BRIAN: Good morning Seattle, Kirkland, good evening Salt Lake City. We’re here today with Brian Decker, myself, and Clayton Bradshaw, we’re both licensed fiduciaries and financial planners. Why is it important, Clayton, to be a licensed fiduciary, before we dive in? By the way, I just want to give a top-of-the hour, what we’re going to talk about is, finish up the problems that people face in retirement. Inflation, stock market crash, death of a spouse, long-term care.
BRIAN: We’re going to cover-we’re going to finish covering 22 different things that we go through our clients with at Decker Retirement Planning, and we’re going to go through and finish this list of 22 different items. But why, in your opinion, Clayton, is it important to deal with a fiduciary?
CLAYTON: For your protection, Brian, whenever you’re dealing with your finances, with what you’ve worked so hard in your life to put together, you want a fiduciary because you can put your trust in them, and they’re going to have your best interest first.
BRIAN: Now that’s not just rhetorical. Do you, in the time that you’ve been doing this, have you ever sold a variable annuity to a client?
CLAYTON: I have not.
BRIAN: Okay, do you think that that would be in the best interest of any client that you know?
CLAYTON: Not at all.
BRIAN: So define what a variable annuity is, and tell us why you would never in your career as a fiduciary, sell that to someone that’s retired.
CLAYTON: Well, a variable annuity is where the broker makes eight percent up front, and then they get paid every year after that. Then on top of that, you’re paying the insurance company and the mutual fund company that provided it. So, you’re typically paying five to seven percent in fees every year, before you ever see a dime.
BRIAN: Okay, so that hurts you when the markets go up, how does that affect you when markets go down?
CLAYTON: You lose money.
BRIAN: You lose more?
CLAYTON: Right.
BRIAN: So whatever the market losses are, you add on, tack on another five to seven, is that right?
CLAYTON: Yep.
BRIAN: So if it under-performs in the upside and it loses more on the downside, why would any banker or broker sell it?
CLAYTON: because they want that commission.
BRIAN: It’s substantial too, isn’t it? I mean, we’re talking eight percent. Okay, now, Elizabeth Warren rolled out the DOL rules, the Department of Labor rules, dragging the bankers and brokers kicking and screaming to a fiduciary “level one,” let’s call it.
BRIAN: We’re going to talk more about fiduciaries, how we are full-fledged fiduciary, and we’ll give you three points, Decker Talk Radio listeners, to know if your adviser is a true fiduciary. But Elizabeth Warren rolled out the DOL rules, they came in force in June, and they… This was all, came about by the high-commission products like variable annuities, and non-traded REITs.
BRIAN: Clients of bankers and brokers had no idea how they were getting bushwhacked with commissions of 10, 12, 15 percent on these non-traded REITs. Why don’t you like… Oh, let me ask you this. So, Clayton, have you sold a non-traded REIT to any of your retirement clients before?
CLAYTON: No.
BRIAN: Do you plan on it?
CLAYTON: No.
BRIAN: Could you be a fiduciary and do that?
CLAYTON: No.
BRIAN: Explain what’s so bad about a non-traded REIT. They’re non-tradable, right? They’re not liquid.
CLAYTON: Yeah.
BRIAN: And what happens to REITs, real estate investment trusts, when the cycle for real estate goes down like it did in ‘08?
CLAYTON: Well, you lose a ton of money.
BRIAN: Right, and you can’t get out.
CLAYTON: Yeah. You’re locked in.
BRIAN: So I just described two investments that are high-commission products, that clearly are not in the best interest of retirees, and yet they’re very popular. How do you explain it?
CLAYTON: It’s because those brokers and bankers want that commission.
BRIAN: It’s the money, it’s all about the money. Okay, back to a fiduciary, we are full-fledged fiduciaries. Clayton, how can someone know if their banker or broker is a fiduciary, right, there’s a threefold test, right?
CLAYTON: Yeah, there’s three checks. So first, are they independent? That’s number one. Second check, are they series 65-licensed? Not series seven. And then the third check, are they a registered investment advisory?
BRIAN: Okay, so let’s go through these one at a time. If I’m at Oppenheimer, and I sell you Oppenheimer funds, is that what a fiduciary would do?
CLAYTON:[LAUGH] No.
BRIAN:[LAUGH] Why?
CLAYTON: Because it’s not in the best interest of the client, because you’re just selling whatever that company’s pushing. So in the case of Oppenheimer, you’re selling Oppenheimer funds even though they might not be in the best interest of the client.
BRIAN: Why would a broker at Oppenheimer want to sell you, the retired client, Oppenheimer funds?
CLAYTON: Because they’re going to get that kickback, they’re going to make more money.
BRIAN: It’s extra money, okay. So could we… First of all, could you say that a banker or a broker is independent, check one?
CLAYTON: You can’t say that, because they’re not.
BRIAN: And why do you say that?
CLAYTON: Because they’re working for a bigger company.
BRIAN: Who’s telling them what they can and can’t sell.
CLAYTON: Exactly.
BRIAN: Okay, so strike one against the bankers and brokers, they have to be independent. And this is common sense. They have to be independent to be able be arm’s length, to offer any of the financial instruments out there to help their clients. So Decker Retirement Planning, we are independent, we meet the first test, being independent. Okay? Number two, you said that you have to be series 65, what’s the big deal about that? Why can’t you be series seven licensed and be a fiduciary?
CLAYTON: Well, when you’re series seven licensed, you can take a securities commission. We are fee-based as series 65 licensed, which means we can’t take that commission.
BRIAN: Okay, so if I was series seven and I charge a commission, is that transparent?
CLAYTON: No, it’s not.
BRIAN: Okay. Decker Talk Radio listeners, we’ve talked about this before, C-share mutual funds are the poster child of non-fiduciary, non-transparent commissions.
BRIAN: So, a C-share mutual fund works like this, Clayton. Let’s say that you come in and you’re my client, and you want to have some good performing mutual funds for the stock market, and you specifically tell me that you don’t want any front-end or back-end-loaded funds. Well, I trot out some C-share mutual funds, and I can tell you honestly there’s no front-end or back-end fee. But here’s what you fail to know. I get paid one percent every year, and you don’t know it. It’s not disclosed, and you have no idea that you just got shafted, and that you’re paying me one percent, whether the markets go up or down.
BRIAN: If markets go down, I get paid one percent, and you lost another one percent on top of your market losses. C-shares are so slimy… Hey, that’s a… That’s like “Sally sells sea shells by the seashore.” C-shares are so slimy, that they’re not even allowed to enter into TD Ameritrade or Schwab, and fidelity, they require that they be sold. It’s almost like cancer, they don’t want them even in their custody.
BRIAN: Okay, another example of non-transparency is what we talked about being a fiduciary and selling non-traded REITs and variable annuities. Those commissions are hidden, clients don’t know it, and in stark contrast to that, Clayton, when you’re a fee-based fiduciary, can you hide that fee?
CLAYTON: No, you can’t.
BRIAN: It’s all above-board. Has to be, right?
CLAYTON: Yep.
BRIAN: Okay. So that’s number two, we fleshed that out. Dealing with a fiduciary, number three being an RIA, a registered investment advisory corporation, do you accidentally become an RIA?
CLAYTON: No, you don’t.
BRIAN: You have to purposely register as that. So at Decker Retirement Planning, we purposely wanted to be a fiduciary, full-fledged, and we want to make sure that our clients, as an arm’s length company, get the highest, best products that help them in retirement. All right, so we talked about fiduciary and why that’s important.
BRIAN: We hope Decker Talk Radio listeners, that you care enough about your retirement to make sure that you’re not subjecting yourselves to an adviser, a banker or broker that is incented to sell you stuff that benefit the house. And so, we as fiduciaries have to be… And we have annual audits that make sure that suitability is enforced, they’ll take out different… They’ll take out different client accounts and they’ll review them for suitability based on age, risk profile to make sure that what investments are in their portfolio are suitable.
BRIAN: All right, so now let’s get back to… Anything else that we should talk about when it comes to a fiduciary?
CLAYTON: I think we’ve covered everything. Just those important three checks, are they independent? Are they series 65-licensed? And are they a registered investment advisory?
BRIAN: Okay. So when it comes to your retirement, chances are you’re taking too much risk. So make sure to protect your retirement, do yourself a favor, give us a call. This is something that we’d love to contrast side-by-side, a retiree’s portfolio from a banker, broker, with a retiree’s portfolio side-by-side with a fiduciary.
BRIAN: Okay, now let’s dive into what we want to cover today, and that is all the problems that people face in retirement. Clayton, why do you think it’s a good idea after an early draft of your plan, to hit it hard with the biggest problems that you think people will face in retirement, why is that a good idea?
CLAYTON: Well, it’s better to run it through a test before the problems actually happen, so that we can make sure that your test is-is foolproof, so that when you take it out into the real world, nothing’s going to be affected.
BRIAN: Do you think Boeing does this on their airplanes?
CLAYTON: I would hope so, I was just one of them.
BRIAN: [LAUGH] All right. So, here’s what we covered last week. And by the way, Decker Talk Radio listeners, if you missed this program last week, you can go to the website www.DeckerRetirementPlanning, and pull up the podcast and you can listen to this. We covered last week, the importance of knowing how much income that you need in retirement, most people think that they need less, that’s a mistake. Typically they need 20 percent or so more once you retire, because you’re doing things, and doing things costs money.
BRIAN: We talked about inflation protection, stock market crash, we talked about how much income is lost at the death of a spouse, whether or not you need or don’t need life insurance. How much you should have at risk, do you need to take any risk? The percentage of assets that are in retirement accounts and non-retirement accounts, why that percentage is very, is vital to keeping your taxes down.
BRIAN: Legacy holdings, what they are, how we use them. Tax optimization strategies, required minimum distributions, Roth conversions, and a dynasty trust. We don’t have time to cover those, but it was a jam-packed session that we did last week. Go to the website at DeckerRetirementPlanning.com, pull up last week’s meeting, it was fantastic. We’re going to start now on asset protection. So Clayton, after 40 years of accumulating assets, now we’re going to talk about how we recommend our clients protect those assets.
BRIAN: So first of all, let’s start with having any extra funds, do you want your heirs to receive money today, at death, or a combination? People are going to answer that differently, right?
CLAYTON: Sure.
BRIAN: Okay. Some people want to receive their money today, some want to keep it all until death. We recommend most of the time a combination, so that you can enjoy creating memories while you’re still alive with your children and grandchildren. I think that’s common sense, and most all our clients fall into that category.
BRIAN: But when it comes to knowing how much you can spend that’s extra, if you have a pie chart, Clayton, from your banker or broker, how can you possibly know if you have extra?
CLAYTON: You can’t.
BRIAN: Yeah, you can’t know that. If, with a distribution plan, explain to Decker Talk Radio listeners, Clayton, how someone that’s a client of ours would know if they had extra.
BRIAN: And by the way, the analogy that we talk about with our clients is, you know the flight attendants before the plane takes off, they talk about something that’s not intuitive to parents at all, and that is when the oxygen masks fall down, you’re supposed to put yours on first. Parents need to be reminded of that, because it’s not-it’s just not natural. But once you have your oxygen mask on, you’re able to help your children to safety. So when you see in a distribution plan in your retirement that you have extra, now we can mathematically make a decision, if we want to help our children, uh, with the extra that we have.
BRIAN: So, our oxygen mask is on, our-our home is on firm foundation, our financial house is in order, and now we’re able to help our kids. So describe for radio listeners, how a distribution plan is number one, different from a pie chart, so this is going to take you a while, and number two, describe how our clients can see if they have extra.
CLAYTON: So, the distribution plan is great because it lays out all of your sources of income, so your income from assets, your pension income, if you have rental income, that’s included as well. It’ll look at your social security income for both couples, which is another great point, we can talk more about the social security income and how we can help optimize that. But we take all those sources of income, we add them up, we look at taxes to determine where you’re going to fall with your effective tax rate.
CLAYTON: Now, we don’t look at tax bracket, we look at your effective tax rate, we subtract that out of your gross total, and that gives us your net spendable income, and then we put another column in there so that you can see how much you have every month for the whole year. The things that’s so great about this spreadsheet is it lays it all out in front of you so you can see and plan on how much you’re going to be getting every month, essentially for the rest of your life.
CLAYTON: We take that plan down to age 100 just to make sure that there’s enough for our clients to get through the rest of their life. We don’t anticipate our clients living ‘til age 100, some of them do, but the money is going to be there, and that’s our goal with the distribution plan, is to make sure that they have that funding, that they have that income for the rest of their lives, so they can rest easy, and if they maximize their income through the plan and they can see that they only need 7,000 a month versus 10,000 a month, or 15 versus 20, or whatever the dollar amount is, that extra amount, they’ve already put on that oxygen mask, so they can look towards their kids, their beneficiaries, anybody else that can benefit from that added income.
CLAYTON: They can have those experiences, and whether it’s spending time with family, or whether it’s serving a greater purpose in some humanitarian benefit, you can see clearly in that distribution plan what you’re going to have to work with through the rest of your life.
BRIAN: That is a great description. So a distribution plan, and you know the answer to this, the number one fear of people before 2008, in all the United States for, I think it’s age 35 and older, what was the number one fear before 2008, for adults in the United States?
CLAYTON: Public speaking.
BRIAN: And the number two?
CLAYTON: I think that was going to war?
BRIAN: And number three?
CLAYTON: Death.
BRIAN: Fear of death. Okay, and that’s right. So after 2008, that was so horrific, that was a life-changing event financially for a lot of people in this country. After 2008, for people that are over 50, what is the number one fear, then and now, still is?
CLAYTON: Fear of running out of money before you die.
BRIAN: Right. So do our clients have that fear?
CLAYTON: Nope.
BRIAN: How can you say that? because you just described the distribution plan. Why would our clients not have a fear of running out of money before they die?
CLAYTON: Because they can clearly see in the distribution plan, how much they can draw for the rest of their life. And one thing I forgot to mention is that we include a cost of living adjustment so that as energy and food prices increase, our clients are going to be able to account for that in the increasing amount that they’re going to get every year.
BRIAN: Okay, so when it comes to the distribution plan, you described it beautifully. Left side of the spreadsheet has all their sources of income, total amount, so it’s the pension, it’s social security, it’s income from assets, it is any rent on real estate, total it up, minus taxes, gives annual and monthly income with a three percent cost of living adjustment, to age 100. So our clients can visually see, mathematically, how much they can spend. That is priceless.
BRIAN: So back to this point of, will your heirs take money, will you receive… Will your heirs receive the money today, at death, or a combination? Now with the spreadsheet showing if you’re ahead of schedule and you have extra, now you have that option, Clayton, you and your wife, to share those funds any way you want.
BRIAN: The second point here on asset protection is, will there be money left over for your heirs? If you have a pie chart, can you answer that?
CLAYTON: Not accurately.
BRIAN: Yeah. So if our clients, they visually see that if they pass away at 80 or 85 or 90 or 95, or even 100, they can see estimates of how much they will be leaving to their children, and also, do we include their house on the income plan?
CLAYTON: No, we don’t.
BRIAN: Why?
CLAYTON: Because there’s no income from your house.
BRIAN: Okay. Did you know that some of the financial planners include their house and put a reverse mortgage on it?
CLAYTON: [LAUGH]
BRIAN: Do you think that’s a good idea?
CLAYTON: No, not at all.
BRIAN: Why not? It’s a good idea for the banks, right?
CLAYTON: Yeah, because the banks are going to get a house when somebody passes away, at next to nothing.
BRIAN: Yeah. And it makes no sense for us at Decker Retirement Planning to put your house in there.
BRIAN: I’ve been doing this 32 years, and there’s only been one time where a client had a reverse, and that came in from the outside, their former person did that. Why would you pay huge fees… And by the way, if you listen to some of these celebrities, they think it’s a good idea, on TV, they say it’s a good idea.
CLAYTON: I didn’t know that, that’s… I don’t see why you would want to do that, seems like a terrible idea.
BRIAN: Okay. Why… Let’s say that you are down to your last leg, you’ve got maybe 150,000 left, you’re 75 years old, you’re living on Social Security, but you have a house. Let’s say it’s not even paid for. It’s worth 500,000, and you got a 150,000 dollar mortgage on it. You can go one of two directions, you can have a reverse or not. So let’s talk this through.
BRIAN: If you don’t do a reverse, what are your options? Well, you could sell the house, now’s a good time, it’s a seller’s market most everywhere in the country. You could sell the house, and you could buy a condo, and inject a lot of extra capital into your investment plan, right?
CLAYTON: Sure.
BRIAN: Okay. Or you could call the bank, like some of these celebrities say, and do a reverse, and get a payment coming back to you, up to 50 percent of the value of the home.
BRIAN: Which by the way, if you have a 150,000 dollar mortgage on a 500,000 home, you’ve got some wiggle room there of 100,000 spread over your lifetime. Are you going to receive an income stream more than selling, outright selling and buying a condo, and injecting that capital? There’s no way. You’re going to get three times that, and you’re not going to pay the fees and give your house to the bank.
BRIAN: I just think mathematically, I’ve yet to run across someone who has benefited by a reverse mortgage. So how many reverses have you done in your career?
CLAYTON: Zero.
BRIAN: I’ve done… Like I said, 32 years, I’ve done zero, I’ve seen one come in. But in our opinion, it’s just not beneficial to the client. Okay, now let’s talk about a bleeding heart. Do you want to define for Decker Talk Radio listeners what a bleeding heart is?
CLAYTON: Well, it’s still pumping out blood, it can’t be stopped.
BRIAN: That’s not a bleeding heart. Okay, do you want me to define it?
CLAYTON: Let’s hear what a bleeding heart is.
BRIAN: Okay. Bleeding heart is where you’ve got a silent cellphone, is your cellphone silenced? Okay. A bleeding heart where you’ve got kids that have grown up where your money is their money, and when they crash their Mercedes, they don’t call their spouse, if they’re married, usually they’re not married because no one can live with them. Just saying
BRIAN: They call Mom and Dad, and they say “Gosh, I crashed the Mercedes, can you please buy me a new one, and oh, by the way, I’m late on my rent, and I just haven’t gotten around to this or that,” and I’ve seen this. Have you seen it yet? You haven’t seen a disaster yet, have you?
CLAYTON: Not yet. I’ve heard of a couple, but I haven’t seen them personally.
BRIAN: Okay. A bleeding heart is where anything Johnny or Sally wants, Johnny and Sally gets. So when they buy their first home, “Hey Mom and Dad, I can’t qualify on my own, so will you please cosign?” Now, a lot of people will cosign. Do you know that that becomes, that loan becomes a part of your credit and is your responsibility, financially? Did you know that that transfers right over to you?
CLAYTON: Yeah, if you’re cosigning on it, yeah.
BRIAN: “And by the way, I’m behind on my student loans, and I’m, the interest rate is going up, will you please cosign on my student loans?” Do you know what happens to your credit?
CLAYTON: It takes a hit.
BRIAN: It takes a hit. It is your loan now. When you sign on as a cosigner for your kids… Now we’re not saying to abandon your kids, we’re not saying that. But we do say this. Love them enough to let them go through and struggle during their early 20s and maybe through their 20s so that they can learn the life lessons of finance and savings and frugality and investing and doing without. Those aren’t bad things, those are good things. Do you think?
CLAYTON: Yeah, absolutely. I think learning those lessons, it’s better you learn them younger than when you’re older.
BRIAN: Okay, back to… I’ll tell you a disaster story, this is the worst story that I’ve run into in my career. There was a couple that came in to see us several years ago, this has gotta be, I think this was early ‘08, actually. And they had a house on Lake Washington, but they didn’t have any funds left in their IRAs. Neither retirement accounts. Do you know, and I think they were in their late 60s.
BRIAN: They had no retirement savings left. Do you know where those retirement savings went to?
CLAYTON: Where?
BRIAN: Johnny and Sally.
CLAYTON: Of course.
BRIAN: Because Johnny and Sally needed this and they needed that, and they looked us like of course we’re going to send them the money. Now, they had a home, they had no savings, they didn’t even have any emergency cash, and they came to see us to see if we could, I guess, create money out of thin air and re-fund their retirement accounts.
BRIAN: When we told them that we couldn’t do that, they were very disappointed in us.
CLAYTON: I’m sure.
BRIAN: And in fact, we were the bad guys that told them that they have one more asset left to fund their retirement, and that was a house on Lake Washington, and they should sell it. Do you know that they never came back?
CLAYTON: I can only imagine. That’s too bad.
BRIAN: [LAUGH] Mathematically, we’re on sound ground. They have one asset left, and they couldn’t even afford to pay their gardener to do the lawn maintenance anymore, so in the late 60s… Oh no, they were older than that. Maybe they were mid 70s. because he didn’t have the health to go mow his lawn or do any of that.
BRIAN: It’s stunning to me that this happens, but it does. So what we do at Decker Retirement Planning is we have our clients who do have this problem have us be the bad guys. because they don’t want to tell their kids that they can’t send them a check anymore, so guess what they tell their kids? “Clayton Bradshaw at Decker Retirement Planning said that we couldn’t do it. We’d like to, but we couldn’t do it.” And we tell them to say that.
BRIAN: “Brian Decker at Decker Retirement Planning, he said that we couldn’t send you a check. So I’d like to, I love you honey, but we can’t do that. This is our retirement.” That is the bleeding heart issue. Anything more to say on that before we move on?
CLAYTON: No. It’s just say to hear that it comes down to that, that parents, I recognize you want to help your kids, but it probably is more detrimental in the long run than helping teach them how to manage their money, and helping them learn how to work hard for it just like you have all your life.
BRIAN: So if this is a problem, call us and we’ll Google and give you the best boot camp that we can find out there to whip your kids into shape. All right, next one is going to take a while, it is long-term care. Actually, let’s hit the umbrella. What’s an umbrella policy, and why is that part of asset protection?
BRIAN: Well, if you’re driving through the parking lot and you bump someone, chances are they’re going to get out of their car, grab their neck, and say “I need a list of all your assets, your net worth, my attorney’s on the phone and he wants all of that,” and they’re going to take you through the laundromat, they’re going to clean you for everything you’re worth. So an umbrella policy, it’s a rider on your homeowner’s policy, it protects your assets in case something like that happens.
BRIAN: And it’s really inexpensive. We don’t sell it, but as a rider on your homeowner’s, it gives you access to, like, a million dollars of extra, universal, umbrella coverage. So you’re able to, for like 400 bucks a year, have an extra million dollars. Now you described a situation that I actually saw, not saw, I actually heard first-person. A client bumped someone in the parking lot, there was no damage.
BRIAN: He was a gentleman, got out of his car, went over, and the other guy rolled down his window and was already on the phone with his attorney. And he… He said “Are you okay?” And of course the guy was okay. But the guy said to him, and this is legal, he said “I don’t need to answer that yet, and you are required by law in this incident to send me a net worth statement, send a net worth statement to my attorney, here’s his email.” And the guy was right.
BRIAN: We live in a litigious society, and if you’ve worked 30 or 40 years to gather assets, and you ride out into the sunset in retirement and you don’t have an umbrella policy, I don’t know, what’s the analogy? Riding without a seatbelt, or driving without guardrails? I don’t know, it’s just an unnecessary risk. We we recommend that in this litigious society, you have this umbrella policy because it’s not just bumping someone in the parking lot.
BRIAN: What happens if they trip and fall on your steps at home?
CLAYTON: They can come after you, they’re going to get some money.
BRIAN: Bouncing on your trampoline in the backyard and they hurt themselves.
CLAYTON: Yeah, that’s a real risky one. I had that happen to a relative of mine, risky business.
BRIAN: Did he have to write a check?
CLAYTON: No, he didn’t, the neighbors were really good about it, luckily, but they could have come after him for everything he was worth.
BRIAN: Okay. We just want to point out, some of this, no, all of this is common sense. So do we recommend you have an umbrella policy? Yes. And specifically, if you have rental real estate, not only should you have two or three million dollar umbrella policy because there’s a lot of exposure of people that can hurt themselves on your property, but for tax reasons, you should also probably have those rental properties held in an LLC.
BRIAN: That’s another layer of protection that can separate those assets and that liability from your corpus, your regular estate. Okay, so we talked about umbrella policies, and we talked about liability protection. But, I say, why, Clayton, why do I need an umbrella when I have 200,00 liability coverage on my car insurance?
CLAYTON: Well, because the car insurance is only going to protect you in case of a car accident, it’s not going to protect you in case…
BRIAN: Trampoline.
CLAYTON: Trampoline. Or if the, uh, accident’s bad enough and the damages exceed what you have on your car insurance policy, then they can come after your assets.
BRIAN: That’s right. Okay, now let’s switch to life insurance. If someone is… By the way, we do sell life insurance, how many life insurance policies have you sold in your career?
CLAYTON: Um, I haven’t sold any.
BRIAN: Zero?
CLAYTON: Yeah.
BRIAN: Okay, and I’ve sold maybe, gosh, I could count them on two hands, in 32 years. Very rarely. Because we have a saying, that if you have it, keep it, if you don’t, you don’t need it. There’s three major reasons why we recommend life insurance. The first is to get you across the finish line, to get you retired. So let’s say that John and Jane, clients of ours, are within five years of retirement. Jane, maybe she is or isn’t working, but if Jane loses John within five years of retirement, that’s an income stream that’s now gone. How does she replace that?
BRIAN: Boom, life insurance, check that off. So that’s one, is get them to retirement. Once they’re retired, they don’t need that. The second reason we need life insurance is if John or Jane had a huge pension with no survivability. Once that dies with them, then, you know, our clients at Decker Retirement Planning, we make sure that they have income replacement through life insurance. So we make sure that our clients are protected. Is it a good idea to protect them with term?
CLAYTON: No.
BRIAN: because when you need term, term all of a sudden becomes too expensive.
CLAYTON: Right.
BRIAN: So what we do is we use whole life and permanent insurance so we can, for the life of the client, make sure that that income replacement risk is handled. Okay, the third reason that we use insurance is for estate planning. And this is through… Let’s say, Clayton, that you and our wife, state of Utah, and… Well, state of Utah doesn’t have state estate tax, but the state of Washington does.
BRIAN: And let’s say that at the federal level, to affect both states, you have an exemption of five point two million approximately, so let’s say that your estate is under the federal level of five point two, but let’s say you live in Washington and you’ve got an exemption of around two point three, so anything above four point six million as a couple, you’re going to pay around 18 percent state estate taxes.
BRIAN: So let’s say that your estate is six million dollars, your exposure to that is… Let’s see, you’ve got around one point seven… Let’s call it two million dollars, and at two million dollars at 18 percent is, off the top of my head, 360,000 dollars in state estate tax exposure. So you’ve got some options. You can either just pay that when you die, do nothing, but some estates are… It’s rarely a good time to liquidate investments or real estate to pay that estate tax.
BRIAN: It’s disruptive, and it may not be a good time. Markets are down, real estate or stocks, so what you do in this case is you have ILIT, irrevocable life insurance trust, and that’s where you have your insurance held outside of your estate. By the way, this is kind of silly, I’ve seen this before, someone said that they had an estate plan, and they had their estimated taxes all teed up ready to go on the life insurance, but it was in their estate, so what just happened?
BRIAN: Now, they have more taxes owed because their life insurance comes due inside of their estate, their estate is worth more, and… Anyhow, that’s how not to do it. How to do it is hold it outside of your estate, gift the money through a Crummey provision, which is, it’s a law that says that you gift money to your kids to pay the life insurance premium, but they can do whatever they want, they can spend it, they can buy a car, they can do whatever they want. Why do you think the kids are going to make sure that they pay the life insurance premium?
CLAYTON: For the money.
BRIAN: Because of the inheritance, right. So they want the estate intact, they don’t want to pay the estate tax from holdings that may or may not be a good time to sell, so they’re going to cooperate. Okay, those are the three reasons we use life insurance. Many, many, many times, we see people with life insurance that in our opinion is, it’s just unnecessary when you’re retired. All right, so if you have it, keep it, if you don’t, you don’t need it.
BRIAN: Okay, now the big one. This is probably going to take the rest of the show. And that is long-term care. Long-term care, why don’t, do you want to define long-term care?
CLAYTON: Sure. Long-term care is just making sure there’s enough money in case your spouse has some severe medical problems and has to go into long-term care, you want to make sure that there’s enough money around to cover those expenses so that you aren’t bankrupt by the medical expenses from you spouse.
BRIAN: Exactly right. So the risk of long-term care is one spouse bankrupting another spouse. What if you’re single, do you have long-term care risk?
CLAYTON: Nope.
BRIAN: Wait, why wouldn’t a single person buy long-term care?
CLAYTON: because they’re just going to have to finance their own care through the assets that they have.
BRIAN: Right, and if they run out of assets, they they go onto Medicaid.
CLAYTON: Exactly.
BRIAN: Now, when you’re in dementia, do you realize… This sounds heartless, but I’m just saying, if you have dementia and/or Alzheimer’s, do you realize if you’re at the Hilton or Motel 6?
CLAYTON: No.
BRIAN: Okay. And also, your kids… They have an interest, sometimes, in having you pay long-term care, because if long-term care can pay the bills, then there’s more of an estate that can pass to them for inheritance.
BRIAN: Do you know that some kids are suing their financial planner because they didn’t put long-term care in there?
CLAYTON: Oh goodness, that’s too bad.
BRIAN: Yeah. Okay, back to long-term care. There’s a statistic that we call into question, the long-term care industry trots out a statistic saying that 70 percent of Americans will spend some time in a long-term care facility. We call bogus on that, because they’re counting even one day in hospice, as part of that statistic.
BRIAN: So if you strip out 30 days or less of hospice, that statistic actually reverses, now 70 percent of Americans don’t go into a facility, we just die. We have a heart attack, we have a stroke, we just die, we just, car accident, whatever it is, we just die. We don’t go into a facility. Of the 30 percent that do go into a facility, they’re there about 18 months or less. When it comes to long-term care, what we want to do is hope for the best and plan for the worst.
BRIAN: So, the worst, Clayton, let me describe this situation. And see if you can top this. The worst is where you’ve got a healthy body, and Alzheimer’s. That’s the worst combination, financially, that you can put together.
CLAYTON: Yep
BRIAN: So, since your sweet wife isn’t here… Well, I can’t throw her under the bus.
CLAYTON: [LAUGH]
BRIAN: So let’s say that you [LAUGH] Let’s say that you, Clayton, are… Let’s say that you’re diagnosed with Alzheimer’s, and you’ve got a buff, healthy body, and you’re in your mid 70s, and that’s a financial disaster.
BRIAN: So let’s talk through, for Decker Talk Radio listeners, what they’re facing. And by the way, Decker Talk Radio listeners, you guys have experienced, a lot of you, you’ve seen this, what I’m going to describe. The first third of the journey is not expensive, it’s emotionally draining because it’s all on your wife, she’s taking care of you.
CLAYTON: Sure.
BRIAN: The second third of this journey is where it’s beyond her ability, and now she’s calling for help from in-home care.
BRIAN: In-home care is not 10,000 a month, it starts smaller and gets more and more expensive as you use it more and more. The third part of this journey is the tragic, last leg, and that’s where now you’re wandering out on the freeways and you’re dressing up for meetings in the middle of the night, now you need in-home full time total care.
BRIAN: So now it is 10,000 a month, and sadly, tragically, again, the odds are you’re going to be there around 18, 24 months. So, 10,000 times 24, 250,000, we’ll just round it up. Do you have 250,000? So we look at our clients and we see that they have it in two places. Number one, they have it in their, as equity in their home. Right, if they had to, they could pull that out.
CLAYTON: Yeah.
BRIAN: Second, they have it in their investments. So we have risk bucket investments that we show, creates an extra buffer when we’re planning on six, and it’s actually, the managers we’re using have done multiples of that, so it creates a buffer so that by the time they get into these age of risk, these clients have a buffer that they can pull from for both inflation protection and also long-term care.
BRIAN: Honestly, if we act as fiduciary, because we do sell long-term care risk insurance coverage. We haven’t sold it, because most all the time when we go through the options, to sell finance is a better deal for the client than selling them a long-term care insurance coverage. By the way, here’s a ridiculous question. Clayton, a long-term care insurance agent, do they make their money by being extremely cooperative and falling all over themselves to hand you money for all the different services you need as long-term care expenses roll in?
CLAYTON: No.
BRIAN: [LAUGH] Why didn’t you hesitate on that?
CLAYTON: because they’re an insurance salesperson, they’re just trying to get you that policy so they can make their commission.
BRIAN: No, I’m saying once you have it and you want to cash in on it, do their earnings go up if they’re really excited to write you checks for whatever you want?
CLAYTON: Oh sure, no, not at all. They want to keep that money as long as possible, and they’re going to fight over it, especially if it’s a big claim, they’re not going to want to pay out anything.
BRIAN: Right. And so, I’ve talked to people that have been either power of attorney agent to their parents, or they were executors to their parents, and they watched their parents go through this, and they said that they saw time and time again when they wanted to use their insurance, that it was so difficult, and the company made it so difficult that they swore that they would never, never ever use long-term care insurance for themselves.
BRIAN: So just saying, hey, we sell this, so if clients want it and need it, we have it to sell, but we are fiduciaries, so we want to make sure that you know of all the different options. So, self-insuring is option number one. Option number two is traditional long-term care. That’s where company X, Y and Z, they offer traditional long-term care for four or five hundred bucks a month, per person, you have access to three or four hundred thousand of traditional long-term care.
BRIAN: So Clayton, let’s say that you have it, and you get his by a bus, you never went into a facility, you paid premiums for, I don’t know, 10 years, did you get that money back?
CLAYTON: Nope.
BRIAN: Wait a second, you paid for something.
CLAYTON: You paid for it if you needed it, but if you didn’t need it, then all that money is gone and the insurance company’s laughing all the way to the bank.
BRIAN: Down the drain. Okay, so the long-term care only cashes in if you go into a facility. So if you get hit by a bus, it doesn’t work.
BRIAN: That’s a problem. Second problem is the premiums are called what? Premiums are called guaranteed-level premiums.
CLAYTON: Sure.
BRIAN: Are they guaranteed-level?
CLAYTON: No, they’re not.
BRIAN: What happens in your late 60s, early 70s?
CLAYTON: You get the letter.
BRIAN: What does the letter say?
CLAYTON: Letter says that now that you’re old enough, your premiums are going to double, or your benefit’s going to be cut in half.
BRIAN: Not doubled, 60 percent.
CLAYTON: Sorry, 60 percent.
BRIAN: Why 60 percent? Because that’s the maximum allowed by the States, and the insurance commissioner allows it.
BRIAN: So we see this letter come through, and what does the insurance company hope you do?
CLAYTON: You cancel your policy.
BRIAN: Oh, because then, they get to keep all those past premiums risk-free. Or, plan B, what’s the next best thing that you could do for the insurance company?
CLAYTON: Well, that they jack your policy up so you can keep your same benefit, and they make even more money.
BRIAN: Well, no, they cut… So you panic and you cut your premium in half, now for half the risk, the insurance company’s getting the same amount of money.
CLAYTON: Sure.
BRIAN: Okay. So we want to make sure, being fiduciaries, that our clients know that this is coming. And some of them insist, “Nope, it says right here ‘Guaranteed-level premium,’ they would not lie to me.”
BRIAN: In those cases, we’ve had to get the insurance company on the phone and have the agent from the insurance company say “Yes, John and Jane, Brian and Clayton are right, usually as your enter your age of risk, we jack the rate up, and it’s not guaranteed-level premium, so we’re just making sure your eyes are wide open on that risk.” If it works, if you have it, keep it, if you don’t have it, we want to warn you of these two major things. If you don’t go in a facility you can’t use it, and you don’t get any benefit back, and number two, that the premiums will be going up.
BRIAN: All right, the third option, and gosh, we’ve got six minutes. Five minutes. The third option is where an insurance agent says to you “Hey, Clayton, if you get hit by a bus you can’t use this, so you should buy whole life from me with a long-term care rider, now your benefit of three or four hundred thousand, you can get either way, when you die, or if you go in a facility, you get it either way. So on the chalkboard it sounds like a great deal, but in reality, here’s the deal-breaker, it’s 1,000 dollars a month, it’s very expensive. 1,000 bucks a month per person for life.
BRIAN: Just saying, it’s really expensive. The next option is called asset-based long-term care. This is where you have an account with an insurance company, it’s liquid, you put money in it, you save 10,000 dollars a year for 10 years, you have 100,000 that you save, and you… When you die, it gives a 2X death benefit, but if you go in a facility, it gives a 3 or 4X long-term care benefit. We like that one, and we use that one, because of the flexibility and the liquidity. If you change your mind, you can pull all that money out.
BRIAN: The problem with it is you have to save 10,000 dollars a year for 10 years per person, for a husband and wife, for a lot of people in retirement to put that kind of money away is very difficult. All right, the next two, I’m going to rattle through very quickly. Safe harbor trusts. Safe harbor trust, Clayton, is where you and your wife, in the event that you’re trying not to put your assets at risk, you’re going to move all your assets to your brother, what’s your brother’s name?
CLAYTON: Uh, Sterling.
BRIAN: So you and your wife move all your assets to Sterling, because if you’re diagnosed with Alzheimer’s, now there’s no assets, you go on Medicaid, and then after you pass, your sweet wife calls Sterling and pulls all those assets back. That’s the plan. The problem is twofold. One is Sterling can wake up one day and call you from Cabo, and say “Hey bro, I like your assets that you gave me,” and there’s nothing you can do, because legally it has to be arm’s length.
BRIAN: So that’s a problem. Then the other problem is, the IRS got onto this, and they have put in a five-year look back, that if you’re diagnosed with Alzheimer’s or dementia within that five-year period, they claw those assets back. All right, the last thing, tragically, and this is very popular, because the conundrum, the quandary with long-term care, is if you can afford it, you don’t need it. And if you need it, you can’t afford it. So tragically, for assets, for couples or individuals that can afford it, their plan is number six, and that is divorce.
BRIAN: So for financial survival, couples will divorce to preserve any remaining assets, to live out their life. All right, we got through traditional long-term care. This is Brian Decker and Clayton Bradshaw from Decker Retirement Planning, both licensed fiduciaries. We got partway through the problems that retirees will face in retirement.
Thanks for joining us, have a great week, and we will see you next week.
