MIKE: Good morning, then 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 four pedestals to gauge your retirement, to make sure you’re either good, or maybe you need some corrections. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good morning everyone, this is Mike Decker and Brian Decker, on another edition of Decker Talk Radio’s Protect Your Retirement. Brian Decker, we’re lucky to have him, from Decker Retirement Planning, as a licensed fiduciary. And we’re going to be going over some… We’ve gone over in the past, Brian, potential problems in retirement. But we’re going to kind of highlight some individual and specifically. But you know, before we get started, last week you told me to watch The Big Short. I never got around to it, and I just watched it last night, and the crazy part about the show is, there’s only a couple guys that could foresee what was actually going to hit. It’s a remarkable movie. We recommended for anyone that hasn’t seen it. I think it’s on Netflix now, so you can stream it for free.
BRIAN: Okay, can I jump in on this?
MIKE: Yeah.
BRIAN: So signs of a top in The Big Short is when these people were knocking on doors of people that owned homes, and they weren’t even living in them.
MIKE: Signed by their dog.
BRIAN: Signed by their dog. No-app mortgages. I mean, those are signs of a top. Can I give you one that just came out this morning?
MIKE: You know, I didn’t even know that you had one. Let’s talk about it.
BRIAN: Okay. Guess what a parking lot just sold… I’m sorry, not a parking lot. A parking spot, in Hong Kong.
MIKE: How much?
BRIAN: A parking spot in Hong Kong just sold for 664,000 dollars.
MIKE: That’s ridiculous.
BRIAN: A parking spot. One parking spot. Also, there was a three-X, three times over subscription to some Argentina bonds…
MIKE: Mm-hmm.
BRIAN: Know what Argentina has a bad habit of doing every 10 or 15 years?
MIKE: Defaulting?
BRIAN: Defaulting.
MIKE: [LAUGH]
BRIAN: There is such an ignorance, the flight of money chasing yield and return. And also, typical top of this, of the real estate market, are the house flippers.
MIKE: Yep.
BRIAN: They’re out in force right now. So there’s a lot of signs that we are at or near top.
BRIAN: What we look at aren’t so many esoteric things like parking spots. We look at price-to-earnings ratios on the stock market, price to sales, price-to-book. And by any measure, the stock market has only been exceeded two times in the last 100 years. One is 1929, and the other is 1999. And both of those didn’t work out so well. Also, Mike, sorry to get off on this. I want to have you finish up in a second. So we at Decker Retirement Planning are extremely math based. And we look at the 10-year forward rates of return.
BRIAN: When the S and P is down at between 10 and 12 percent, the returns are phenomenal in the forward 10 years, when the S and P price-earnings ratios are low. They’re very high. It’s like 15, 18 percent, average annual returns going forward. But when you get the S and P on the top side, when the S and P price-earnings ratios are what they are right now, around 18, 19? Then you have returns that are flat to negative.
MIKE: Mm-hmm.
BRIAN: Historically. So, maybe it will be different this time, in the last hundred years.
BRIAN: But statistically, historically, the returns, when you’re invest in the stock market and the price-earnings ratios are this high, your returns on a buy and hold strategy are going to be very close to flatline. So what we do, catch up into this, Mike, [OVERLAP]
MIKE: Yeah. That’s okay. I’ve got my notes to finish my thought, but this is a good topic. Let’s keep going.
BRIAN: All right. So what we do is, our clients at Decker Retirement Planning, we are fiduciaries to our clients. This cracks me up. If we were working for [CLEARS THROAT] I won’t say the name of the brokerage firm. Guess what [OVERLAP]
MIKE: Say a firm that’s already under.
MIKE: Because a bunch went under in ’08.
BRIAN: Okay, Bear Stearns.
MIKE: All right. [LAUGH]
BRIAN: If we were working for Bear Stearns, guess what mutual funds you know?
MIKE: It’d be Bear Stearns.
BRIAN: Bear Stearns. If you were working for, what’s it?
MIKE: [INAUDIBLE]
BRIAN: Merrill Lynch.
MIKE: Yep.
BRIAN: Guess what mutual fund you would own?
MIKE: I’m going to take a wild guess and say Merrill Lynch.
BRIAN: That’s right. And why is that? Because you are incented, as a broker of that firm, to sell clients those funds, because you get paid more. Forget about that their returns are subpar. That’s irrelevant. I’m being sarcastic.
BRIAN: But we are fiduciaries, so what we do, Decker Talk Radio listeners, is we go to the databases. And this is what you would expect. If we’re fiduciaries to our clients, we would go to the databases and we would find out which mutual funds and which money managers are producing the highest rates of return. And we just have two measures, two yardsticks. And by the way, Mike, what we want to talk about today isn’t what we’re talking about right now.
MIKE: But it’s important. There’s a lot of things going on with the markets. We should address it anyway, just to kind of keep our pulse.
BRIAN: All right.
MIKE: And your pulse on what’s going on.
BRIAN: Because it is spectacular, what we’re going to share with Decker Talk Radio listeners. We have two mission statements for risk money. Number one, track with the S and P when the markets go up. And number two, protect principal when the markets go down. People in retirement are in a quandary right now, because number one, they can’t make it on CDs, and two, they can’t take another hit like 2008. CDs are returning around two or three percent. You can’t make it on that. Most people can’t. So they’re forced into the markets, but they know that they can’t afford another hit like 2008.
BRIAN: Bankers and brokers are trotting out nonsensical advice like, “buy and hold, hang on, the a long-term investor.” Well, you can do that in your 20s, 30s, and 40s, but when you’re over 50 years old, you can’t afford to take these 30, 40, 50 percent hits that seem to roll around every seven or eight years. So what we do… Here, I’ll get to the point and we’ll move on.
MIKE: Okay.
BRIAN: Because we’ve gone through the databases, we have six managers. Three of them trade the stock market indexes, one of them trades gold and silver.
BRIAN: The other trades oil, and the other trades treasury bonds. Now, why would we have gold silver treasury bonds and oil mixed in with our other three managers that trade the indexes? I’ll tell you why. Because they’re perfectly correlated to protect you in a down market. Guess which four sectors always go up, Mike, when the markets get creamed.
MIKE: Let’s see, we’ve been over this before. But is it gold? Precious metals?
BRIAN: Gold is one.
MIKE: It’s gold, and silver is the second one?
BRIAN: Yep.
MIKE: Okay, and then there’s the treasuries.
BRIAN: Treasury bonds.
MIKE: They go up. And I forget what the fourth one is.
BRIAN: Oil.
MIKE: Oil, that’s right.
BRIAN: And those are our four managers. So last year, when oil got creamed down to 25 bucks a barrel, and then there was a tremendous volatility…
MIKE: That was brutal.
BRIAN: The manager that we’re using for oil last year returned [net of?] fees over 100 percent. The guy we use for our treasury bonds, last year when treasuries on the 10 year treasury it went down to one point six percent, and then six months later was up at two point six percent. Most people lost a lot of money.
BRIAN: This manager, with a two-sided algorithm, his returns were over 36 percent. On treasury bonds, last year. The manager that we use for gold and silver has averaged since 2005, his gold model is averaging 29 percent. And the silver model, since ’06, is averaging [net of?] fees 49 percent. So these are models that catch the, you know, when you’re standing at the beach, and the tide comes in, and then there’s a shift, and the tide goes out.
BRIAN: These are trend following models, and the trend changes. Just like the tide, these models change too. And so what our clients don’t need this for the markets to go up to 50,000 on the Dow for us to make a lot of money. Our clients are able to make money even if the markets chop, like historically they’re expected to. When the price-earnings ratios are this high and the markets are this expensive, our clients are using two-sided models that are designed to make money in up or down markets.
BRIAN: We don’t need the markets go up and double from here in the next 10 years to do very, very, very well. In fact, we fully expect in the next 18 months or so that the markets will go down, and our clients will have significant downside protection two different ways. First of all, unlike the banks and brokers that have all your money at risk, we use principal guaranteed accounts to deliver your income for the first 20 years of your retirement.
BRIAN: And by the way, how can we get much of a return? I’ll get to this in a second. The returns that we’re getting on our principal guaranteed accounts, we call it bucket three, our 10 year account, last year did nine percent. Remember this?
MIKE: Mm-hmm.
BRIAN: Okay. And the average annual returns for the last 10 years for our bucket two and bucket three accounts, these are principal guaranteed accounts of six and a half percent. These are good returns.
BRIAN: These are principal guaranteed accounts, so when the markets get creamed, as they do every seven or eight years, our clients are going to breeze through the next market downturn. If 2008 revisits, then our clients don’t lose a dime in their emergency cash buckets one, two, or three, which is 75 percent of their retirement money. They don’t lose a dime, because it’s principal guarantee. The 25 percent that is at risk, and why would it be 25 percent?
BRIAN: It’s because clients don’t need that money for 20 years, and we can grow that money three and four times easily by having those funds going out 20 years. So we get a three or four X on those. And by the way, that’s only on 6 percent. Average annual returns, our returns that the models that we’re using right now are much higher than that. But anyhow, Mike, I just wanted to throw out right at the beginning of the show that bankers and brokers have all of their client money at risk, which makes no sense to us, number one.
BRIAN: Number two, they use the rule of 100 to decide how much money is going to be in their bond or bond funds, which makes no sense when interest rates are so low. So if you’re 65 years old, you’d have 65% of your money earning almost nothing. And then when interest rates to go up, you actually lose money, and they tell you that that’s a safe place to put money. I’m kind of bouncing around here.
MIKE: That’s okay. I want to interject here real quick, because we’re saying some really important points here, and you’re probably jotting a note down, and thinking about who you’re currently working with.
MIKE: Brian, did you have anything else you want to wrap up on this before we dive into our actual topic?
BRIAN: Yeah, here’s our actual topic that we’re going to talk about. So Decker Talk Radio listeners, we at Decker Retirement Planning, once we put version one, version two of a client’s income model together, then we test it with the biggest problems that we feel like people will face in retirement. Stock market crash, inflation, death of a spouse. All these things, we want to talk through those issues right now.
MIKE: So before, I just want to finish up my thought about The Big Short.
BRIAN: Okay.
MIKE: And then we’ll dive into that, because it does lead into this. And that is, in the movie it highlights three people that saw the signs, and were [LAUGH] were jumping up and down screaming, going, “This is ridiculous, this is ridiculous.” And then, the country collapsed. Now Brian, correct me if I’m wrong, but every seven or eight years, the markets tank. Well, we’re about eight, nine years since the last collapse. Decker Talk Radio listeners, we’re going to go over some very important topics, do take notes. We want to be one of those that they’re calling out, and I can’t think of a good phrase here, but saying that you got to be able to protect your retirement.
MIKE: You can’t just take these huge crashes here. And so we want to be like the guys on The Big Short, not necessarily shorting a huge housing market, but giving you the tools to protect your retirement, and to avoid a crash, because you don’t want to have to go back to work and re-earn your retirement again. That’s just ridiculous. We want to help you avoid that. So, Brian, could we get a quick schedule of the topics specifically that we’re going to talk about, that will help prevent people really destroying their retirement?
BRIAN: Well, what we’re going to talk about right now is, after we get an income plan together, version one or version two, it’s an early version, we test it, prod it, kick it, blow it up. We tried to find any weakness in the plans by going down this list of what we’re going to cover. These topics of what we’re going to cover right now should be good tests for your plan. By the way, if you’re keeping any notes, this is a good test to see if your financial planner is on track with what we do. There’s four foundational parts of an income plan.
BRIAN: Number one, we got to make sure that it delivers the income that you need and fought for the rest of your life. The people who use the banker-broker model, which is the asset allocation pie chart, where you write down, you record answers to a risk questionnaire and you submit it and then the bankers and brokers kick back to you a version of a diversified portfolio of stock and bond funds, international emerging markets, all that.
BRIAN: All your money’s at risk, and that is their recommendation for you. So how are you going to decide how much income you’re going to get from that? You’re going to use the four percent rule. The four percent rule has destroyed, in our opinion, more people’s retirement than any other piece of financial advice out there. It’s toxic. The four percent rule goes like this. Stocks have averaged around eight and a half percent for the last hundred years, that’s true. Funds have averaged around four and a half percent for the last 37 years. That’s also true.
BRIAN: So let’s be really safe and just draw four percent from your assets for the rest of your life. And that will be conservative, that will be safe. Four percent rule works beautifully when the markets are trending higher. When the markets go down, or go into a flat market cycle, like we have every 18 years or so, then that’s when the four percent rule actually destroys your retirement. So here’s what we mean. If you had around four million dollars, let’s say that we have Monopoly money, for everyone listening.
BRIAN: You retire January 1 of 2000 with four million dollars. [OVERLAP]
MIKE: Sorry, quick aside. Do you know they replaced the Monopoly pieces with cell phones and new things?
BRIAN: Oh, it’s about time.
MIKE: I think it’s kind of a bummer. I mean, it takes away the…
BRIAN: Who wants a thimble to go around on a game?
MIKE: I was always the top hat. [LAUGH]
BRIAN: Top hat.
MIKE: Anyway, sorry to interrupt there.
BRIAN: I liked the dog or the car, but not the thimble. Anyhow, the four percent rule, let’s give all the listeners four million dollars of Monopoly money and retire you January 1 of 2000 at the beginning of a flat market cycle.
BRIAN: Guess what happens? 2001 and ’02, you lose 50 percent on your stock, your equity assets, plus you’re drawing four percent here. Four, four, and four. You’re down 62 percent going into 2003. But the good news is, markets go and double from ’03 to ’07. But you don’t get all that, because you’re drawing four percent in ’03, ’04, ’05, ’06, ’07. And then you take the hit in 2008, down 37 percent plus four percent, and now you can no longer stay retired.
BRIAN: Now, in 2009, we saw proof of this by all the gray-haired people that we saw show up at banks, fast food, retail, Wal-Mart greeters. They had to sell their home, move in with the kids. There were millions of people in this country, their retirement was destroyed by the four percent rule. The guy who invented the four percent rule, his name is William Bengen. You can go on our website at deckerretirementplanning.com, D-E-C-K-E-R, deckerretirementplanning.com, and you can see some of his quotes.
BRIAN: He says in 2009 that the four percent rule doesn’t work when interest rates are this low. He calls it dangerous, and he says quote-unquote, he doesn’t use it. So the guy who created the four percent rule publicly discredited it. And yet, the banks and brokers still use that. So number one, when I told you to, and when I asked you to take a note, make sure that you have a source of income, this is very important, that you have a source of income for your retirement.
BRIAN: Our clients are drawing income from principal guaranteed accounts, that if the stock market crashed like it did in 2008, it does not affect our clients. It doesn’t. It doesn’t change their travel plans, it doesn’t change their future, how much money they’re going to draw. Think of the peace of mind that you get. Instead of having a life-changing event every seven or eight years when the markets get creamed, our clients are able to go into retirement with spectacular, priceless piece of mind, knowing that when the markets cycle down the next time, they don’t have to go back to work.
MIKE: Real quick, if you’re listening, this is Protect Your Retirement. You’re listening to Brian Decker, our featured guest, a licensed fiduciary from Decker Retirement Planning. Glad to have him. We’re talking about how to avoid potential problems retirement. So Brian, that was point number one.
BRIAN: Point number one is making sure that your financial plan delivers you the income that you need and want for the rest of your life. It’s called…
MIKE: [OVERLAP] Oh, go ahead.
BRIAN: We hope that your plan is not using the four percent rule. Okay, here’s number two. Number two is comprehensive tax minimization. Make sure that the plan that you have has tax minimization.
BRIAN: We use four parts to it. First part is we look at lines eight and nine on your 1040, and that’s where you have interest and dividends show up. And on lines eight and nine, we typically see a lot of money from people who have, in their non-qualified accounts, they have mutual funds reinvested dividends and interests. Well, guess what? You have 10 or 15,000 dollars there at your end, and you’re paying tax on that at 30 percent. So you’re paying 5,000 dollars every year in taxes on money you’ve never even touched.
BRIAN: That’s an inefficiency that we fix, typically by repurchasing those funds in a retirement account, so you’re not taxed on that. You have the benefit of reinvesting those mutual funds. Or we turn that spigot on, stop the reinvestment, have you take that income, and spend it. It’s an inefficiency to pay money, pay taxes on money you never touch. So that’s point number one. Point number two, as far as comprehensive tax minimization on your financial plan, is we look at the IRA to Roth conversion. This is a big deal.
BRIAN: So Mike, when we talk about the biggest tax-saving strategies that most people will have in their whole lifetime, it’s this one. So here’s a trick question. We’re talking trick question, we’re talking taxes. So Mike, if we took 375,000 dollars in your IRA, day one, and we grew that money to one point two million, are you happy with this?
MIKE: That’s an incredible return on investment.
BRIAN: Okay, so you’re happy with this.
MIKE: Absolutely.
BRIAN: But now in your late 80s, we put you in the top tax bracket because of required minimum distributions, and now you’re paying tax on one point two million, and you turn around and ask us, “Hey guys, why didn’t we pay taxes on my IRA at the 375,000-dollar level, why are we paying taxes now at one point two million?” So it’s a fair question. We use the IRA to Roth conversion. And we know because we’re math-based, our practice is math-based, we know to the dollar how much money you should convert from an IRA to a Roth.
BRIAN: It’s not all your money. It’s not all your IRA money. It’s typically around 25 percent of your investable assets. If you convert more than that, then it’s an inefficiency, because the beauty of a Roth is, number one, it grows tax-free. Number two, it pays income back to you tax-free. And number three, it transfers to your beneficiaries tax-free.
BRIAN: So this is something that we only use for our risk assets, and when our managers, the six managers we talked about at the top of the show, average annual returns of 16 and a half percent net of fees. Now when you pay 20 percent to convert an IRA to a Roth, now we can justify, with those good returns, earning that money back and making new ground, and growing tax-free. If your banker or broker is earning around four or five percent, you’re going to pay 20 percent and wait four or five years to break even? That doesn’t make sense.
BRIAN: So we, mathematically, know how much money you should convert from an IRA to a Roth, and the difference between converting, or paying tax on 375,000 and one point two million is a six-figure difference. This is where most people will have the biggest savings of their life. Now we don’t convert the short-term money, buckets one, two, or three, because you’re taking the money too soon, and the returns aren’t high enough to justify paying 20 percent tax. Also, we don’t convert the IRA to a Roth all at once. We do it over five to seven years.
BRIAN: Every year in the fourth quarter we contact our clients, we ask how much income they estimate that they’ll have during the year. We see what deductions they have, we estimate those. And we find out how much room we’ve got before we bump you up to a higher tax bracket. This is how we convert from an IRA to a Roth, and it’s the biggest tax saving strategy for most of our clients. So, bankers and brokers, we throw the gauntlet down, we challenge.
BRIAN: You ask your banker or broker mathematically how much you should convert from an IRA to a Roth, and you watch them waffle, stutter, and tap dance trying to make up some kind of rational, logical response to that. We have mathematically nailed down the calculations on exactly, to the dollar, how much you should convert from an IRA to a Roth. And this is the biggest tax-saving strategy for most people, and they should come in and see it.
BRIAN: Okay. So we talked about two things so far. Four parts that are foundational to your financial plan that you have. Test number one, make sure it delivers the income you need and want for the rest of your life. Number two, make sure that you have comprehensive tax minimization. So far we’ve talked about two of the four parts of comprehensive tax minimization. One is to look on lines eight and nine of your 1040, make sure that you are zeroing that out so that you’re not paying tax on money you never touch.
BRIAN: And the second one is to make sure you take advantage of the IRA to Roth conversion. That is a huge tax savings. The third thing, Mike, has to do with taxes or cost to transfer assets to your beneficiaries. This is a big deal. Especially if you’ve got an estate that has estate tax exposure at the state or federal level. We have done this thousands of times, we’ve worked with your CPA and your estate tax attorney, and we zero that cost out.
BRIAN: If you have any intentions of putting an estate tax plan together, we can help you on this. But the costs are totally unnecessary to pay those estate taxes to transfer assets to your children or your beneficiaries. There are other costs that we can help minimize in the transfer process of an estate to the next generation. So that’s number three. Number four, and these are for the higher-asset estates, three million, four million and above.
BRIAN: We work with your CPA, and we want to make sure to explore family limited partnerships, Nevada corporations, or foundations, to help bring down the taxes on your income that you are receiving each year. So that’s number two. We talked about four parts that are foundational to anyone’s income, for anyone’s retirement plan. Number one is making sure you have the income you need and want for the rest of your life. Number two is comprehensive tax minimization.
BRIAN: Now let’s talk about number three. And that is comprehensive risk reduction. This entails making sure that… Gosh, there’s so many parts to this. And this is common sense. It’s okay to be aggressive, and have all your money at risk in your 20s, 30s, and 40s. But it makes no sense to do that when you’re over 50 years old. You’ve accumulated a large nest egg, and what, you’re going to take a 30 or 40 percent hit on that every seven or eight years.
BRIAN: The markets get creamed every seven or eight years historically. So let’s go through the numbers. In 2008, from October of ’07 to March of ’09 that was over a 50 percent drop, 37 percent of which was on the S and P dropping in 2008, calendar year. Seven years before ’08 was 2001. Twin Towers went down, it’s in the middle of the tech bubble bursting. Three year drop of over 50 percent in the stock market.
BRIAN: Seven years before that was 1994. Iraq had invaded Kuwait. The market struggled, interest rates went up. The economy was actually in recession. Seven years before that. 1987, black Monday, October 19. 30 percent drop in one day. Seven years before that was 1980. ’80 to ’82 was sky-high interest rates, the economy in recession, was a 46 percent drop in the market. Seven years before that was 1973, ’74, bear market.
BRIAN: That was 42 percent drop. And seven years before that was the ’73-’74 bear market, where markets dropped over 40 percent. And it keeps going. So we just want to point out that markets bottomed in ’09. ’09 plus seven or eight years is about where we are right now. We are due. We’re in year nine of typically a seven, eight year market cycle. So we hope that you have risk reduction plans in place, downside protection.
BRIAN: Any banker or broker that tells you, quote, “buy and hold, don’t time the markets, be tax efficient, be a long-term investor,” they do not have your best interests in mind, because I was trained on this model, and I, in my early career, said the same thing. I wanted you to know, Decker Talk Radio listeners, what that’s code for. That’s code for “let me manage your money, don’t bother me, and I’ll just charge you my fees.”
BRIAN: So, we have quite a different take, as fiduciaries… First of all, you shouldn’t have all your money at risk. First thing we do in getting your plan together is that around 75 percent of your money is taken out of risk and put in principal guaranteed accounts. Then we take what is at risk, and we use, in a two-sided market that goes up and down, that’s what we mean by two-sided, we use two-sided models in a two-sided market.
BRIAN: These models are designed to make money in up or down markets, and have been around for decades. There’s a book called What Works on Wall Street. This is Jake O’Shaughnessy. He spends 300 pages talking about fundamental analysis and how great his mutual funds are. In appendix A, he does the biggest study ever done by anyone on the subject of what works on Wall Street. He tests out, from 1950 to 1997, all the different strategies that are out there.
BRIAN: All of the top 10 models are absolute return focused, two-sided models. Models that are designed to make money in up or down markets. This is common sense. When you don’t take those 50% hits every seven or eight years, then guess what? Your returns go up. Your returns go up dramatically. In fact, January 1 of 2000 to 12-31-10 is called the Lost Decade. It’s the worst 10-year stock market period ever in the history of our country’s stock markets, worse than the Great Depression.
BRIAN: That was two 50 percent drops in that 10-year period. 100,000 invested January 1 in the S and P grows to, today, around, with dividends reinvested, around 220,000. 100,000 invested in the models that we’re using grows to over 900,000. Average annual return is 16 and a half percent net of fees. The reason for the dramatic difference between the two models is justice, they didn’t take the big hits in 2000, ’01, ’02, or in 2008.
BRIAN: So when we talk about comprehensive risk reduction, number one, have less money at risk. Number two, what you do have at risk, let’s make sure that you use a two-sided strategy in a two-sided market. It makes no sense to have a one-sided strategy buy and hold in a two-sided market. These models that are so spectacular, and are so fantastic, have been around for many, many years. We just did the homework to find them.
BRIAN: We screened through the Morningstar database, the Wilshire database, TimerTrac and Theta, and because we are fiduciaries to our clients, we found the best six models that we can find. And by the way, Mike, we should make an offer right here, to have people come in and see these managers’ models. We’ll show them line by line, year by year, how they have outperformed the market and protected the downside for our retired clients.
MIKE: Absolutely. All right, so for the next 10 callers that call in right now, this is huge.
MIKE: Brian, when they come in, they’ll see third-party verified fact sheets of these managers.
MIKE: That’s a big deal.
BRIAN: With net of fee returns.
MIKE: With net of fee returns.
BRIAN: Right. So on the subject of risk reduction… And by the way, Mike, it looks like we are probably able to squeeze all… We never even intended to cover this today, but this is…
MIKE: It’s important.
BRIAN: …four foundational parts to a financial plan. One is to make sure you have the income you need and want for the rest of your life. We talked about that. Two is comprehensive tax minimization.
BRIAN: There are four parts. We’ve talked about that. Three… By the way, if you’ve missed that, you can go to our website and pull up the podcast and that’s www.deckerretirementplanning.com, and you can listen to this again. Now we’re talking about risk reduction. Stock market risk. Our clients, when they went through 2008, the clients that did the planning suffered no change in their lifestyle. Because they’re drawing income from principal guaranteed accounts.
BRIAN: When you draw income from a fluctuating account, you compromise the gains when the markets go up, you accentuate the losses when the markets go down, and in fact, you’re committing financial suicide. Mathematically, that makes no sense at all. So, what we do is we draw from principal guaranteed accounts that don’t fluctuate, so we have eliminated stock market risk, eliminated interest rate risk, because if interest rates go up or down it doesn’t affect us.
BRIAN: If the stock market goes up or down it doesn’t affect us. And if the economy goes up or down it doesn’t affect us. So our clients have tremendous peace of mind by reducing or eliminating these risks. When it comes to the money that is at risk, we have a two-sided strategy. Six managers with two-sided strategies in a two-sided market. All right. The other risks that we talk about now are liability risk. Sadly, tragically, we live a litigious society, and when you bump someone in the parking lot, they’re going to grab their neck, and they know they have a blank check and they’re going to sue you.
BRIAN: And so if you enter… Gosh, this would be tragic. You work hard for 40 years, you save for your golden years, your retirement, you bump someone in the parking lot, and they hit you up for 600, 800, a million dollars. Sadly, that is the world we live in. For four or 500 bucks a year, you can buy an umbrella policy. It’s a liability coverage that covers you from claims like this. It’s four or 500 bucks a month, and it’s a rider on your homeowner’s insurance.
BRIAN: That, in our opinion, and we’re fiduciaries, can be some of the best money you’ll ever spend in your life. If someone trips on your sidewalk, hurts themselves on the backyard trampoline, you bump someone on the sidewalk, or you bump someone in your car in the parking lot, you have liability. And [we’ll want to?] zero that our or minimize that liability with the umbrella policy. All right. The last thing we’ll talk about here is long-term care risk. And darn it, that’s usually a 35, 40 minute discussion.
BRIAN: I will just say here that long-term care risk is the risk that one spouse bankrupts another spouse because of health care costs. This is a big deal. We are fiduciaries, and we’re licensed to sell long-term care. Mike, do you know, in the history of our company, how many long-term care policies we have recommended or issued?
MIKE: Isn’t it zero?
BRIAN: It is zero.
MIKE: Makes sense. Because that conundrum. If you can afford it, you don’t need it, and if you need it, you can’t afford it.
BRIAN: Right.
BRIAN: It is tragic that the people who need it, they use one of the six strategies, and they look at each other and say, well, we’ll just divorce, and tragically try to financially survive that way. But the people who can afford it are typically our clients. And we show mathematically how out of the choices of a safe harbor trust, asset-based long-term care, whole life with a long-term care rider or traditional long-term care, that the best option out of those four is the fifth option, which is to self-finance.
BRIAN: Now, Mike, this is a big enough deal, I don’t want to spend time on this, but I know this is a concern for a lot of people. I don’t want to spend time on this right now. But if anyone has that interest that they want to talk about this, all of our planners are trained to take you through a 25 to 45 minute discussion in detail with a calculator in hand, on why it’s in your best interest most of the time to self finance that risk.
BRIAN: All right. So comprehensive risk reduction is number three.
BRIAN: In the four parts of risk reduction, four parts of a foundational financial retirement plan, make sure you have the income you need and watched the rest of your life, number one. Comprehensive task minimization, number two. Comprehensive risk reduction, number three. And then fourth and final has to do with liquidity. This is very quick, we’ll just talk about this. We define liquidity as money that’s available in your savings, checking account, next day, no penalty.
BRIAN: Sadly, well, I’ll just say it. If all your money is liquid, it’s not working for you. It’s sitting there earning point zero two percent. But if all your money is locked up, that’s equally ridiculous. We bring this up as a foundational components of a financial plan because sadly, tragically, a lot of our competitors in the retirement planning community, unbelievably, lock people up in annuities. To where if they have a life event, they don’t have the money or the liquidity for those emergencies. So what we do… Yes, sir.
MIKE: Not just annuities. I mean, there are other investments that are just ridiculous, like non-traded REITs.
BRIAN: Oh, good point.
MIKE: Right.
BRIAN: Good point.
MIKE: Yeah, there’s a lot of things you should be careful about.
BRIAN: Yep. Okay. So what we do is make sure that there’s a good compromise between being all liquid and being 100% locked up. What makes sense for us is 30, 40 percent of their plan to be liquid. And what we mean by that is you’ve lived all of your adult life having some component of your investable assets not being liquid.
BRIAN: Usually it’s your retirement account, your 401k, your IRA or your Roth. You know that if you touched it before 59 and a half you got penalized. So yes, you had it, you lived with it, it was a big chunk of your investable assets. But you didn’t touch it. You’ve never had all your money liquid. Most people have never had all their money liquid. So we try to strive for around 30 to 40 percent liquidity score. And we take you through that by grabbing a calculator, making sure that you’ve got the proper amount of emergency cash. This is money that’s in your savings, checking, credit union.
BRIAN: And we try to be helpful. There’s some money market accounts that are FDIC guaranteed, that are earning one point two five percent, we try to help our clients get the best rate they can. And then we look at the other accounts. Bucket one, bucket two, bucket three, and the risk account. And typically our clients are around 30 to 40 percent of their investable assets are next day liquid with no penalty. That’s a big deal. You want to make sure that you’ve got the liquidity, so that when life happens, that you’ve got the money to handle the new roof, the new car, the water heater, whatever.
BRIAN: All right. I think those are the four. The four foundational parts of a financial plan or retirement plan, what we just covered. Now Mike, it’s 47 minutes. We’ve got 10 minutes left to talk about what we actually had planned to cover. So let’s start this. I’m going to make a note, and we’ll start on this next week.
MIKE: Continue next week. Excellent.
BRIAN: Okay. So these are the potential problems that people face in retirement. The first, top of the list issue, and there’s 22 points here that we’ll cover.
BRIAN: Top of the list is to make sure you know how much income you need in retirement. A lot of people erroneously think that they need less once they retire. That’s not true. Typically you need about 20 percent more. Why is that?
MIKE: Got more time on your hands.
BRIAN: You got more time.
MIKE: You want to do stuff.
BRIAN: And doing stuff costs money. So when you’re at work, you’re working, you’re making money, and you’re busy, you’re engaged, and you’re not doing stuff. When you retire, you want to do stuff, and doing stuff costs money. So typically, there’s a 20 percent bump from what you’re used to spending to what you should expect to spend in retirement.
BRIAN: So make sure you have the budget, and you know mathematically, realistically, what you’re looking at for a budget. Our whole planning, all of our retirement planning, focuses and centers around how much money you need, and can the assets you have plus any pension or any rental real estate or your social security, we add it up, minus taxes, and we put a COLA, cost of living adjustment, of three percent up to age 100 to find out if what you need is able to be generated from the assets that you have.
BRIAN: I mentioned that our practice at Decker Retirement Planning is extremely math-based. And so we make sure that you’ve got the income that you need and want for the rest of your life. And we want to make sure that what you need and want is factually and mathematically able to be generated. Okay, so that’s number one. Make sure you have a budget, make sure it’s realistic, and make sure that you’ve got around a 20 percent bump from what you spent in your working years to now in retirement.
BRIAN: The next thing is inflation protection. Inflation is one of the top worries and fears of people in retirement. Do you know 20 years ago, Mike, was only 1997?
MIKE: That seems like it was yesterday, I mean, doesn’t seem that long ago.
BRIAN: Yeah. And I just remember when I was a kid, this dates me, gasoline was under a dollar. I remember actually filling up my motorcycle for 25 cents. That was one gallon.
MIKE: Mm-hmm.
BRIAN: I remember that cars were a few thousand dollars, and homes were under 50,000. So inflation can change your life when the cost of the things that you need in your life go up dramatically. Now we’ve had low inflation for the last decade, but not when it comes to healthcare. Not when it comes to, well, education, healthcare, and some of the food costs and energy costs have gone up quite a bit.
BRIAN: Homes have gone up, cars have gone up. So these things are things that retirees use and consume, so we’ve got to make sure that what is okay for you today in retirement, got to make sure that you have protection to make sure that 20 years from now that you’re going to be fine. So we have five parts of our inflation protection. And Mike, I bet we’re going to end this show on this. Number one, we put in a three percent cost-of-living adjustment.
BRIAN: So every year, the funds that you draw from your plan go up three percent. It works pretty well to give you one way to help you protect you from inflation. That’s just number one. Number two, we price in any inheritance that you’re going to get. I know that’s a horrible subject and topic. But if it’s going to happen, then we try to be conservative as far as number of years and the dollars coming back. But that event is going to happen, and we want to be conservative in pricing that in.
BRIAN: Number three is any real estate acts as a tremendous hedge for inflation. If we have high inflation, then hard assets like real estate go up beautifully in value, along with higher interest rates, and they protect our clients from higher interest rates. So if you have real estate, whether it’s your residence, or rental real estate, it acts as a wonderful hedge. Number four is called downsize.
BRIAN: Downsizing is when you’re in your late 70s, early 80s, your joints hurt, your back hurts, you’re no longer interested in stairs or gardening. And that’s when you sell your home for X, buy a condo for Y, and you inject the difference, because X is larger than Y, and we make sure that that acts as an inflation hedge. It’s another source of funds, usually later in life, and we account for that. The last thing is the hedge that we have for our risk bucket.
BRIAN: We plan at six percent, when in fact, the managers have done almost three times that. So it creates a buffer, 10, 15, 20 years from now, that acts as a wonderful inflation hedge. Between all of that, the COLA three percent, the inheritance, the real estate, the downsize, and the risk bucket growth, those five things provide an amazing, very effective, efficient hedge for inflation, where we as fiduciaries can look at our clients and tell them that they really don’t have an inflation problem.
BRIAN: Mike, we actually have time for one more.
MIKE: Let’s do one more real quick, in two minutes.
BRIAN: Okay. In two minutes. The biggest lifestyle-changing event on this whole list is this one right here. Stock market crashes. They come around typically every seven or eight years. We’ve talked about them in this show. Our clients are drawing their income from principal guaranteed accounts for the first 20 years, and so they don’t have any stock market exposure on their retirement income, and so they don’t have to worry about, Mike, the banker broker model.
BRIAN: Getting a call from their banker broker saying, “Hey guys, you know that income stream from the four percent rule? Well, we got to dial it way back to protect your principal to make sure you don’t run out of money before you die. Do you mind going back to work? Do you mind selling your home, moving in with the kids? Because we just took a 40 percent hit, and now you can’t draw from this like you used to.” I hope this is common sense, because when it comes to protecting your retirement, we are trained Decker Retirement Planning to do things quite different from the banker broker model.
BRIAN: Mike, this is an important difference, that we should have people come in and see. When it comes to stock market crashes that typically happen every seven or eight years, when you’re retired, when you’re in your 20s, 30s, and 40s it’s no big deal. You just go roll through it. But when you’re over 55 years old and you take a 30 or 40 percent hit on all that you’ve accumulated over 40 years, that’s a big deal. That is a life-changing event.
MIKE: All right. Thank you so much for listening this week, and we’ll continue our discussion next week. Take care.
