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 the potential problems in retirement, hittin’ the big ones, that you may see when you’re retired. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good day everyone, and happy Sunday. This is Mike and Brian Decker on another edition of Decker Talk Radio’s Protect Your Retirement. Brian Decker, a licensed fiduciary from Decker Retirement Planning, we’re excited to talk to you today about potential problems in retirement. If you’re near retired or currently retired, listen up, because these are some huge pitfalls that some people have experienced, and you can avoid them with what we’re talkin’ about today. Brian, let’s dive right into it.
BRIAN: All right. We’re going to talk about potential problems in retirement.
BRIAN: So when someone has their income plan set where they get the income they need and want for the rest of their lives, they’ve got laddered principle-guaranteed accounts for their income for the first 20 years, they have emergency cash set aside in their plan, and they have risk models that are two-sided, meaning they’re designed to make money in up or down markets. In other words, when we get the income plan set, now we’re going to hammer it with the biggest problems that we’ve seen over the last 32 years.
BRIAN: I’ve kept a Word doc that keeps track of the biggest problems that people have seen, that we’ve run into over the last 32 years, and we test your plan. We want to go through and make sure that it stands up to scrutiny. So some of the biggest things here that we start with, the first three, in my opinion, are more important than the other 22 combined. So top of the list, Mike, think of how silly this is, how much income do you want at retirement? Such a basic question, why do you think that’s top of the list?
MIKE: Oh my gosh. I mean, so many people don’t really know how much they need to spend. Because isn’t it true, Brian, when you retire and you stop working, you have more time, which means you want to spend more money?
BRIAN: Right.
MIKE: And do more things?
BRIAN: That’s exactly right. So, Mike, a lot of people think that they’ll spend less in retirement, and we add 20 percent because of what you just said. So let’s talk about this. A couple of things based on your income. When you’re engaged at work for eight hours, you’ve gotta commute, you get home, you’re tired, you have dinner, and that’s five days a week. You’re engaged and you’re not spending money, you’re earning money.
BRIAN: When you retire, you have free time, and when you have free time, you want to do things, and when you want to do things, they cost money. So we recommend that you add, based on what you’re used to spending, another 20 percent. And we don’t want people to retire into a straightjacket, where, yes, they’re retired, but they really can’t go out and do things. We hope that you know how much income that you need to retire and do the math. By the way, Mike, this is somethin’ really important.
BRIAN: With the asset allocation pie chart that bankers and brokers have, people are basically guessing on how much income they can have for the rest of their lives. And they use the four percent rule, I won’t even go there, which, by the way, is what we believe is the most toxic destructive financial strategy out there. They use that to distribute income for the rest of their lives. What we do is we have an income plan, which is basically a spreadsheet that shows all sources of income for our clients.
BRIAN: It’s shows your pension, it shows your social security, it shows your rental real estate, it shows the income the you receive from your portfolio. We gross it up, minus taxes, that gives you annual and monthly income, with usually about a three percent COLA, cost of living adjustment, to age 100. The number one fear of people in the United States that are over 50 years old after the year 2008 is… running out of money before you die. That’s the number one fear of people who are retired.
BRIAN: Running out of money before you die. Our clients don’t have that fear at Decker Retirement Planning, because we use a distribution plan that shows how much income you can draw for the rest of your life. And it shows, net of tax, how much income, and it gives you a COLA every year. So, first of all, we run a max income plan, day one, version one, to see how much income you could possibly have. That tells you if you can retire or not.
BRIAN: Now, if you’re already retired, many people that we have are under distributing their income because of fear that they will run out of money before they die. So if it’s pre-retirement, we should run this for you so that you can you see how long it takes to retire and have a plan to get there. If you’re already retired, you should come in and have one of our planners in Seattle, Kirkland, Washington, Salt Lake City, have them run these plans to see if you can retire.
BRIAN: And if you already are retired, you want to know how much you can actually draw so that you don’t run out of money before you die. Income is a big deal in retirement. So you need to know your budget, you need to know how much your portfolio can draw. And one of three things is going to happen when we do version one. We either will show you that you have not enough income, and so you need to work longer, and thank goodness that we caught it early so that you don’t have the disaster of retiring too early into an income stream.
BRIAN: But we can show you mathematically how many years it takes to get to that number that you need to retire. So we’re a math-based firm at Decker Retirement Planning. Instead of looking at a pie chart and guessing, which is what your banker or broker is doing… And by the way, Mike, we got some feedback recently that we were too harsh on bankers and brokers, and we need to differentiate between the people and the practice, right?
MIKE: Yeah. They’re good people, but how they’re structured creates a huge conflict of interest.
MIKE: I mean, you can be a good person, but at the end of the day, you still need a paycheck.
BRIAN: Yeah. And so what we’re pointing out is that your banker or broker, your advisor, is a good person, they’re just trained in practices that fail common sense, math, and logic. So the way that they distribute income is to look at the pie chart that keeps all your money at risk. Strike one. That makes no sense. Telling you to put your safe money in bond funds when interest rates are at or near all-time record lows. That makes no sense, so that’s strike two.
BRIAN: And telling you to distribute your income for the rest of your life using the four percent rule, which is strike three. Mike, I can’t avoid this. Even though we’ve done this hundreds of times on the radio show, I’m going to go into this rant again about the four percent rule. It’s something that we have at our website. It’s something that is predominately spoken out against. If you Google the four percent rule disaster, you will get hundreds of articles that speak out against this. So let’s talk about it. Let’s define what the four percent rule is.
BRIAN: The four percent rule says that if you look at how stocks have done for the last 100 years, they’ve averaged around eight and a half percent for the last 100 years. If you look at how bonds have done since interest rates peaked in 1980, so for the last 38 years bond funds have averaged around four and a half percent. So let’s be really conservative and just draw four percent from your assets for the rest of your lives, and you should be fine.
BRIAN: The problem with that is when you retire, you’re retiring needing an income stream for the rest of your life, and if interest rates go up from here, and the stock market doesn’t cooperate and it goes down from here, you have a problem. So let’s talk about those two separately. Interest rates move in cycles. If you look at a 100 year interest rate chart, you’ll see that interest rates on the 10-year treasury has only hit two percent twice. Once was last year, 2017, and the other was 1940. You have to go back that far.
BRIAN: All the other times, interest rates have been higher. So now, you’re going to put your retirement money into bond funds when interest rates on the 10-year are at 2.8 percent. Now, when interest rates trend higher, they trend higher for usually 15 or 20 years. Can you imagine? You’ve got your safe money losing money every year when interest rates are trending higher. That makes no sense. Now let’s talk about the stock market. There’s a way to value how cheap or expensive the stock market is.
BRIAN: One of the ways is called a price-earnings ratio. You take the price of the S&P divided by the earnings of the S&P and you get a number called the price-earnings ratio. There’s been three times in history that the stock market has hit 25 times trailing earnings. One was 1929, the other was 1999, and the third time was mid-January of 2018. Now let’s look at what that means. In 1929, when the stock market hit 25 times trailing earnings, it took more than 10 years for you to get your money back from that point.
BRIAN: In 1999, it took more than 10 years for you to get your money back from that point. In January of 2018, I guess, that the stock market is going to do something that it’s never done before, and that is go up from here. To go up, once you hit that point, well, it’s never happened before. So we’ll see. Now, at Decker Retirement Planning, if markets go up from here, then we will take advantage of that.
BRIAN: But if markets go down from here, it doesn’t devastate our portfolios because our safe money doesn’t lose money, our emergency cash doesn’t lose money, and our risk money is invested in two-sided models that we expect to make money. So the next 2008 we go through at Decker Retirement Planning, our clients are expected not to just not lose anything, but we should make money in the next 2008. So, if you have that kind of confidence, then you’re in good shape.
BRIAN: By the way, let me define what the four percent rule is because I split up income, and interest rates, and the stock market. For the first time in a long time, we could have interest rates going up, losing money on your bonds, and the stock market going down, losing money on your growth portions of your portfolio. In other words, you could lose on your entire portfolio where diversification amounts to no downside protection.
BRIAN: You’re losing both, on your bonds and your stocks. That’s the setup of what we’re looking at right now. At Decker Retirement Planning we plug those holes. But on the four percent rule, the four percent rule says to distribute four percent of your income for the rest of your lives and you should be fine. When the markets are trending higher, that works beautifully. When the market goes into a flat market cycle, and in the last 100 years, usually every 18 years, the markets go into a flat market cycle.
BRIAN: When the markets go into a flat market cycle, not only doesn’t the four percent rule work, it actually destroys your portfolio. So let me give you an example. Decker Talk Radio listeners, let’s say that you’ve all got four million dollars in investable assets, and you retired at the beginning of the latest flat market cycle which is January 1 of 2000. So the good news is you’re retired, you’ve got four million dollars, and that’s the good news.
BRIAN: The bad news is the market crashes, the tech bubble bursts, and you lose 50 percent. But remember, you’re drawing four percent a year. So actually, four, four, and four, you go into 2003 down 62 percent. But the good news is the markets double from here, so from March of 2003 to October of ’07, you make all your money back. Oh, actually, I need to say you don’t get all of that double because you’re drawing four percent every year. Four percent in ‘03, ‘04, ‘05, ‘06, and ‘07.
BRIAN: And then you take that 50 percent hit from October of ‘07 to March of ‘09, plus the four percent you draw, and you are done. You know that you cannot mathematically stay retired because your portfolio is so brutally hit. Now, the guy who invented the four percent rule, his name is William Bengen, he came out in 2009 and he said that the four percent rule doesn’t work when interest rates are this low. He called it dangerous, he said he doesn’t use it. You can see William Bengen’s quote on our website at Decker Retirement Planning dot com.
BRIAN: So the discredited strategy by its founder is still in full use today. Banks and brokers didn’t miss a beat, they still use it today, even though it destroyed millions of people’s retirement in the year 2008. And in 2009, proof of what I’m telling you is true is the millions of gray-haired people that showed up in banks, retail, fast food, greeters at Walmart.
BRIAN: They had to do something different. They had to sell their home, move in with the kids. They had to go to Plan B because the four percent rule destroyed their retirement. So when we talk about income, this is the number one item on our list, Mike, because if you have your income set for life, a lot of problems go away.
BRIAN: All right. So on income, the number one item in making sure that you’re income plan works.
BRIAN: Now, what we’re doing here is probing, or hitting your income plan trying to find weakness in it. And so we want to make sure that you’ve got enough income for the rest of your life. One of the things, and this a good thing, after 40 years of generating income by saving, and scrimping, and doing without, sometimes mentally, psychologically, it’s very hard for people to transition from the saving mode to the spending mode. For 40 years, you’ve told yourself it’s irresponsible to spend the money that you’re putting away.
BRIAN: In fact, once you retire, your new paychecks are coming from your portfolio. Coming from social security, coming from your pension, coming from your rental real estate. That is your new paychecks. And, yes, you should spend them, especially when you can see how much money is coming every year, net of tax, on an annual and monthly basis. Some people have scrimped and saved so much that they’re used to living on a budget of, let’s say, six thousand dollars a month, net.
BRIAN: Well, when we show them that they can take twice that, there are a lot of people who just wince and say, “Gosh. I just don’t think I can.” So we build on our spreadsheet, our distribution plan, a legacy column that shows how much money that is building up that they’ll be sending to their children. One of two things happen. After a few years where they have total access to that fund, they can take trips around the world, they can dip in for new cars, new house, whatever.
BRIAN: After a few years of seeing and having confidence in their income, usually they start to raise their income, which is a good thing. We are loyal to our clients, we are fiduciaries to our clients, but when they’re used to only spending six thousand dollars a month and see that they can take 10 or 12, we’re happy at Decker Retirement Planning when our clients enjoy their retirement. Now, one more thing about that income.
BRIAN: Whenever we show a three percent COLA, typically it might show eight thousand dollars a month when you’re 60 years old, and then getting, I don’t know, 14 thousand dollars a month in your 90’s. A lot of people will say to us, “Jeez, Brian. Can’t we take more income now during our healthy travel years, and kind of flatten the COLA a little bit?” And, absolutely, we do that. We want to warn you, we want to give you a heads up, that the 80’s are tough on people’s health.
BRIAN: You might be different, but for most people the 80’s are tough. So when you retire at 60 or 65 years old, we want to frontload your plan, flatten the COLA a little bit, and make sure that you have enough income to hit your bucket list, while you both, you and your spouse, are healthy. I hope this is common sense. Gosh, I’ve taken a third of the show to talk about one of the 22 items on our list, and I purposely didn’t talk about any market information because we wanted to get through this list. But, Mike, it’s not looking good.
MIKE: Hmm.
BRIAN: So on income, Mike, did I miss anything? What would you add, making sure our retired clients don’t retire prematurely, that if they are retired, that they know how much they can draw, the mentality of retiring into a larger amount, and knowing your budget. What else should I have covered?
MIKE: I think, Brian, to sum it all up, I mean we’ve got the research that shows income analysis, and what you’re talking about, is one of the most sought after pieces of advice for retirement. And you can’t know, unless you run the numbers that we’re talking about here.
MIKE: You can’t know with a pie chart, you can’t know by just guessing on dividends, you can’t know, unless you run these numbers. Right, Brian? I mean, it’s that simple. It’s math.
BRIAN: That is true. All right. So with a third of the show done, let’s switch over to inflation and stock market crashes. Those two are the two biggest destroyers of people’s retirement. So let’s talk about inflation. Inflation is that the cost of living is going to be going up for the next several decades.
BRIAN: If you remember back in the 60’s, Mike, this is when I was a kid, how much do you think it cost to buy a house in the 60’s, 1960’s? Take a guess.
MIKE: Oh my gosh. Wasn’t it around 60 or 70 thousand?
BRIAN: Nope. It was around 15 thousand, 12 to 15 thousand for a house.
MIKE: Oh my gosh.
BRIAN: Guess how much it was for a car?
MIKE: Oh, like, what? 1000?
BRIAN: Yeah. 800 to 1500 dollars for a car. What are we? From the 60’s, we’re 58 years down the road. Now, when you’re retired, you’re 30, 40 years in retirement.
BRIAN: So, will it be that significant? Now houses and cars are 10 times that. More than 10 times that. So let’s talk about inflation. Some people have made the erroneous conclusion that inflation has been low for the past several years. And the answer is, it depends. The cost of food, the cost of energy, the cost of several things have stayed low.
BRIAN: But the cost of healthcare, the cost of college tuition, those two things, automobile cost, housing cost, those things have gone up quite a bit. I guess even food has gone up. So we want to make sure that we put in a COLA. When we talk about inflation, our clients have five different layers of protection. The first thing is the COLA, cost of living adjustment, our clients have increases every year to help protect them. Does that on its own protect you from inflation? No, it doesn’t.
BRIAN: We add in four other components to make sure that our clients are protected against inflation. The first is adding a COLA, cost of living adjustment to your income plan. The second has to do with any inheritance that you get. And this is a really difficult subject to talk about, but if there is going to be an inheritance, and if your parents are going to be passing away and leaving assets, then we want to account for that.
BRIAN: It’s horrible to talk about, you want your parents to live forever or to spend all their money, but if this event is going to happen, we want to account for it in our distribution plan. We’re conservative on time, having them live as long as what you think, and then being conservative on dollar amounts. But we price that into your plan as the estimated contribution or distribution coming into your plan. Inheritance acts as a second layer of protection on your plan. The third is any real estate that you have. Real estate acts as a incredible hedge against higher interest rates.
BRIAN: In the 70’s, when we had runaway interest rates, inflation, hard assets like real estate, gold silver, hard assets go up in value and act as a beautiful hedge against inflation. So any residential real estate, rental income, rental real estate, those are wonderful hedges against inflation. The fourth is what we call a downsize. In your late 70’s, early 80’s, your joints ache, your back hurts, you’re no longer interested in the stairs or gardening, you sell your home for X, you buy a condo for Y, and the difference between X and Y is typically invested in your plan.
BRIAN: Do we account for that? No, that’s icing on the cake. That acts as a fourth hedge against inflation. We see this all the time, and that’s a distribution that comes into your plan of [allotted?] money. The fifth and final hedge against inflation has to do with our risk bucket.
BRIAN: When someone transfers their accounts into our plan, and they’re used to having all their money at risk by their banker and broker, there’s a significant reduction in risk because typically, for our clients, the amount of risk exposure we have falls from 100 percent with their banker and broker, isn’t it true, Mike, to around 25 percent? Is that the norm?
MIKE: That sounds about right, yeah.
BRIAN: Okay. So a 75 percent reduction in risk.
BRIAN: Oh, by the way, Mike. Bankers and brokers were charging their clients on all of that risk money, so if there’s a 75 percent reduction in risk, there’s what kind of reduction in fees that our clients pay?
MIKE: Oh, it’s huge. 75 percent.
BRIAN: About 75 percent reduction in fees that are paid. So a huge reduction…
MIKE: That’s a lot.
BRIAN: It is.
MIKE: I mean, Brian, think about that too. That money you’re saving, if you keep it invested, also grows.
BRIAN: Right. Okay, now here’s what I love to do with clients, is to show them the huge buffer that we have on purpose.
BRIAN: And by the way, Mike, I love saying this. If you work for Oppenheimer, guess what kind of mutual funds you’re going to recommend to your clients?
MIKE: Oh, it’s Oppenheimer. Big surprise, right?
BRIAN: Oh, that’s correct. Big surprise. And if I’m working for Merrill Lynch Bank of America, guess what kind of mutual funds you get?
MIKE: Oh, it’s whatever company they work for.
BRIAN: Right. It’s because they’re incented, they’re paid for. That’s’ not how a fiduciary works.
BRIAN: What we do as fiduciaries on our risk buckets is we go out to the major databases, like the Wilshire database, the Morningstar database for mutual funds, Timer, Track and Theta, we want to know who’s beating us, who has better money managers than the ones that we have in place. And I look at this every quarter. I want to see who’s beating us. And we as an independent company that are fiduciaries to our clients simply use the highest performing, net of fee, money managers out there.
BRIAN: And, Mike, would it surprise you for the last 20 years that computer programs have been beating everyone?
MIKE: No, doesn’t surprise me at all.
BRIAN: Okay. And of the computer programs, trend-following models that are two-sided, meaning they’re designed to make money in up markets, and they’re designed to make money in down markets. Those, no one’s even close to those, for the last 20 years. So guess what we do in Decker Retirement Planning? We use those models. And by the way, for 100 years the S&P has averaged around eight and a half percent.
BRIAN: These models are almost double that. They’ve averaged, in the last 18 years, 16.5 percent. Now, the planning we do uses six percent. When we plug in what these managers have actually done, with what our planning is, typically it shows a client with 1.5 million and 25 percent in the risk bucket, so there’s about 350 thousand in there growing at six percent to one million two, something like that, in 20 years.
BRIAN: When we plug in what 16.5 percent actually does, that 350 thousand grows to around four and a half million, not 1.2 million. So there’s a huge buffer there that Decker Retirement Planning clients get as a buffer for inflation. It’s extra money for whatever you want to do with your family, it’s extra money for long-term care insurance funding, it’s just there. So those are the five components that are there for Decker Retirement Planning clients for inflation protection.
BRIAN: I just want to explain because inflation is a huge concern for people going into retirement. I’m going to say these five again. Number one, we put in a COLA, cost of living adjustment, in the income for our client. Every year our clients get more income. Number two, they have protection by accounting in our income plan for any inheritances that are coming in.
BRIAN: Number three, we just tell people that they have added protection from inflation through their real estate that they have, whether it’s their residence, or their residence plus their rental real estate. Number four, making sure that they know that they have that extra protection by having a downsize, which we don’t account for in the plan, it’s total icing on the cake. We make sure that their income plan has that extra kicker when they downsize from a home. In their late ‘70s, early ‘80s, they sell their home, they buy a condo.
BRIAN: The difference between selling their home and buying a condo is usually a couple hundred thousand dollars, that goes back in your plan, that’s icing on the cake. And number five is the extra that is earned in the risk bucket that acts as a buffer. So our clients, we are fiduciaries to our clients, and we have to tell them if they have inflation exposure. Yes, they do. Do they have inflation risk handled? Most all of our clients we can look them in the eye and say, “You’ve got this licked. There’s not an issue.” This is a big concern for a lot of people.
BRIAN: All right. We’re now going to hit the number one biggest destroyer of people’s retirement plan. It’s not inflation, it’s stock market crashes. Stock market crashes are defined as any drop in the market. A correction is defined as a 10 percent drop, a market crash is 20 percent or greater. Let’s go through the history of these stock market crashes and list them. Typically, it’s every seven or eight years. So the last market crash we had was a 50 percent drop from October of ‘07 to March of 2009.
BRIAN: That stock market crash hurt a lot of people, it destroyed a lot of people’s retirement. Seven years before ‘08 is 2001. The twin towers went down that year, it’s the middle of a 50 percent drop, and the tech bubble burst. Seven years before that was 1994. Iraq had invaded Kuwait, the interest rates were spiking up, the economy was in recession, and the stock market struggled that year. Seven years before that was 1987. Black Monday, October 19th, a 22 percent drop in the market that day, a 30 percent drop peak to trough.
BRIAN: Seven years before that was 1980. The stock market from ‘80 to ‘82 took a 46 percent hit. Seven years before that was the bare market of ‘73, ‘74. That was a 42 percent hit. Seven years before that was the ‘66, ‘67 bare market, a 44 percent drop. And it keeps going. So the market’s bottomed March of 2009. We are in year 10 of what typically is a seven, eight year market cycle. What’s your plan for downside protection?
BRIAN: Now, think of this. If you don’t have any downside protection, and your banker and broker is telling you to buy and hold, no one can guess the market, be a long-term investor, let’s make sure your portfolio is tax efficient, I want to give you two pieces of advice. First of all, that has to fly in the face of common sense to you, and know that if you’re in your 20’s, 30’s, and 40’s, that makes sense. You’re in an accumulation strategy.
BRIAN: But once you retire and take that last paycheck you’re ever going to take, and you’ve amassed a large amount of money, you can’t afford to take a 30 or 40 percent hit. So why is the banker and broker telling you to be a long-term investor? Mike, why do you think that is?
MIKE: I mean, that’s how they get paid.
BRIAN: That is how they get paid.
MIKE: Also…
BRIAN: Go ahead.
MIKE: Brian, somethin’ to do with the buy and hold strategy. Isn’t it true that a lot of bankers that suggest the buy and hold, they just can’t handle actively all of their client’s accounts with all the different requests they have? And so it also helps field them from not having too much tediousness in managing these accounts.
BRIAN: I was trained in these models and, Mike, I am 100 percent sure that it’s because that’s how they get paid. They get paid to keep client money at risk. Is it your best interest, Decker Talk Radio listeners, is it in your best interest to keep all your money at risk? No. This flies in the face of common sense. You do not need an econ finance degree, you do not need any 40 years in Wall Street experience to know that now that you’ve amassed this large amount of money that’s supposed to last you for the rest of your life in retirement, the advice of the bankers and brokers flies in the face of common sense and it will hurt you.
BRIAN: Let me say again. This is the number one destroyer of people’s retirement. Number two, we are at year 10. It’s like musical chairs, where the music’s been playing a long time and at some point very soon the music stops. And at that point, what kind of downside protection do you have? Let me tell you what’s in place for Decker Retirement Planning clients. Number one, there’s three parts to anyone’s portfolio in retirement. There’s cash, there’s safe money, and there’s risk money.
BRIAN: So on cash, when the market tanks, that’s banks, credit unions, we don’t lose any money in those. And then our safe money which is laddered principle-guaranteed accounts that generates income for the next 20 years, that’s principle-guaranteed money. That money is not going down. That is not going down in the next 2008. Third is the risk money. Our client’s risk money is only around 25 percent of the portfolio, that’s a huge change, by the way, from your banker and broker portfolio.
BRIAN: And number two, it’s invested in two-sided, trend-following computer algorithms that have made money collectively. We have six managers. They made not a little bit of money, they made a lot of money in 2008, and they made a lot of money in ‘01 and ‘02. So these models are there to protect your principle. It’s not protection for you to just sit there and do nothing. Deer in the headlights. That helps the banker and broker, it does not help you.
BRIAN: I really hope that this is striking a chord and people call in and talk to our planners, because at Decker Retirement Planning we take this very seriously, our fiduciary responsibility to respect people in retirement. In fact, Mike, that’s kind of something that we have, what do you call it, trademarked now? Is Protect Your Retirement trademarked?
MIKE: No, it’s not. Well, it’s not trademarked by us. We just say it sometimes.
BRIAN: We just say it a lot, right?
MIKE: Yeah. It’s trademarked back east, so we can say it on the west coast, but… yeah.
BRIAN: All right. But anyhow, when it comes to making sure that you’re protected on the downside, this is a number one, top the shelf list item for us at Decker Retirement Planning. Okay. Let me take the second option here. If you insist that you’re going to buy and hold, why are you paying a banker or broker a management fee for something that you can do for yourself and not have any management fees? Let me tell you about robo investing.
BRIAN: Robo investing is about five years old. It started with Vanguard, Fidelity, Schwab. Those three companies have robo investing where you can call and request it, and what you do is you own the indexes. They give you a risk questionnaire, you fill it out, and based on how you answer the risk questionnaire, they’ll give a portfolio of ETF’s, exchange-traded funds, where you own the indexes in the large cap, mid-cap, small cap indexes, emerging markets index.
BRIAN: And when you own the index, you’re beating 85 percent of money managers and mutual funds every year anyhow, you’re diversified, and you’re owning ETF’s that are low-cost, and you’re not paying a management fee. If you insist on buying and holding, and you’re paying a banker or broker a management fee, then you’re ignorant. You’re ignorant of the robo investing program at Vanguard, Fidelity, and Schwab, where they rebalance your portfolio on a short-term regular basis, and you are not charged a management fee.
BRIAN: So we’ve covered both sides on that. So number one, of all the potential problems in retirement, we’ve got a list of 22 here, we’re 40 minutes into a 60 minute program and we’ve covered three, but these are the three biggest. Number one, making sure you know how much income you need and want in retirement. Number two, inflation protection. Number three, stock market crash protection. Okay, on this number four here, how much income is lost at the death of a spouse? This is really important.
BRIAN: And, in fact, I think for women where security is a number one retirement, this is something that speaks peace to their mind. Once we have their income plan set, and we talk about this one, this is fun for me to see the face of the spouse when she sees how she’s protected. When we talk about how much income is lost at the death of a spouse, here’s what we do.
BRIAN: The worst time to lose your spouse financially. This is hard discussion, because emotionally this is terrible. But the worst time to lose a spouse financially is today. So we kill the man off first, and we turn, look at the wife and say, “What are you going to do?” The portfolio income is still yours, the income from your rental real estate, the income from that is still yours, now let’s talk about his pension. How much survivability is there on his pension?
BRIAN: We see everything from not having a pension of course, to having a pension and having it be 100 percent survivable. Meaning, all of that money transfers to the spouse, the surviving spouse, when the one spouse passes away. We see also that the pension can be non-survivable and if it’s a significant pension, that can be a big hit to the surviving spouse to have that pension die with the one spouse.
BRIAN: Then we look at social security. When it comes to social security, you get the higher of the two, not both. So when we total up the income that’s lost to the surviving spouse when the first spouse passes, it’s either seeing mathematically that it’s manageable, or we see that there’s a problem. If it’s manageable, we visibly see the surviving spouse breathe a sigh of relief and say, “Oh my gosh, I’ve wondered this forever. I’m so glad we went through this.” Or, we see a problem that we need to solve.
BRIAN: Now, there’s three reasons that we use life insurance, typically. One is to get both spouses past their retirement date. So it’s to get you cross the finish line. You’ve got to have replacement income, life insurance, in place to get you to retirement. Number two is what we’re talking about right now.
BRIAN: In retirement, if one spouse passes and creates a huge income hit for the other, then we need to protect the surviving spouse with income replacement, life insurance, and we mathematically put that together to make sure that that’s in place. And we try to be very frugal in how we use that. So if the client’s young enough, then we try to use term and get you well into the 80’s on a 20 year term, or something like that.
BRIAN: The third way that we use life insurance, now with the new tax laws is going to be less used, and that’s for estate tax planning reasons. Now the estate tax exclusion has been doubled, where it’s now 11 million, so you need to have an estate above 22 million where you have federal estate tax exposure. Now, the states didn’t move their estate tax limits, so we do have some state estate tax exposure that we deal with.
BRIAN: And sometimes, clients like to pay their estate tax with five cent dollars by using an ILIT, and irrevocable life insurance trust. It’s a strategy that’s used quite often, and we talk to clients about it. But those are typically the three reasons that we use life insurance. We have a saying at Decker Retirement Planning that if you have insurance, keep it, if you don’t, most of the time people don’t need it. But we assess what risk there is to income when we just play along and kill spouses off one at a time and see what the effect is on their income plan.
BRIAN: Then we look at the wife and say, “What are you going to do if there’s a dramatic drop in income?” And women are inherently very good at this. Their responses typically are, “Well, I have the house. I can sell the house, downsize to a condo, and that gives me plenty of income replacement for the rest of my life.” Or, “I don’t have to do anything.” But we talk through the plan.
BRIAN: This is very important to us at Decker Retirement Planning, that we as fiduciaries talk through worst-case scenarios like this, and if there’s a problem, we deal with it and we put a new plan in place that deals with income replacement if, at the death of a spouse, it puts another spouse in income jeopardy. All right. The next thing we want to talk about when it comes to a plan is, is it necessary to even take any risk to accomplish your goals?
BRIAN: Now, we have clients come through from time to time where they really only need around six thousand dollars a month, but their plan can generate twice that, 12, 14, 15, or more. And then, one of the things that we do, which we talked about early in the program, is to set up a legacy account. A legacy account is money that they don’t spend each month, it’s invested in an account that they have access to, that’s liquid to them, that is growing and probably includes money that they’ll never spend for the rest of their lives.
BRIAN: Well, that’s one part of having more income than you can spend. The other part now becomes, do you even want to take any risk at all? Because the risk bucket is throwing off more income that they won’t spend. So the option they have, and this is true for about 15 percent of our clients at Decker Retirement Planning, do they want to take any risk at all?
BRIAN: This gives the option for these clients to say, “You know, I’ve hated the stock market, I’ve never done well in the stock market, no. I don’t want to have any risk. I want all of my portfolio to be principle-guaranteed for the rest of my life. Even that generates more income than I can spend. But, no. If I have the option to be 100 percent principle-guaranteed and not have to worry about the daily stock market report that shows the market’s up or down, yeah. I would love to have that tremendous piece of mind and have no risk for my retirement for the rest of my life.”
BRIAN: That’s one option that they have. The second option is that they can say, “You know, I don’t need to take any risk, but I feel like it’s prudent to take risk, just for diversification reasons, because I have confidence in what you guys are doing, and I see that as a responsible way to increase the amount of inheritance that’s coming to my kids.” So, that’s a discussion that we have. We’re a math-based firm, and we calculate if it’s necessary to take any risk at all, and we give the clients an option.
BRIAN: Another thing we mention to our clients is that when it comes to managing risk assets, we don’t have to manage them at Decker Retirement Planning. Most of our clients have us manage the risk assets. In fact, Mike, I don’t know of any exception to that. I think all of our clients that do want risk managed in their accounts, all of them are having us manage their accounts. Do you know of any exception to that?
MIKE: I think we have a couple clients that wanted a few shares of their pet stock that they were emotionally attached to, but besides that…
BRIAN: Yeah.
MIKE: …no.
BRIAN: Right. So they’ll have some of their money where they call it entertainment money, where they’ll invest a small amount, but the majority of the risk buckets, they look and see what we have at Decker Retirement Planning, and they absolutely say, “No, we can’t possibly get close to that. And we don’t know of any banker or broker that can average 16.5 percent, net of fees, for the last 18 years and make money in 2008, make money in ‘01 and ‘02.”
BRIAN: All right. Mike, we only have eight minutes left. I want to start the tax part. Once we get the income plan set, and we pounded through some of the big components, now we talk about tax optimization. So here, what percent of their account is in retirement and non-retirement components? So what is qualified and what is non-qualified? Qualified accounts are retirement accounts. These are accounts that as money grows, it’s tax-deferred.
BRIAN: Or, non-qualified accounts, as money grows it’s taxable, the gains in the accounts every year are taxable. Let me say it another way. When you pull 1000 dollars out of an IRA, you’re going to pay tax on that, it’s taxed as income for that calendar year. When you pull 1000 dollars out of Bank of America, or Chase, or your credit union, you’re not taxed on that. That’s called already taxed money. So guess what we do? There’s some tax strategy that we call placement.
BRIAN: When we fund your plan, we put your already taxed money in your emergency cash, and in the frontend of your plan, so that for the first 10 years or so you’re getting money back, you’re getting money back that’s mostly already taxed money. So that means that your AGI, your adjusted gross income, plummets. It falls dramatically. Your AGI determines how much tax that you’re going to be charged on your social security.
BRIAN: So for that 10 year window, your taxes on your social security dramatically fall, sometimes, with some clients, to zero. So you have a 10 year window to convert IRA’s to ROTH’s. Where do we do that? We’re a math-based firm, we do that in the risk bucket. We are not doing our clients any favors by taking an IRA at 225 thousand dollars and growing it to a million over 20 years. Now, instead of paying tax on 225 thousand, now you’re paying tax on a million dollars, and we have done a great job growing your money, but we haven’t been responsible with a tax strategy.
BRIAN: So in the risk bucket only, we know to the dollar how much money you should convert from an IRA to a ROTH. A ROTH account is a beautiful account in three ways. Number one, it grows tax-free, number two, it distributes income back to you tax-free, and number three, it passes to your children tax-free. That account is a beautiful account. And we create in your risk bucket, ROTH. If you have money in ROTH, it goes there. If you have IRA’s it goes there, and we convert it.
BRIAN: Not all at once, over five to seven years, we get that money converted. We do not convert IRA to ROTH in buckets one, two, or three, in the principle-guaranteed accounts, for two reasons. Number one, you’re taking the money too soon, and number two, the rates of return are not high enough to justify. So when you’re taxed around 20 percent on that ROTH conversion, and your account is only growing four or five percent, that’s a four or five year breakeven when you pay taxes for one year. That makes no sense.
BRIAN: So what we do is, it’s in the risk account only, and when the risk account is growing on average around 16.5 percent, now you’re looking at less than an 18 month breakeven to earn back that money, and absolutely we can justify that. So on the ROTH account when it comes to placement, we do three things.
BRIAN: We take your already taxed money, put it in the front of the plan, we take your not yet taxed money, your retirement accounts, put it in the back of the plan, any ROTH money you have goes in the risk account, and any other money that goes in the risk account is IRA money that we convert over time. So it’s a beautiful thing. In fact, the color of the risk account is gold because ROTH accounts are golden. So that’s the background of that.
BRIAN: Okay. We talked about legacy holdings. Tax optimization strategies for most people are placement and ROTH conversions. The last thing I want to talk about, and I’ll toss it back to you, is required minimum distributions.
BRIAN: These are payments that the IRS requires to come out of your IRAs, not your ROTH accounts, but out of your IRAs, when you’re 70 and a half and older. So it’s something that we at Decker Retirement Planning are responsible for with our clients, and it’s something that once you become a client, we take that responsibility. Meaning that if you under distribute a required minimum distribution, the IRS hits you with a 50 percent penalty.
BRIAN: Now, at Decker Retirement Planning, we take that hit, because we take over responsibility to do the calculations and to distribute that back to you. Now, there’s a right way and a wrong way to distribute a required minimum distribution. Let’s say you’ve got a taxable income stream for the rest of your life, and every fourth quarter there’s a big lump sum required minimum distribution on top of that. Now you’re paying way too much tax. You’re paying tax on all that income stream for the year, plus that huge lump sum from your required minimum distribution. That’s the way not to do it.
BRIAN: What we do is we feather that into your income during the year, so that your required minimum distributions are part of your income. Doing it that way keeps your taxes low, and you’re able to receive that required minimum distribution. So, Mike, you’ve got one minute. Take it away.
MIKE: All right, that about wraps up our show today. Stay tuned next week, same time, same place. Have a great weekend everyone.
