to the healthy travel years, so that you can enjoy more income in those years.
BRIAN: And then we can flatten your COLA, Cost of Living Adjustment, during the 80 plus years when you’re not traveling as much or drawing as much income. Now we get it, we know that there has to be a COLA. There’s medical costs that will be, that you’ll be dealing with. So we get that, and we account for that. But we do have the conversation that we want to have you have more of your money during your early travel years, during your healthy travel years. And we have that conversation to make sure that you account for that. Current advisory relationships.
BRIAN: We want to make sure that when it comes to your plan, that you’re getting good, strong advice. So we encourage our clients to see what’s out there, see what the bankers and brokers are saying, compare our plan to theirs, so that they appreciate in contrast what we are telling clients. And we put them in a strong financial position, as opposed to having all of your money at risk in the Banker Broker Model. By the way, Decker Talk Radio listeners, why do you think that the Banker Broker Model has all of your money at risk? Mike, I wish we could hand out a prize.
BRIAN: ‘Cause I know that-
MIKE: One of our famous prizes? [LAUGH]
BRIAN: Yeah. I know that our clients are, or people that listen to this radio show, I know they know the answer. The answer is, the bankers and brokers are incented to keep your money at risk because that’s how they get paid. Their compensation is tied into the fees that they can charge on, quote on quote, at-risk money. At-risk money is not money in CDs, treasuries, corporates, agencies, municipal bonds.
BRIAN: It is money that’s in the stock market, or in ETFs, Exchange Traded Funds, or in mutual funds. All right, portions of the plan that you don’t want us to implement. We want to make sure that in the spreadsheet that we have, that we account for everything. We don’t have to manage everything, but we account for everything. So, if you’ve got rental real estate, we account for that income, and we show it going through pre-tax and after-tax and account for it in your income.
BRIAN: If you’ve got a business, we account for that income flow. We account for [COUGHS], for all of your funds coming in, and we flow them all through together so you get a very good idea of how much you can spend. These last couple, I’m just going to say this last one, and use this to be the last one here. Getting used to investments as your income.
BRIAN: You’ve taken 40 years to earn, save, invest, scrimp, being frugal, so that you can retire one day. Well, now that one day is here, it’s not easy for a lot of people to transition to where now your paychecks are no longer W-2 or 1099 paychecks from work. Now, those paychecks are coming from your savings and your investments.
BRIAN: Getting used to that is pretty easy for a lot of people, but very difficult for some. We have to talk through some people that it is not irresponsible and reckless to spend the money that you’ve saved for 40 years. That is what generates your income for the rest of your life. So, we talk people through that.
BRIAN: I described it where it’s a spreadsheet, and it shows their sources of income, totals it up gross minus taxes, is annual and monthly income with a COLA of 3 percent to age 100. If you don’t do these calculations, you can’t know how much money you’re drawing for the rest of your life. And we’re happy to have you in and produce these for you.
MIKE: And Brian, correct me if I’m wrong, but whether you’re currently retired or about to retire, it still applies to both people. I mean, you have to run these calculations regardless.
BRIAN: Yeah, if you haven’t done these calculations, you are just guessing.
BRIAN: Hey Mike, cover for me for a second, because now we’re going to talk about all the different principal guaranteed options that are available for our clients at Decker Retirement Planning. And we cover them comprehensively. We’re going to have that discussion right now, but I want to print up today’s rates on all these things and then have them in front of me. I’m just going to ask John to run this. So, tell a joke or something for 30 seconds.
MIKE: Well, I mean, you’re still listening to the show but I love this part of our planning process. Because when it comes to principal guaranteed accounts, there’s a number of different options. And when you go through the planning process, you’re going to choose what’s best for you. And so we’re just here really as a fiduciary to educate people on the options that are out there, and to almost kind of give them the questions to ask, and the answers that they might not even know that they have. So, it’s quite a phenomenal experience to be able to do that. But, I did want to point out as well, Brian Decker, being the head of Decker Retirement Planning, he’s a licensed fiduciary. Which means, we’re legally bound to do what’s in your best interest.
MIKE: And so, the way we do that is, we give you the information, the facts. And, Brian, I was just talking about the options sheet. You really go through, in detail, all of the principal guaranteed options that are out there. Right?
BRIAN: All of them.
MIKE: No, I thought I heard-
BRIAN: That’s right.
MIKE: -all of them. Yeah, so, we’re trying to be as transparent as possible. But what’s just crazy is, principal guaranteed accounts, the rates are just all over the place. Brian, did you get the…
BRIAN: I’ve got them.
MIKE: Are they getting printed out right now?
BRIAN: Yep.
MIKE: Let’s go through these and see how they actually are doing right now.
BRIAN: Okay. So, we agree that you should have three parts to your portfolio. One is your liquid money, and those are in savings accounts. By the way, we’re-
MIKE: For like emergency cash?
BRIAN: Yep.
MIKE: Or discretionary near purchases, things like that, right?
BRIAN: Yeah, and so, for emergency cash, we use savings accounts, credit unions, banks. And we give our clients good information, and we know of some money market accounts that are yielding over 1 percent.
BRIAN: The highest one that we know of right now is 1.05 percent, and we give our clients that information so that they can get the highest return possible on their liquid cash. Every portfolio should have some liquid money. We get that, and we try to maximize the return. The next part is, there should be part number two. They should have some safe money. And then part number three, they should have risk money. So, when putting that portfolio together, everyone is different. Everyone’s income needs are different. Everyone’s outlook is different.
BRIAN: So all our plans are different. I’ve never seen the same income plan. Everyone is unique to them, and what their needs are. But let’s talk about, we talked about optimizing your savings accounts. Now let’s optimize your safe money. Again, early in the program, we started about, started talking about interest rate risk. We would jump up and down and with passion say that your bond funds are not safe. They are not principal guaranteed. In fact, let me take one step back.
BRIAN: There’s different types of guarantees out there when it comes to, what we call, principal guaranteed accounts. So let’s talk about the integrity of the guarantee, first off. So, the lowest, I’m going to do a three, two, one to rank the integrity of these guarantees. The veracity of the guarantee. The third, the lowest on the totem pole in my opinion is called a corporate guarantee.
BRIAN: A corporate guarantee is specific to municipal bonds where corporations like Ambac, FGIC, MGIC, will step in and guarantee a municipal bond offering. And it’s symbiotic. Both sides benefit. The offer of Seattle School District benefits by paying X, Y, Z bond offering, or bond guarantee [corp?], 250,000 to guarantee the bond.
BRIAN: Because the school district doesn’t have to pay as high of rate when it’s stamped AAA and insured. So it lowers the rate that they pay. Of course the corporate bond guarantor benefits because they make up on volume a large amount of money in fees, that if there is a hit to principal somewhere, they want, they have the ability to cover it. The problem that we have with municipal bonds is strike one, two, and three.
BRIAN: Strike one is, 49 out of the 50 states in the United States right now have signed onto pension obligations that they can’t possibly pay back. This is not news to anyone. You’d have to be from a different planet to have this be new news. Strike two is that the municipal, municipals are tied into state obligations. And so there’s a day of reckoning coming where, at some point, just like an individual that’s taken on way too much debt, they have a reorganization plan to reorganize their debts.
BRIAN: Create a plan to pay off what they can with the income stream that’s available. Sadly, municipal bonds are going to be part of that. And so, we steer clear of that and have steered clear of that from our clients, for our clients since 2008. We sold the last municipal bonds we had for clients in the first quarter of 2008. Strike three is what we’re talking about right now, and that is the integrity of the corporate bond guarantee is weak in our opinion.
BRIAN: So, when you’ve got 17 cents on the dollar in coverage for all of these municipal bond obligations that are out there, that makes us very nervous. [COUGHS] I know with the way insurance works that they’re counting on not all their chickens coming home to roost at the same time. But, we feel much more comfortable with the higher levels of guarantee. So we have decided for our firm at Decker Retirement Planning in Seattle, Kirkland, and Salt Lake, we have decided to steer clear of that.
BRIAN: All right, the next highest guarantee when it comes to safe money is called an Assumed Guarantee, and that has to do with FDIC backing of certificates of deposit, or CDs, at the bank. Are we comfortable with CDs? Absolutely. Would we use them? Yes, once rates get higher. Before 2008, our clients used them in our planning because you could get 5 percent on a five-year CD, 7 percent on a 10-year, no brainer, for our planning that we did.
BRIAN: Now that rates have been crushed, there are alternatives that are out there that are much better. Much higher rates. So we have this discussion right now, and what we’re going to talk about this in just a couple minutes. The highest, the strongest and highest integrity principal guarantee out there, in our opinion at Decker Retirement Planning, is called a Reserve Guarantee. A Reserve Guarantee has three parts to it.
BRIAN: Part one is when the entity, the bank or the insurance company, takes in your $100,000 investment and keeps it in short term instruments, such as banker acceptances, overnights, certificates or commercial paper, things like that. There is a reserve requirement where the bank or the insurance company puts 5 percent, they reserve 5 percent against, on top of the funds that go in. And is kept separate from the corporate shelves.
BRIAN: So if the company, the bank or the insurance company went down, those assets are kept off to the side. A third party, usually the CPA firm, signs off that those reserves are adequate and marked to market. And those, the CPA firm, has criminal liability making sure that those reserves are there. That is step one. Step one on a Reserve Guarantee is the reserve itself of 5 percent on top of liquid investments that keep those funds available.
BRIAN: So if the company went down, that those reserves are separate. The second part of Reserve Guarantee is at the state level. They get a piece of all the transactions and build up a safety fund that, like FDIC, reserves up to 250,000 in principal. So if your principal was compromised in any way, you have a backup guarantee with the safety fund at the state level.
BRIAN: Third and final part of this Reserve Guarantee is that the, all the banks and insurance companies that operate with these type of investments, have to cross-insure each other. They have a consortium agreement to make each other whole. So if any one of these companies, banks or insurance companies, go down, they’re required for these types of investments to make each other whole.
BRIAN: Years ago in the, gosh it was a long time ago, Executive Life went down, and all the different insurance companies were required to make them whole. It’s the highest guarantee, in our opinion, in the world. It’s called a Reserve Guarantee, and we try to choose investments so that they have peace of mind that if things get ugly, that they have the highest guarantee in the world. It’s called a Reserve Guarantee. Okay, now that we’ve talked about the guarantee behind principal guaranteed accounts, let’s talk about rates.
BRIAN: ‘Cause we’re fiduciaries to our clients, and we want to make sure that our clients are drawing income from principal guaranteed accounts, but we try to optimize them three ways. Number one, they need to be principal guaranteed. Number two, we need to maximize the rate that we’re getting for our clients. And number three, they need to be able to generate monthly income. Those are the three requirements for the principal guaranteed part, or the safe part of our client’s portfolio.
BRIAN: So what are the options? Now I’m going to mention literally all of them. All of them. So, when it comes to what’s out there, there’s 10 options right now. Now I’m going to list the top, the first six of them. These are fixed rate options. CDs, municipal bonds, corporate bonds, government agency bonds, government treasury bonds, and fixed annuities.
BRIAN: Now, by the way, as soon as I say the word annuity, I want everyone at Decker Talk Radio to know that we don’t like variable annuities. We don’t like income annuities, life annuities, or income riders. We’re very much opposed to all of them. Variable annuities is where the banker or the broker gets paid around 8 percent commission right up front off your money. He gets paid every year you own it. The insurance company gets paid every year you own it, and the mutual fund companies that are involved get paid every year you own it.
BRIAN: Three layers of fees that usually add up to 5 to 7 percent before you make a dime. We don’t like them, we don’t use them, we’ve never used them, never will use them. And we try to warn people passionately to stay the heck away from them. We don’t like variable annuities. Income annuities, life annuities, and income riders can be illustrated with the following story on why we don’t like these. Let’s say I’m 65 years old. I retire from Boeing, let’s say.
BRIAN: And Boeing comes with a package offer of either taking a lump sum of 200,000, or I can take 250,000 for life. What am I going to do? Well, I’m smart. I’m going to take the higher number. 250 is higher than 200. So at that point, they look at my life. I’m 65 years old. They’re going to say, gosh, I think he’s going to live 20 years, so we’re going to pay you Brian, 12,500 for the rest of your life.
BRIAN: And, 12,500 divided by 250, by the way that’s a 5 percent return. You can’t beat that these days. So let me unravel what’s just happened to Brian, retiring at 65. Brian is now paying an insurance company to get his own money back, at the rate of 5 percent a year before I make a dime. It takes 14 years just to get my 200,000 back. We don’t like these, and the insurance company by the way is hoping I die soon so that they can keep what they don’t pay me.
BRIAN: We don’t like these, we don’t use these, and we warn people against using income annuities, life annuities, or income riders. Because we’re fiduciaries, we speak out passionately against using things like this. However, what I just mentioned here, fixed annuities, is like a CD from an insurance company. A fixed rate annuity is like a CD from an insurance company. So, in 2008, we could get 5 percent on a five-year CD, but we’d get 5 and 1/2 percent from an insurance company.
BRIAN: Apples to apples, we took the five and a half. It was a no brainer. So, that’s, as fiduciaries trying to get the best rate for our clients, that was a no brainer for us. But let me go back and cover these six again. When it comes to fixed rate investments of CDs, municipals, corporates, government agencies, treasuries, and fixed annuities, these are all fixed rate investments offered to an investor for a fixed rate over a fixed period of time.
BRIAN: We used to use these when rates were higher [COUGHS], but now that rates are lower, they are an option but they’re not the best option, in our opinion. For example, a 10-year rate on a CD right now, I’m looking at right now a CD, a 10-year rate is around 2.1 percent. Let’s even bump it higher. Let’s say it’s 2 and 1/2 percent, if you could get a good rate on a CD.
BRIAN: What’s the rate on a municipal bond? A AAA municipal bond, because we’re talking about principal guaranteed accounts, you’re lucky to get, I’m going to bump the CD rate to 3 percent. Let’s say that you can get 3 percent on a CD. You get around 2 and 1/2 percent tax free on a municipal bond for 10 years. Corporate bonds, right now, AAA corporate. You can get around 3 percent.
BRIAN: Government agency bonds, you can get right now around 3 percent. Treasury bonds, the 10-year treasury is at 2.3 percent. And fixed annuities right now are around 3 percent. So on a 10-year, the highest you can get is around 3 percent. However, there’s some other options. When it comes to savings accounts, I’ve already said that that’s totally separate, we handled that. 1.05 percent is the higher we’re, highest we’re getting there. Personal pensions is an option.
BRIAN: Before 2008, we’d get 4 or 5 percent where we called the bank and we said, “How much will you pay us for 250,000?” Where we take a monthly amount each month for 60 months, and we draw it to zero. How much will you pay us? We used to get 3 or 4 percent for those, now we’re getting .5. 0.5 percent. Those are not a competitive option right now. The last two are very interesting. Equity indexed accounts, or equity-linked CDs.
BRIAN: They’re offered by banks and insurance companies, and the way they work is you capture around 60 percent of the S&P when the markets go up. And you lose nothing when the markets go down. So, for example in 2000, ’01 and ’02, when the markets were crushed by 50 percent, people who used equity indexed accounts or equity linked CDs, didn’t make anything but they didn’t lose anything. Then when the markets doubled from ’03 to ’07, every year you capture around 60 percent of that.
BRIAN: And you have a new basis or floor from which you cannot lose money. So then you’re up to 2007, and then the markets get creamed in ’08. You keep all of that gain, you don’t lose any money. And then from ’09 to present as the markets are up, about 150 percent. Every year you capture around 60 percent of that gain, you lock it in.
BRIAN: 100,000 invested in the S&P from January One of 2000 to present is less than 100,000 invested in these equity indexed accounts or equity-linked CDs for one reason, and it’s because they didn’t take a 50 percent hit in 2000, ’01 and ’02. And they didn’t take the second 50 percent hit in 2008. So that puts us ahead. These things have been around for over 25 years, they average around 6 and 1/2 percent.
BRIAN: And, the reason that most people haven’t heard of these is because they don’t pay any security commissions, so the incentive for a banker or a broker is pretty small. So we want to point out that our clients know about these, and frequently they are used because of their high average rate and their inability to lose money when the markets go down, or when interest rates go up or down. Unlike bond funds, where you lose money when interest rates go up, and where they’re hardly paying anything, this gives us a good return.
BRIAN: Last year with the S&P up 12 percent with dividends reinvested, our best one earned over 9 percent last year on principal guaranteed money. 9 percent on principal guaranteed money. All right, the last one when we talk about options for principal guaranteed or safe money, is life insurance. Now I know, I came from the securities side. As soon as I say life insurance, I want to wash my mouth out. Are we, but I have to, being a fiduciary, I have to tell you about these.
BRIAN: Mike, by the way, I bet, 95 percent of Decker Talk Radio listeners are hearing this for the first time. They’ve never heard of this before. When it comes-
MIKE: That’s probably true, but it’s just math. So I know you’re going to dive into it, but it’s a conversation you have to have. And I was saying over, or earlier in the show when you were getting those printouts, that a lot of times you have questions you don’t really know you have questions about.
MIKE: We want to help you know the right questions to ask, and then also give you the answers.
BRIAN: Yep. All right, so on this, on the last one here for principal guaranteed accounts. Is life insurance an option? And we would say, yes. Do you know about an IUL? Indexed Universal Life. An IUL, Indexed Universal Life, you should know about because it is the highest principal guaranteed, tax-free option out there today. Here’s how it works.
BRIAN: You invest in it, not all at once. You can’t put everything all at once. You’ve got to feed it in over three or four years. And the agreement between the insurance companies and the IRS is that if you feed it in over three or four years, then you don’t MEC or Modified Endowment Contract, you don’t MEC the policy. In other words, you build it up over three to four years, let it grow, and then when you pull money out, you can pull it out not as income, but as a loan.
BRIAN: In other words, you loan it back to yourself to zero, and that makes it tax-free, because it’s a loan. How do these things do? Well, if you’re 65 years old, and you invest $150,000 in this, we would run an illustration and show, ‘cause we’re mathematically based, that the IRR, the Internal Rate of Return, settles in around 5 percent. What is 5 percent tax-free right now? Well if you’re in the 35 percent tax bracket, which it’s easy to be there right now, that would be the tax equivalent of 7.7 percent principal guaranteed.
BRIAN: Where in the world are you going to get that? So, when it comes to tax-free principal guaranteed, mathematically you can’t find a higher principal guaranteed rate of return than an IUL, or Indexed Universal Life option. And when it comes to taxable, there’s no higher principal guaranteed option than the average annual returns that have been coming in under equity indexed accounts or equity-linked CDs.
BRIAN: Now I want to warn you that there’s a lot of bad stuff out there. We have a mathematical approach, we pay a lot of money for a third party to sort through all of these so that our clients, net of fees, can know mathematically what the highest return options are out there for equity indexed accounts and IULs. I’ll give you an example of the garbage that’s out there. When you walk in a bank, you’ll see that savings accounts are paying zero.
BRIAN: One year CDs are paying almost zero, five year CDs are paying 1 percent, and equity-linked CDs are paying 3 percent. Now 3 percent sounds like a good rate. The problem is, people get trapped into what they don’t know. 3 percent is not a good rate. It’s not a competitive rate for equity indexed accounts, where the goods one have been averaging six and a half, or more than twice that.
BRIAN: So when you put it up against a one year or two year CDs, or the money market savings, some very smart people get tricked into putting some of their money into equity-linked CDs at the bank, where they’re not competitive. In fact, I would say that 97 or 98 percent of what’s out there, we would never use or recommend. There’s a very small part of the sandbox, in the IUL and in the equity indexed account arena, that is competitive, compelling, good, strong investment options for our clients.
BRIAN: And that’s what we use. So it’s very powerful to say, for our clients, that mathematically we look through all the options and here’s your highest returning principal guaranteed tax-free and taxable option out there. And that’s how we help build your portfolio at Decker Retirement Planning.
MIKE: We want to help you see the options you actually have, and show you how they can develop in a plan.
MIKE: And Brian, I think it’s safe to say as well, those that want to see the principal guaranteed accounts, we would show them a plan as well as how it incorporates with utilizing these accounts and how we’re recommending them, right?
BRIAN: Right. We have a mathematical approach, and we know how much money should be put in each of the buckets, so that you’ve got the income that you need and want for the rest of your life. When you’re dealing with a banker or broker and you’ve got it all mashed into a pie chart, you can’t have the same conversation that we have with our clients, where mathematically we’ve made the calculation on how much money that we can draw, how much money you can draw for the rest of your life.
MIKE: Excellent, excellent, excellent. All right, so Brian we’ve only got about four or five minutes left. We’re trying to wrap up a third segment here of problems in retirement, but I don’t know if we can even finish it.
BRIAN: Oh yeah, well let’s start then what we can finish. And that is, we’re going to start a conversation of what, of all the different risk options out there, how do we sort through those? And what we recommend to our clients.
BRIAN: So we’re going to talk next week about all the different risk options. These are oil and gas partnerships for an exchange futures, options, commodities, stocks, bonds, funds, variable annuities, ETFs. We’re going to cover everything. Literally everything to make sure that our clients know what all the options are, and what is the best fit, and what parameters that we use to decide what goes where.
BRIAN: And I want to just tell you that when it comes to the measuring stick that we have against all of these options, we have a twofold mission statement when it comes to risk money. And, by the way, the enigma, or the difficulty that retired people have when it comes to the stock market is, number one, with rates where they are, they know that they can’t survive on CDs anymore. Rates are just too low. But they also know that they can’t afford to get hammered in the market like they did in 2008 again.
BRIAN: So the twofold mission statement that we have is, what out there can keep, can track with the S&P when the markets go up, and protect principal when the markets go down. By the way, that twofold mission statement is quite the feat, because 85 percent of money managers and mutual funds according to Vanguard, don’t track with the S&P when the markets go up. 85 percent of money managers and mutual funds underperform the S&P. And then the second part of the mission statement, who do you know that made money in 2008?
BRIAN: Seriously, who do you know that made money in 2008? This is, this lacks common sense for us. By the way Mike, I’ll end the show with this statement. The stock market is a two-sided market. It goes up and it goes down. What makes no sense to us, or any of the people that work for our company, is to have the Banker Broker Model, a one-sided strategy in a two-sided market. They tell you to buy and hold. Buy and hold don’t tie into the market. What that means interpreted is, give me your money, I’m going to make fees on the risk side, and leave me alone.
BRIAN: We don’t think that that’s in your best interest. Mathematically or common sense tells you that you should have a two-sided strategy in a two-sided market. When the markets go up, you track with the S&P. When the markets go down, you have protection of principal that automatically kicks in. So I want to end this radio show by telling you this statistic. 100,000 invested in the S&P January One of 2000 with dividends reinvested, grows today to around 220,000.
BRIAN: Average annual return is around 4 and 1/2 percent. 100,000 invested in the models that we use for our clients, 100,000 has grown to over 900,000 net of fees. Average annual return is 16 and 1/2 percent. These models that we’re using today made money. They made money together in 2000, 01’ and ’02 when the markets lost 50 percent.
BRIAN: And they made money from October of ’07 to March of ’09, when the market lost another 50 percent, and they tracked with the S&P when the market doubled from ’03 to ’07, and from March of ’09 to present. So Mike, when people come in, we’ll give them an opportunity to come in and we’ll show them the name, all the details, the year by year data on all six managers.
MIKE: And we’ll open up the binders and the books, and show you not only who they are but what their performance was. So, have a great week everyone, and we’ll talk to you next week.
