MIKE: Good morning and thank you for listening to DeckerTalk Radio’s Protect Your Retirement, a radio program brought to you by Decker Retirement Planning. This week, we’re finishing up our show from last week, potential problems you may face in retirement. The comments on DeckerTalk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good day, everyone, and welcome to another edition of DeckerTalk Radio’s Protect Your Retirement. You’re listening to Mike Decker and Brian Decker, Brian Decker a licensed fiduciary from Decker Retirement Planning. Got a show packed for information here. Now, before we get started, we’re going to talk about the market, though. Brian, what’s been going on in the market today?
BRIAN: Markets have been dancing around a little bit, we had Gary Cohn resign as the top economic advisor, concerns about tariffs, and I wanted to talk more about earnings. There’s two reasons that stock will go up. One is lower interest rates.
BRIAN: Lower interest rates means that more people are seeking returns in the stock market, so they will take their chances. As interest rates go up, the opposite is true. More and more people are happy with locking in two, three, or four percent. So, lower interest rates is one of the two reasons that markets go have a multiple expansion or stocks go up. All other things being equal, the second reason is earnings. Earnings growth caused multiple expansions, caused the markets to go up.
BRIAN: But what about the earnings growth over the last 10 years? When I read this, this was fascinating to me. There has been almost no corporate instrument of mistruth more powerful than stock buybacks, because buybacks have accounted for about 40 percent of the total earnings per share growth since 2009. That’s an astounding 72 percent of earnings growth since 2012, according to Artemis Capital Chris Cole. Buybacks, stock buybacks, are already on record pace.
BRIAN: 171 billion worth have been accounted so far in 2018, more than double the amount disclosed by mid-February of last year. Like a snake eating its own tail, the market cannot rely on share buybacks indefinitely to nourish the illusion of stock market growth. Until the 1980s, buybacks were actually illegal. Did you know that, Mike? Buybacks were actually illegal in the United States, due to concerns that executives would use them to manipulate share prices. That’s not happening is it?
MIKE: Not at all, never.
BRIAN: Okay, so, now stock buybacks have been legal for many decades. The bulk of total return from U.S. equities in recent years have been due to valuation expansion. In layman’s lingo, it was the result of price earnings ratios being pushed higher even though earnings hadn’t changed much. In a glaring contrast to the United States, total returns for European stocks have really been risen from earnings growth. Now, on a different topic, we’ve had a lot of volatility in the last three weeks.
BRIAN: After going back more than 400 days, a little over a year, without a major cluster of volatility like we have, stocks have moved one percent most of the past 30 days. That’s commonly believed to suggest a trend change in the market. The S&P 500 has gyrated more than one percent on six out of the last seven sessions. It recently has gone more than 80 days without one single one percent move. So, this is the first time in its history it’s undergone such dramatic change in volatility. This has never happened before.
BRIAN: I just… we’re a math-based firm at Decker Retirement Planning, so we keep track of all this. All right, so, Mike, last time we got halfway through the potential problems that people come and encounter in retirement, so we’re going to finish that up and then cover new ground, talking about the different options for principal guaranteed money. At Decker Retirement Planning, we are fiduciaries and we want to make sure that all our clients know all the different options for principal guaranteed accounts and all the different options for risk accounts so that they can mathematically look at bottom line net of fee best returns that are out there.
BRIAN: Now, to dial this back, Mike, what if someone is interested in what they’re hearing here and want to hear the front end of what we talked about last week? So, we’re talking about potential problems in retirement, and I don’t want to go back and talk about what we covered before.
MIKE: We’ve only got so much time, so you can either go to SoundCloud, iTunes, Google Play, and just search for “protect your retirement” and just catch the newest show that was posted, or you can go to deckerretirementplanning.com, and on the top there’s a tab for radio shows in which you can listen to it. And we also transcribe it. So, I know there’s a couple listeners out there that listen to it on their commute to work each day, well, not each day but once a week.
MIKE: But catch the show and a lot more information, articles, dive into those details there to help protect your retirement.
BRIAN: So that you know what we covered last week, we talked about, when it comes to potential problems in retirement, a lot of people don’t know how much income they need or want in retirements. We talked about budgeting and income and we talked about transitioning from being 40 years of saving and being frugal to spending that money, and some people have a hard time with that transition. We talked about inflation protection, stock market crashes, the effect on your portfolio.
BRIAN: We talked about how much income is lost at the death of either spouse, how to protect against that, making sure you know how much risk you need to take, how to manage that risk. We talked about the percentage of assets that are retirement and nonretirement and the benefits. I’m going to start with tax optimization. So, last week we covered all of those things. Now, I’m going to talk about tax minimization, comprehensive tax minimization that we do at Decker Retirement Planning.
BRIAN: So, the first thing we want to talk about is the different tax optimization strategies. So, step one is where we look on lines eight and nine of your 1040, and that’s where you have dividends and interest that show up. If you’re like most people, you have [CLEARS THROAT] nonqualified, which means nonretirement funds, and in those funds you’ve got dividends reinvested, dividends and interest reinvested on your mutual funds. In a year’s time, you can accumulate a lot of money there.
BRIAN: So, if you’re spending, I don’t know, three, four, or five thousand dollars in taxes on money you never touched, that’s an inefficiency that we recommend you fix one of a couple of ways. First of all, you can either turn that income on to receive that money as part of your income. Now at least it’s not so bad. You’re not being taxed on money you’ve never touched. Or, number two, you can repurchase those mutual funds in retirement accounts and turn on the benefit of reinvestment and not be taxed on them because those are in your retirement accounts. So, that’s one thing.
BRIAN: The second thing is typically the largest, number one, biggest tax saving strategy in your lifetime, and it is the Roth conversion. IRAs grow… we’re not doing anyone any favors because if we take your IRA account at, oh, I don’t know, let’s say 250 thousand, and we grow it to a million dollars, after 20 years are you happy with us? And everyone says “Of course, I’m ecstatic. Now I’ve got four times my money in 20 years.” We then point out the tax issue.
BRIAN: The tax issue is you could have paid tax on that IRA at 250 thousand. Now, you have to pay tax on a million dollars. So, that’s an inefficiency that we do fix by making sure that mathematically, and, again, we are a math-based firm at Decker Retirement Planning, mathematically we want to look and see that the risk money that you’ve got is the money that we want to convert from an IRA to a Roth for several reasons. One is that’s the long-term money. Number two, it’s the fastest growing account.
BRIAN: Number three, that money, if we convert it from an IRA to a Roth over five to seven years, that money is going to do three incredible things. Number one, it’s going to grow tax free, it’s going to produce income back to you tax free, and it’s going to pass to your beneficiaries tax free. So, this is a golden account. In fact, Mike, we are kind of corny at our firm. We color that bucket what color?
MIKE: The…
BRIAN: It’s gold, right?
MIKE: The gold one. It’s like an off-yellow, but looks mostly gold.
BRIAN: Yeah, I think it looks gold. And so, that account is golden. We color it golden. We do not convert your IRAs to Roth in buckets one, two, or three because those are principal guaranteed accounts, where you’re taking the money too soon and you destroy the benefit of tax-free growth. We know, to the dollar, how much money you should have in a Roth account. Now, check me out on this. Call you banker or broker… and by the way these are good people. It’s just that they’re not trained the way we are.
BRIAN: When we attack the firms, sometimes people think that we’re attacking people. We’re attacking strategies, strategies that hurt you in retirement.
MIKE: I mean, people go to work to get paid, and so they’re going to do what’s best to get paid and try and do the right thing and find some happy medium in there. And if you’re a banker or broker, you get paid on keeping people at risk. That’s your job.
BRIAN: Right. So, ask your banker, broker, or advisor how much money, to the dollar, that you should have in a Roth account, and I think that they’re going to waffle. We know specifically how much money you should have in a Roth.
BRIAN: That money is going to grow tax free. And the difference between paying taxes on 250 thousand or a million dollars, it’s a lot of money. It’s a six figure difference. So, we want to help you, our client, make sure that you know that that huge benefit of a Roth conversion is available. Now, how to do the Roth? Do we do it all at once in year one? Absolutely not. That would not be in your best interest.
BRIAN: Each year, we look at your taxes, your gross income, we look at your estimated deductions, your standard deduction and your other inline deductions, and then we try to estimate an AGI, your adjusted gross income. Then, we look at your brackets and we see how much room we have to convert from an IRA to a Roth, and, without raising your bracket, we work with that amount and we get it done usually over five to seven years, then we have the benefit of that money growing tax free. That is, for most people, the biggest tax saving strategy.
BRIAN: Now, the next point, as far as the tax optimization strategies, is for our bigger clients that have three million or more in assets. We have a conference call with their CPA and we explore ideas on their income for foundations, family limited partnerships, or Nevada corporations.
BRIAN: Depending on what kind of assets they have, do they have rental real estate, do they look at limited partnerships there, do they look at Nevada corporations or foundations, if you have corporations, we try to look at different ways to shrink the taxes due, the income that you’re pulling from these accounts. So, those are the different tax optimization strategies, and we want to make sure that we are using all the ones so that it’s comprehensive.
BRIAN: Now, some people, when it comes to required minimum distributions, at 70 and a half, you are required to take a portion of your IRA as income for each year going forward. You can pull it up and see, based on your age, the factor that’s supposed to be used. Now, once people become a client of Decker Retirement Planning, we take over that responsibility. So, we had… actually, Mike, we had a case where we missed an inherited IRA and they, the client who was depending on us, missed their required minimum distribution. So, who paid the penalty on that?
MIKE: That was us. We took care of that.
BRIAN: We did that. Now, this is a major stress for people in retirement because guess what the penalty is on underdistributing your income? It’s…
MIKE: It’s about 50 percent of what you’re supposed to take on top taking it.
BRIAN: Right, so, you’re taxed on it and you got a 50 percent penalty, so this is a big deal. It freaks out a lot of retirees. They’re anxious about it, and we, at Decker Retirement Planning, we are on it. And so, we do that calculation every year.
BRIAN: Now, I want to contrast what we do with what you don’t want to have happen. What we do is we factor that RMD income as part of your income during the year. That’s very efficient. What some people do is they take their income for the year and then in the fourth quarter, usually in November, you have this big lump sum of taxable money, required minimum distributions. If you do it that way, which we hope you don’t, but if you do it that way you’re paying unnecessary taxes on that lump sum. It should be part of just your income during the year.
BRIAN: So, that’s important to us that we factor in and feather in the spending on the RMDs. So, we talked about Roth conversion, we talked about lines eight and nine, we talked about Nevada corporations, family limited partnerships and foundations, we talked about RMDs. I want to talk to you about a dynasty trust. A dynasty trust is a trust that helps you avoid a huge penalty and a huge tax that’s called the generation skipping tax.
BRIAN: Let’s say that you’ve got two kids, both kids are doing great. They say, “Mom, dad, we don’t need your money,” so now you want to send money down to the grandkids for some reason. Well, the IRS… if you skip a generation, that money that you send down to your grandkids is money that the IRS could have taxed for a full generation, and they don’t like that so they hit you with a 48 percent generation skipping tax, or generation skipping penalty. So, what a lot of people do is they use what’s called the dynasty trust.
BRIAN: A dynasty trust is something that’s created while you’re alive and funded with whatever portion of the estate that you want. It could be five percent or 10 percent. If you have two kids, you could have 40 percent go to each of the kids and then the remaining 20 percent go to the dynasty trust. A dynasty trust is perpetual, meaning it doesn’t die when you die, and it’s per stirpes, meaning it stays bloodline only.
BRIAN: So, if your great grandson or daughter marries and that spouse decides after 10, 15, 20 years that they want a divorce, they have no access to this money. It stays bloodline only. The use of a dynasty trust is mostly for education. So, this is a way that your descendants forever are grateful for grandma and grandpa, you, and you put money, and your children and grandchildren and their children all have access to a certain percentage of the trust for education, for tuition or books.
BRIAN: It’s a percentage of the trust, and you make it available for all your generations. This is something that allows you to bless the lives of all of your descendants, so it’s very, very popular. It’s called a dynasty trust or a generation skipping trust. [COUGH] The last thing I want to talk about is the legacy. Legacy holdings are funds that where you see that you could draw 15 thousand dollars a month, net of tax from all of your investments, your social security, your pension, your rental real estate, and your portfolio income.
BRIAN: And let’s say that you’re used to, for the last 40 years, you’re used to spending only six or seven thousand dollars. Well, that’s eight thousand dollars a month that’s coming in that you don’t need, that’s extra. So, what we do at Decker Retirement Planning is we send that money each month over to the legacy account. The legacy is liquid to you. It’s separate from the rest of your investments. If you decide that you want to use it for travel or to buy a boat or a car or whatever your use is, it can be great inflation protection. It’s available for long-term care, if you have that issue or concern.
BRIAN: But that’s money that’s probably going to go to the next generation. It’s kept separate, it’s invested separate, and we try to have that liquid to clients for the rest of their lives. Legacy money is something that can be very efficiently, tax efficiently, sent to your kids. If it’s IRA money and we just send that to your kids, they have to pay tax on that money when they pull it out as ordinary income. It’s an inherited IRA. There are strategies that we have where we can send that money tax free to your children and grandchildren.
BRIAN: Hey, Mike, this is probably a good stopping point. If people are interested in taking advantage of comprehensive tax minimization on their retirement plan, give us a call.
BRIAN: All right, continuing on with problems that we see in retirement, these are issues that you want to face head on, talk them through, and make sure that, if it’s an issue, you go to a solution. If it’s not an issue, you just move on. Next issue is called asset protection. So, will your heirs receive the money today, at death, or a combination? What we mean by that is it would be a tragedy for someone with a 600 thousand dollar estate or a six million dollar estate to live their whole life, if they have two or three kids, and not share in the benefit or the blessing of your kids and grandkids, and share precious memories while you’re still alive with them and then they receive an inheritance, yes, but you could have done much more.
BRIAN: Now, at Sea-Tac and at Salt Lake airports, there’s something that the flight attendants talk about right before the plane pushes back. They talk about how the oxygen masks come from above and you’re supposed to do something that’s not intuitive at all for any parent. You’re supposed to put on your oxygen mask first so that you can help those that are around you. This is something, again, that is not intuitive. Same thing on your income plan.
BRIAN: If you see on a spreadsheet… and, by the way, we at Decker Retirement Planning, the income plans that we put together are spreadsheets, and we have on the left side all your sources of income. Imagine this. We’ve got, instead of a pie chart that the bankers and brokers use to diversify your assets, we have a spreadsheet that lists your pension, your social security, your rental real estate, and your portfolio income, and we total all of that up, minus taxes, and that gives annual and monthly income with a three percent COLA at age 100.
BRIAN: So, our clients don’t have to stress, they don’t have high anxiety about running out of income before they die. We make sure at Decker Retirement Planning, because we’re a math-based firm, we make sure that our clients have the income that they need and want for the rest of their lives. So, when it comes to this analogy of the oxygen mask, if you see that next year you’re supposed to have 1.2 million and you have 1.4 million, then you have extra money.
BRIAN: And if you have extra money and you feel comfortable doing it, you can fly your kids to Hawaii and have some wonderful memories because you see that your oxygen mask is on, you’re taken care of, you’re on track, and you’re doing what you want to do with extra money. Mike, if you had a pie chart… if you had a pie chart and you had 1.2 million and you had no clue if you were on track or not, would you fly the kids out to Hawaii and…?
MIKE: No. I mean, I’d be stressing every day, especially the way the markets are going right now. I mean, I would be tightening down the hatches.
BRIAN: Right. That’s human nature, right?
MIKE: 2.1 in a pie chart means 2.1 at risk, which means 2.1 that can go away.
BRIAN: Right. And you’ve seen it happen a couple of times in the last 20 years.
MIKE: Oh, I mean, 2008 especially. That was dreadful.
BRIAN: Okay, so, our clients, again, this is in a past… actually, we may talk about this today. Our clients are drawing their income from principal guaranteed accounts, laddered principal guaranteed accounts. So, the bucket one is responsible for the first five years of income, bucket two is responsible for years six through 10, and bucket three is responsible for years 11 through 20.
BRIAN: So, when the markets crash every seven or eight years, our clients don’t have that high anxiety of running out of money or waiting six or seven years just to break even. That’s something that, if you’re a client of a banker or a broker… again, these are good, nice, wonderful people. I’m not attacking the people. I am attacking strategies that don’t make common sense and are antiquated and are for people in their 20s, 30s, and 40s, that’s called the accumulation period. It is not for someone that’s retired to have all your money at risk in a pie chart. That’s an accumulation strategy.
BRIAN: Okay, so, the next thing is will there be money left over for your heirs? A lot of clients say, “I hope not. I hope that the check bounces on the flowers that are purchased for the top of my grave.” That’s the ultimate, the ideal for some people. And I know they’re half joking, but we want to make sure that, if you have children, we want to make sure that you have peace of mind that your beneficiaries are going to receive plenty of funds. But we want to encourage you to enjoy your golden years.
BRIAN: This is your money you’ve saved for this period of time. It is not selfish for you to… it’s not selfish for you to be spending those funds. You’ve saved for this time, and so you should be enjoying that time. Okay, the next problem in retirement that we’re going to talk about is the bleeding heart. The bleeding heart is twofold. It’s kids that were raised where they think that mom and dad’s money is their money. Now, on this first point, I’ve seen this not commonly but it’s not uncommon either.
BRIAN: Johnny and Sally were raised that, whenever there’s a problem, they call mom and dad. Mom and dad bail them out. So, where does this stop? Does it stop when they go to college? No, they call mom and dad whenever they crash their car, whenever they run out of money, and mom and dad wire money. They hustle over and they wire money, and they save Johnny and Sally from any financial hardship. So, does it stop when they get married? No, tragically.
BRIAN: We see some couples that have told each other that, “Hey, we went through financial hardships. Let’s make sure our children never do.” And so, Johnny and Sally are being raised in their teenage and in their 20s and in their 30s that, anytime there’s a problem, call mom and dad, and mom and dad will bail them out. The ultimate, the actual extreme that I’ve seen on this, was, gosh, more than 10 years ago a couple came into the office and they had a lakefront property, a beautiful house, but they, through helping their kids, had burned through all of their IRA.
BRIAN: They were in their early 70s and all their IRAs were gone. They had a beautiful home. In fact, they had no investable assets anymore, but they had their house. We told them, common sense, “You got to sell the house.” It’s a beautiful lakefront property. “You got to buy a condo, and that’s your money that you’re going to live on for the rest of your life.” They looked at us incredulously and said, “How dare you.” We said, “Well, what are you going to do? That’s your only asset. What are you going to do? Are you going to go back to work?” “No, we don’t want to go back to work.”
BRIAN: I’ll never forget that. They allowed their kids to destroy their retirement. Now, is that being a good parent? No, it’s not putting on your oxygen mask first and making sure that you’re taking care of yourself so that you can take care of your kids. I would say most people that come through have raised their kids with responsibility, including financial responsibility. And here’s what’s hard for parents. Now, I’m going to switch this.
BRIAN: Parents, please love your kids enough so you allow them to go through the financial squeeze that exists in their 20s and 30s where life financially squeezes them, and they can learn the life lessons of frugality and budgeting and doing without so that they can financially survive and teach their kids to do the same thing. Please, please, please don’t helicopter in and save them and rescue them from these financial life lessons that are priceless.
BRIAN: All right, so, that’s the bleeding heart. Now, the next thing we’re going to talk about is something that is a big, big deal. In fact, I bet we take the rest of the show on these items, and that is liability protection, insurance, and long-term care. So, liability protection. Mike, what’s going to happen if you get hit by a car? Oh, no, no, no, [LAUGH] let me say that differently.
MIKE: Not much. [LAUGH] Probably hospital trip.
BRIAN: Yeah. What’s going to happen if you bump someone in the parking lot in Seattle or in Salt Lake?
MIKE: I mean, they’re going to… if I bump someone, they’re going to get out there, they’re going to hold their neck, and then they’re going to wait for me to say, “Are you all right?” and they’re going to probably say, “I don’t know. What’s your net worth?”
BRIAN: Oh, let me tell you a specific…
MIKE: That happened to one of our clients.
BRIAN: Yeah. So, one of our clients bumped someone in the parking lot, that was in Redmond, and the guy stopped and politely walked out, saw that there was no damage to his car, no damage to the other guy’s car, and then walked over to the client who… not the client, to this guy who he bumped, rolled the window down. The guy was already on the phone with his attorney, and when he politely asked this guy, “Hey, are you okay?” the guy pulled the cellphone away from his ear and said, “I don’t have to legally answer that until you send your net worth to my attorney. Here’s his email,” and legally he had to do that.
BRIAN: So, we want to tell you that we live in a litigious society. If you bump someone in the parking lot, if someone slips and falls on your property, or if they hurt themselves on your trampoline or at your pool or at your facility or your rental property, they are going to sue you. They have a blank check and they’re going to sue you. What a tragedy to save and scrimp and plan for your golden years, only to have a huge liability lawsuit hit you and rob you of being able to enjoy your retirement years.
BRIAN: So, liability protection is through, very inexpensively, something called the umbrella policy. The umbrella policy is usually for a million dollars. It’s attached to you. It follows you wherever you go, and it’s something that is usually only three or four hundred bucks a year to have that piece of mind and have that money so that liability coverage is there. By the way, insurance companies didn’t build big buildings by… that’s a tongue twister. Insurance companies didn’t build big buildings.
MIKE: Big build…
BRIAN: Insurance companies did not build big buildings by approving all the claims that come through. They build big buildings by denying claims, and that rider that we’re talking about, the umbrella rider, is there to follow you and make sure that you have that million dollars anytime that you need it. All right, that’s the umbrella, but life insurance is something where we say to people if you have life insurance keep it. If you don’t, typically you don’t need it.
BRIAN: We recommend, we’re licensed in life insurance, we recommend that you have life insurance for basically three different reasons. One, we recommend life insurance to get you to retirement, because if you’re a breadwinner and you die, you’ve got to make sure that your death and the stoppage of your wages, that your spouse has income replacement and is taken care of to help you get to retirement.
BRIAN: Second, we want to make sure that if you are retired and have a huge pension with no survivability… let’s say that John and Jane are retired, they’re 65 years old, and John has an 80 thousand dollar pension, a golden pension, and it dies with him. Well, that puts Jane in a really difficult spot. So, that’s something where we would want John to have enough insurance on him, life insurance, so that, if he did predecease Jane, that Jane would still be okay.
BRIAN: The third and final reason used to be a big deal. Now, not so much. We used to use life insurance for estate planning for taxes. And now that Trump has doubled the estate tax [COUGH] on the federal side we don’t see it as much, but there’s certain states that do have state estate taxes. And still, the ILIT, the irrevocable life insurance trust, funded by insurance, is a very inexpensive way, if you want, to pay for estate taxes.
BRIAN: Usually, at the state level, they’re not onerous. At the federal level, they were 50 percent. And they used to be… the exclusion was five and half million per spouse, 11 million total. Now, it’s 11 million per spouse, 22 million total. So, that exempts a lot of people. But those are the three reasons that we have and recommend life insurance, but that’s something where most of the time it’s taken care of.
BRIAN: Now, here’s the bigger conversation. It’s long-term care. By the way, the insurance companies for long-term care [dropped?] out a statistic that [COUGH] I think is very deceptive. It says that 70 percent of Americans will spend time in a long-term care facility. According to the U.S. Census, 14 percent of Americans spend time in a long-term care facility. Why the disparity?
BRIAN: Well, it’s in the best interest of the long-term care insurance industry to rattle you a little bit with a huge statistic, and they are getting their numbers by saying even one day in hospice counts as being in a long-term care facility. So, they inflate their numbers to make you nervous, and that drives you to take care of that almost sure thing that you’re going to spend time in a long-term care facility. But we’re a math-based firm at Decker Retirement Planning, so let’s hope for the best and plan for the worst.
BRIAN: So, Mike, I’m going to use you as an example. Let’s say that you’re married and you… let’s say that you’re 75 years old and, in this case, you… when we say that we’re going to hope for the best, we’re going to hope for the best that you don’t have any need to go into a long-term care facility. But we’re going to actually plan for the worst, and the worst is, Mike, that you have a healthy body and you have Alzheimer’s. That is a worst case scenario. Now you’ve got a very expensive journey ahead. Would you agree?
MIKE: Oh, yeah. That would be terrible.
BRIAN: Okay, so, let’s talk through. The first third of the journey is where your wife takes care of you. Is there cost to that? No. Is there emotional cost to that? Yes. She’s taking care of you. The second third of your journey is where your wife needs in-home help, and so they call in-home care. First, it’s, like, 12 hundred, 15 hundred bucks, and it goes up from there as you need more and more of their resources.
BRIAN: The third part of this journey is where you have you’re wandering out on the freeway at night, you’re endangering yourself, so now you need full-time care and you will go to a full-time care facility. Now, it is eight to 10 thousand a month in today’s dollars. That’s very expensive. Normally, this last third lasts about a couple years, so what is 10 thousand times two years? 24, call it, round it up, 250 thousand dollars. Do you have 250 thousand? Most people it’s yes in two places.
BRIAN: One, their investments. They have an extra 250 thousand in their investments, number one, and number two, they have it in the equity in their home. So, if you have a 14 percent chance, according to the U.S. Census, of using long-term care, we recommend that people self-finance this risk. And, by the way, if you’re single, do you by definition have long-term care risk? The definition of long-term care risk is the risk that one spouse bankrupts another spouse.
BRIAN: So, Mike, if you’re single, do you have long-term care risk?
MIKE: Nope.
BRIAN: Nope. Really is really simple. By the way, if you’re single, how do you take care of yourself if you don’t have a spouse? It’s the assets that you’ve got are going to be used to finance that for the rest of your life. Okay, so, long-term care, there’s… you’ve got options. And the tragedy when it comes to long-term care is that if you need it you can’t afford it, and if you don’t need it you can afford it. That seems to be the issue when it comes to long-term care.
BRIAN: So, there’s five different option on how to handle long-term care risk. We covered the first one which is self-financing that risk. The second risk… or, the second long-term care option to finance that risk is the most popular if you do go out with a strategy. It’s traditional long-term care. And so, you pay three or four hundred bucks a month. You have access to three or four hundred thousand in long-term care benefit, and your premiums, by the way, are called guaranteed level premium.
BRIAN: Mike, are the guaranteed level premiums of long-term care insurance guaranteed level?
MIKE: Absolutely not.
BRIAN: Not, they are not. And some people I have to call the insurance company, getting the person on the phone, and have them say, “No, they are not guaranteed level. They will go up.” for them to believe this, because the insurance company has deceptively labeled these premiums, guaranteed level premiums, when they’re not. [COUGH] So, what happens is, in your late 60s, early 70s, you get the letter.
BRIAN: The letter explains that your premiums have just gone up 60 percent, and the insurance company wants you to panic and cancel. Canceling allows the insurance company all those years of premium now risk free. Or you go to plan B and, instead of canceling, you cut the premium in half. Now what you’ve done is the insurance company now has the same income for half the risk. So, either way, the insurance company wins. We want to make sure that you know that this letter is coming and that we plan around it.
BRIAN: If you have traditional long-term care, we want to plan around it to make sure that you don’t panic and cancel and that you can fully expect that that letter’s coming in your late 60s, early 70s. So, the second option on handling and funding long-term care is called traditional long-term care. The third option is where an insurance guy gets ahold of you and points out, “Hey, Brian, you know that if you get hit by a bus, all those premiums you paid in for long-term care don’t really do you any good.”
BRIAN: You just died. You didn’t go into a facility, so all those premiums are for naught. So, what this insurance guy says is you should take out a three or four hundred thousand dollar whole life policy on me and put a long-term care rider on it. Now, you have access to that three or four hundred thousand either way, either through death or through long-term care. Now, on paper it looks really enticing. The problem that we have with it is it’s very, very expensive. It’s usually around a thousand dollars a month for life.
BRIAN: So, [COUGH] especially when we go through your plan and see that you only, according to U.S. Census, have about a 14 percent chance of needing that money… or, needing long-term care benefit, we want to make sure that you don’t incur expenses on something that you don’t need. If you don’t need long-term care insurance and you don’t need additional life insurance, this insurance guy’s idea really doesn’t work, as far as something that would help you. So, that’s the third option, is where you’ve got a whole life policy with a long-term care rider.
BRIAN: Number four, where do advise long-term care, this is what we typically recommend, and this is called asset-based long-term care. This is where you have an account and you fund it with 10 thousand dollars per year per spouse for 10 years and you build up about 100 thousand in there. Then, if you die… not if, when you die you get a 2x death benefit, and if you got to a long-term care facility you get a 3x long-term care benefit. So, either way you’re going to use the money.
BRIAN: And, by the way, if you change your mind, you can pull all that money back, so it’s a very liquid account. This is what we do like if we ever do use long-term care. The problem for a lot of people is not a lot of people can save in retirement 10 thousand dollars a year per person, and so it makes it difficult because if you can afford to do that, typically you don’t need and you would self-finance your long-term care risk. The fifth option is something called a safe harbor trust.
BRIAN: A safe harbor trust is interesting. Safe harbor trust is where you’re freaked out about the 70 percent long-term care statistics that’s trotted out by the insurance companies and you call a sibling, say, call your brother Jim, and you say, “Hey, Jim, I’m going to transfer all our assets into your name in a safe harbor trust, and when we get through this diagnosis with Alzheimer’s I’ll pull all that money back. That way, we can have the taxpayer through Medicaid pay all our bills and then the surviving spouse we can pull all that money back and we’re good.”
BRIAN: The IRS got on this, and about seven years ago they have a five year claw back provision, which means that if you’re diagnosed with dementia or Alzheimer’s within five years of you funding your safe harbor trust, they pull all that money back and the taxpayer’s not going to pay it, you’re going to pay it. But the bigger problem is this. Your brother Jim can call you one day and say, “Hey, bro, thanks very much for the money. Calling from Cabo San Lucas. It’s beautiful here. I just wanted to let you know we’re enjoying the assets that you gave us,” and legally he could do that because those funds are in his name.
BRIAN: So, we don’t recommend the safe harbor trust. Now, I guess there’s a sixth option when it comes to long-term care, and this is easily, by far, the most tragic, and that is, when people who don’t have a lot of assets are diagnosed with this dreadful Alzheimer’s or dementia and they’re going through this, they financially, for survival reasons, have to divorce. And this very tragic because they have to divorce to financially survive. So, those are the six options.
BRIAN: Mike, this is important enough, I know, because it comes up again and again. If someone really wanted to handle and nail down or get some sustaining strategy to give them piece of mind, they should give us a call at Decker Retirement Planning and we could help them.
BRIAN: All right, so, let’s keep going. Another major problem in retirement is taking money from the wrong source. So, now we’re going to talk about risk minimization. If you have a pie chart and you’re drawing income from assets that are all at risk, yes, they’re diversified, you’ve got stock, mutual funds, and large, mid, and small cap, you’ve got growth, value, you’ve got emerging markets, and you’ve got your bond funds, short, intermediate, long duration bond funds, corporate funds, municipal funds, government funds, yes, you’re diversified, but what happens in a fluctuating account when you’re pulling money out?
BRIAN: Mathematically, here’s what you’re doing. When the markets are going higher, you’re compromising those gains by pulling money out of those accounts. When the markets go lower, you are accentuating those losses and you are mathematically committing financial suicide by doing that. This is the banker-broker model. It’s fine if you’re in your 20s, 30s, or 40s, but if you’re doing this and you’re over 55 years old, you are hurting yourself. Again, we are not attacking the individuals, the bankers or brokers. They’re not trained like we are.
BRIAN: So, we’re a math-based firm at Decker Retirement Planning. We want to make sure you know that that is self-defeating. It is financial suicide to draw income from a fluctuating account. When you draw income like our clients do from principal guaranteed accounts that are laddered, so that bucket one is responsible for the first five years of monthly income, bucket two is responsible for years six through 10, bucket three is responsible for years 11 through 20, and these are principal guaranteed accounts, guess what, you have just insulated yourself from, for the next 20 years, all kinds of things.
BRIAN: Interest rates can go up or down, economies can go up or down, stock markets can go up or down, and it does not affect you. Our clients at Decker Retirement Planning, we went through 2008 and they pinched themselves. So, rhetorically we would talk about how protected they are from stock market crashes, when we actually went through it with them and they saw that their emergency cash was there. It’s in an FDIC bank account, and buckets one, two, and three are principal guaranteed, and the risk buckets which are two-sided strategies designed to make money as markets go down.
BRIAN: When they saw all of that actually happen, we had one client, this is the ultimate, drive up, no appointment, from Portland to… and they drove up and they waved to us through the window to come out in the parking lot. So, we walked out of an appointment for just a few minutes, and they, with tears in their eyes, hugged us through their car windows and thanked us because [COUGH] their plan worked and they saw what had happened to so many of their friends. They had to go back to work, they had to move in with the kids, they had to sell their home, they had to go to plan B because the banker-broker model destroyed them in retirement.
BRIAN: So, making sure that you’re drawing income from principal guaranteed accounts gives priceless, priceless piece of mind during the times when the markets go down. By the way, Mike, did you know that markets crash every seven or eight years?
MIKE: It’s like clockwork. It’s like saying winter’s going to come.
BRIAN: Right, but we’re in year 10 of a seven, eight year market cycle, so this one’s kind of interesting. But, Mike, you’re exactly right. So, the last…
MIKE: Winter came late in Utah.
BRIAN: Oh, you’re right.
MIKE: I mean…
BRIAN: Yeah, the skiing’s been terrible until the last couple weeks.
BRIAN: But let’s look at some dates. 2008, from October of ’07 to March of ’09, 2009, the S&P was down 50 percent. Seven years before that was 2001. The Twin Towers went down. Middle of the tech bubble bursting in a 50 percent, three year drop in the S&P. Seven years before that was 1994. Iraq had invaded Kuwait. Interest rates spiked, the economy was in recession, and the markets struggled. Seven years before that was 1987. Black Monday, October 19. 22 percent drop in a day, 30 percent drop, [peaked drop?].
BRIAN: Seven years before that, 1980. Sky high inflation, ’80 to ’82, was a 46 percent drop. Seven years before that was ’73, ’74 bare market. That was a 42 percent drop. Seven years before that was the ’66, ’67 bare market. That was over a 40 percent drop. And it keeps going. The markets bottom March of 2009, seven years plus that is 2016. We are on borrowed time.
BRIAN: We are close to a new record for the longest market expansion without a 20 percent or greater decline. So, the two major factors that have produced tailwinds for the markets, declining interest rates and the Fed pumping money in through quantitative easing and TARP, those things are now… those tailwinds are now headwinds.
BRIAN: Interest rates from Chairman Powell, Jerome Powell, he’s saying that we’re going to raise rates three more times this year in calendar year 2018, and the Fed… the essential banks are on a campaign to buy back the quantitative easing that was floated out there. So, what was a tailwind is now a headwind. One more thing as far as the markets. There have been three times that the price earnings ratio, the trailing price earnings ratios of the stock markets, have been at 25 times or greater.
BRIAN: One was 1929, the second was 1999, and the third time was the third week of January of this year. 10 years after 1929, the markets were not higher. 10 years after 1999, the markets were not higher. So, a lot of people are expecting the markets to do something today that has never happened before, and that is to go up from here, once you hit a trailing earnings, price earnings ratio of 25 times earning. All right, now, let’s talk about… another risk item is interest rate risk.
BRIAN: Interest rate risk is the risk of losing principal in your bond funds when interest rates go higher. Let me give you a couple examples. And, by the way, this makes no sense to us at Decker Retirement Planning, that someone, like a banker or broker, would tell you to put your safe money in bonds, bond funds, when interest rates are this low. So, interest rates on the 10 year treasury are 2.8, 2.9 percent right now. They hit two percent last year. They hit two percent in 2016.
BRIAN: They’ve only hit two percent one time before that, and that was in 1940. So, a two percent handle on the 10 year treasury is at or near historic lows on interest rates. So, I’m going to say the same thing two different ways. Interest rates are at or near all-time historic lows. Interest rate risk is at or near all-time record highs when it comes to interest rate risk. Let me give you another example. In 1994, the 10 year treasury in one year went from six to eight percent, boom, just like that.
BRIAN: According to Morningstar, the average bond fund lost 20, two zero, 20 percent that year. In 1999, the 10 year treasury went from four to six percent. The average treasury that year lost 17 percent. If we go from where we are right now at 2.8, 2.9 percent back to just, I don’t know, four and a half percent, that would be a hit to principal of almost 17 percent on what bankers and brokers are telling you is your safe money. It doesn’t make sense.
BRIAN: Another reason that it doesn’t make sense to put your safe money in bond funds is because of something called the rule of 100. The rule of 100 says that if you’re 65 years old you should have 65 percent of all of your investable assets in bonds or bond funds, safe money. That makes sense to have it in safe money, but not in bonds or bond funds [COUGH] because when interest rates are this low, interest rate risk is high and you’re not getting paid hardly anything on this.
BRIAN: The smartest guy in the world, in my opinion, on bonds and bond funds is someone called…
MIKE: Bill Gross.
BRIAN: Bill Gross. He was at PIMCO. Mike, you know what, that article, that interview with Morningstar, actually that was an interview in Barron’s last year, is so good we should send that out to people. If there were people who are being told by their banker or broker to put their safe money in bond funds, they should come in and talk to us.
MIKE: Absolutely. Okay, thank you all so much for listening. That wraps up the show today. Tune in next week, same time, same place.
