BRIAN: Good morning and thank you for listening to Decker Talk Radio’s Protect Your Retirement, a radio program brought to you by Decker Retirement Planning.
MIKE: This week we’re talking about a continuation of the four parts you need in a retirement plan from last week.
BRIAN: The comments on Decker Talk Radio are of the opinions of Brian Decker and Mike Decker.
MIKE: [OVERLAP] everyone and welcome to another edition of Decker Talk Radio’s Protect Your Retirement. You’re listening to Mike Decker and Brian Decker from Decker Retirement Planning. Brian, the licensed fiduciary published author we’re excited to continue what we were talking about last week, which are the four points that you have to have in your retirement plan. Now if you are just tuning in for the first time, you can go to Decker Retirement Planning dot com to catch the last show or iTunes and Google Play, just search for protect your retirement. But right now before we dive into it, Brian, I know you’ve got some market news-some market updates that you want to touch base on before we get started. So lets dive right into that.
BRIAN: All right, so the market was down 10 percent peak to trough from fourth week of January to… Gosh it only took a couple weeks and by the way our risk managers were down 0.9 percent, just saying. Because we have two sided quantitative… Market’s a two sided market, it goes up and down. For the last 20 years, the best returns have come from quantitative computer models. Mike, that doesn’t surprise anyone, right?
MIKE: No, I don’t think so.
BRIAN: Okay and of all the computer models, two sided trend following models are the best performing models, so at Decker Retirement Planning because we are fiduciaries we are going to do the homework and plug in the best performing models for our clients. So the markets were down 10 percent, we were down less than one percent. But here’s the interesting market data. On the recovery, that was the best recovery ever after falling into correction mode a week ago, the Dow was rallied, every day an added close to seven percent. That ranks as the best ever recovering after falling more than 10 percent below it’s high for the first time in months.
BRIAN: But there’s carnage in the markets and it’s in the bond markets. Over the past two weeks, an average of almost two out of every three investment grade bonds have declined every day. That’s among the worst stretches in 13 years. Barely above the worst ever reading. Investors have taken notes by yanking eight percent of assets from bond funds. Why is that happening? It’s because of debt. Now you would think that conservative leadership in the White House would be anti debt, but it’s interesting to watch what’s happening.
BRIAN: Don’t you think it’s weird, Mike, that everyone was freaking out about the national debt when it was 60 percent of G-D-P. Now it’s 105 percent of G-D-P and no one cares. I think that’s weird.
MIKE: Well do you think it’s just they’re tired of the story? I mean because it was just trot out for so long and just beaten… the dead horse was kicked too many times?
BRIAN: I think that kick the can down the road is what’s expected instead of anyone expecting to solve that. During the 2016 election nobody campaigned on the deficit. Nobody. Not Bernie, not Hillary, not Trump. Not anyone in the primaries even.
BRIAN: Not even Rand Paul. Nobody said we should cut spending. A few people said we should raise taxes, but for social justice reasons, not for budget reasons.
MIKE: Just seems strange.
BRIAN: So now… Since the Trump budget, this last week people are piping in a little bit about the new trillion dollar deficit. But not very much. The answers of why this is not a big deal… Every other time we worried about it, it turned out to be nothing. If you ask the man in the street…
BRIAN: Say you were one of those local news programs and left your air conditioned corner office, went out on the street and interviewed some random people and asked them what-why is it bad that we run big deficit, I assure you not one person would be able to answer your question. The answer of course is and here’s the point of bonds and bond funds, why they’re losing money, it makes interest rates go up. There’s a phenomenon known as crowding out where the government gets to borrow before you do and if the government borrows too much, it pushes up interest rates and your mortgage goes up.
BRIAN: It’s helpful to consider that when interest rates go up, bond prices go down and you lose money on your bond funds. Anyway, nobody’s had to think of this stuff for a long time. The bond market’s been acting kind of crappy so people are thinking about it now. Both parties like to spend money, so the best check on spending so far has been a divided government, but I’m not sure even that’s going to work going forward. Now one last piece of market information before we dive in and before I get to this point, it’s more on debt.
BRIAN: I just want to point out that one of the problems, one of the many problems we have with the banker broker model is them telling you to put your safe money in bonds and bond funds. When interest rates are at or near all time record lows and the tenure treasury is now 2.8 percent, the lowest it’s gone in the last 100 years is two percent in 1940, but we got down to 1.6 percent in May of 2017, yeah. We got down to 1.6 percent. So when interest rates are this low, for any financial advisor to tell you to put your safe money in bond funds in our opinion at Decker Retirement Planning, that’s financial malpractice.
BRIAN: For two reasons. One is you’re not paid hardly anything on your money. But two, you lose principal when interest rates go up. Just like two plus two is four, you lose money on bond funds when interest rates go up. It’s that simple and it is financial malpractice to look people in the eye especially in retirement and tell them to put their safe money in bond funds particularly using something called the Rule of 100. The Rule of 100 says that if you’re 60 years old you should have 60 percent of all your investable funds in bonds and bond funds.
BRIAN: If you’re 65 years old, 65 percent. So that means that this fails the common sense test when interest rates are this low, you’re getting paid hardly anything on the majority of your portfolio and you lose money when interest rates go up like they have in the last two months. So just spouting off some common sense there. Now this news came out end of last week, the I-M-F warns that 22 percent of U-S corporations are at risk of default if interest rates rise. The median net debt across the S and P 500 is close to a historic high at over one and a half times earnings.
BRIAN: And interest coverage has fallen sharply. That’s a quote unquote from Christopher Cole, he’s from Artemis Capital Management. And his point is that trend evidence continues to point positive for equities right now after the recovery. My favorite weight of evidence indicator is the net Davis research [C-M-G?] U-S large cap long flat indicator. It looks at momentum and overall market breadth across 22 sub industries. When the market-when the majority of industries are in positive up trends, equity markets do best.
BRIAN: When just a few stocks or sectors carry the market in this industry higher and the majority are breaking down, equity markets fare worse. Right now, the net Davis research long flat signal is bullish, so this pullback that we had was a pullback in an up trend. G-M-Os put out a seven year real asset return forecast for many years. Mike, this is the most important thing of all the market research that I want to hand off in the front side and we’ll dive in after this. G-M-Os put out a seven year real asset return forecast.
BRIAN: In 1999, they forecasted 1.5 percent returns. That was too high because seven years after 1999 the markets still were negative. Today, G-M-O is forecasting minus 4.7 percent annualized returns for the next seven years. Now what is simply seven times minus 4.7, if you annualize that that’s a 50 percent drop. Yes that’s a minus sign there. So imagine your million dollar large cap portfolio is worth a half a million dollars in the year 2024. With buy and hold, that’s going to happen. That’s the forecast.
BRIAN: Many thought they were nuts in 1999 and they were exactly right. So what’s needed is after you lose 25 percent, you need a 36 percent return to get back to even. When you lose 50 percent, you need a 100 percent return to get back to even. I want to note that valuations are a poor market timing indicator, so what’s overvalued today can grow to be even more overvalued and that’s been the case over the last few years. But valuations are a great long term predictor of annualized yields.
BRIAN: I’ve got more here, but I’m going to stop there. Right now and I’m going to keep saying this at Decker Retirement Planning… Third week of January when the markets peaked, we were tracking at S and P 500 price earnings ratios of 25 times earning. There’s only been two other times that the market’s been that expensive at 25 times earnings or higher. One is 1929 and 10 years later the markets were lower and 1999 and ten years later the markets were lower.
BRIAN: So people today as we are getting-as we are earning back the 10 percent that was lost, people today that are in retirement are expecting the stock market to do something that’s never been done before and that is make money from this level 10 years from now. Historically, the markets are going to be lower 10 years from now because every time we’ve hit 25 times earnings, the markets have been lower 10 years from now. Every single time.
BRIAN: Our clients at Decker Retirement Planning have on the risk side a two sided strategy, so we fully expect to make money if the markets go down or if the markets chop and go up and down and go essentially net nowhere for 10 years, we do very well with the two sided mathematical algorithms that we use on the S and P, the Nasdaq, gold, silver, treasury bonds, and oil. That’s our portfolio where we have two sided computer models that have averaged over 16 and a half percent net [of fees?] for the last 17 years.
BRIAN: These are models that we as fiduciaries have gone out and found as the best performers that we can find net of fees. We’ve used the Wilshire Database, we’ve used Morningstar Database, we’ve used Timer Track and Theta and these are the best performers, so we plug that into our risk models. On the portfolio side for safe money if you are using the banker broker model and you’re pulling money out of a pie chart where all your money is diversifies across mutual funds and money managers, all your money’s at risk. By the way, that’s what the banker broker model wants because that’s how they gay paid. Is that in your best interest? No.
BRIAN: That’s in their best interest. But all your money’s at risk and it’s fluctuating. Mathematically when you pull money out of a fluctuating account, you’re committing financial suicide because you’re compromising gains as markets go up and you’re accentuating losses when markets go down. So we want to point out at Decker Retirement Planning that we want to make sure that you’re drawing income from principal guaranteed accounts. We ladder them. There’s buckets one, two, and three that are laddered in and are responsible for the first 20 years of income.
BRIAN: If markets go up, we participate, but if markets go down we don’t lose a dime and these have averaged around six percent for the last 10 years and that’s where we’re getting fantastic returns on our principal guaranteed accounts. That means that in the next 2008 and by the way we’re in year 10 of typically seven, eight-year market cycles, so we are in a very mature market. When, not if, when the markets tank the next time, our clients don’t lose a dime in their emergency cash. Not in their bucket one, not in their bucket two, not in their bucket three, and their risk account we expect to make money.
BRIAN: So this will not affect our clients, but it will deeply affect the banker broker model and the typical advisor out there that tells their clients to use the pie chart to diversify their funds. This is a big, big deal.
MIKE: You’re listening to Decker Talk Radio’s Protect Your Retirement on K-V-I 570 in the greater Seattle area and K-N-R-S 105.9 in the greater Salt Lake area.
MIKE: Brian, are you ready to get started?
BRIAN: Ready to get started.
BRIAN: All right, so I’m going to just quickly summarize what we covered last week and, by the way, if someone wants to go into detail on what I’m going to cover, Mike how would they do that?
MIKE: Oh last week’s or the whole history you can find on iTunes and or Google Play. Just go on the podcast side and type in protect your retirement.
MIKE: Pop up first one. If not…
BRIAN: Okay.
MIKE: You can also go to Decker Retirement Planning dot com, where we not only post all the shows, but we also transcribe them. I was talking to a few listeners the other day that called in just to chat with me and they actually read it on their commute on the bus or on the track system, so they just prefer reading it instead. So there you go. Couple options, many different medians [PH] you can get the information and it’s all about just getting the facts and getting the transparency you deserve, especially for retirement planning.
BRIAN: Okay, because this is part two of, part one was last week, of what essentially needs to be in your retirement plan.
MIKE: Yes.
BRIAN: First thing, and I’m going to summarize the first two, the first thing has to do with income planning. Making sure that you’re getting the income you need and want for the rest of your life and drawing it with a COLA, cost of living adjustment, to fight inflation and making sure you’re drawing it from the proper source, which is laddered, staggered principal guaranteed accounts and making sure that you know how much income you can draw for the rest of your life.
BRIAN: If you don’t know that, if you don’t know how much income you can draw and you’re using a pie chart, you’re guessing and a lot of very smart people are guessing and it creates high anxiety in retirement that’s totally unnecessary. Our clients have priceless peace of mind information to know-they know how much they can draw with a cost of living adjustment, where it’s coming from, annually, monthly, after tax income for the rest of their lives. That’s priceless and that’s point number one. It’s all about income. That’s essential information that you need to have in your retirement plan.
BRIAN: Point number two is comprehensive tax minimization. That’s got to be part of your plan and that is looking on lines eight and nine. And we talked about how we eliminate interest and dividends that your pay taxes on every year, typically from reinvested mutual funds and we bring-we usually save clients three to four, five thousand dollars a year by doing that. The next thing is the biggest tax saving strategy typically in our client’s lifetime and that’s knowing how much money to convert from an I-R-A to a Roth. A Roth is a golden, beautiful account for three reasons.
BRIAN: It grows tax free, it distributes income back to you tax free, and it passes to your children, your beneficiaries, tax free. Now we do a great job of growing your risk money. Let’s say we got it an I-R-A that you have for 250,000 dollars and we grow that money to a million dollars. Are you happy with this? Most people say of course we’re happy, that’s a four bagger. But when it comes to taxes you’re not, because you had a chance to pay tax on 250,000 dollars and now you’re going to pay tax on a million dollars.
BRIAN: So what we do is we do, we’re a math based firm, so we calculate to the dollar how much money you should convert from an I-R-A to a Roth. It shouldn’t be in bucket one, shouldn’t be in bucket two or three because those accounts their returns are too small and you’re taking the money too soon. It is only in your risk account and that’s the fastest growing account and that’s the one that we want to convert from an I-R-A to a Roth, not all at once, every year, yeah, every year we look at-see how much income you’ve made minus your deductions to get your A-G-I, your adjusted gross.
BRIAN: We look at your bracket and see how much room we have to convert from an I-R-A to a Roth without bumping your bracket higher. Last is we want to make sure that your estate transfer to your beneficiaries is done with zero taxes. Now our high, our bigger clients with three, four, five plus million dollars and higher, we do want to talk to your C-P-A and talk about other ways that we can greatly reduce the taxes on the income and how you draw your income…
BRIAN: and we typically brainstorm with foundations, family limited partnerships, and Nevada corporations to try to get your taxable or the taxes that you pay on your income way down. But part number two, part number one, is to make sure that the income components are taken care of. Part number two is comprehensive tax minimization. Part number three is securing what you’ve taken a lifetime to accumulate. We talked last week about liability coverage, which is an umbrella policy, it’s a rider on your homeowner’s insurance. Mike, guess what’s going to happen if someone bumps, if you bump someone with your car, what are they going to do in these days, this litigious society that we live in?
MIKE: They’re going to grab their neck and go oh and can’t they, correct me if I’m wrong, but they can then say, they can ask for a net worth statement before they can respond if they’re okay or not, right?
BRIAN: That’s right.
MIKE: Like there’s some crazy things you can do now and they can act, they can fake, they can do whatever they want. They have all the power in that situation.
BRIAN: They have a blank check over you. If they slip on your rental property and you should have de-iced the walkway and they hurt themselves, if you bump someone in the parking lot. Everyone knows that they have a blank check and they can sue you. And so the umbrella policy takes away and provides peace of mind…
BRIAN: It takes away the anxiety of working so hard to retire and then have something like this cost you several hundred thousand dollars. So we want liability coverage in place. Last week we talked about long term care. There’s six different ways for you to solve the long term care option and by the way this is worse dialing it up, going back and reading because, or listening to it, because there’s six different ways… The long term care industry will tell you that you have a 70 percent chance of living in a full time care facility.
BRIAN: If you Google U-S census and you ask in the U-S census how many-what percentage of Americans will spend time in a long term care facility, it’s not 70 percent, it’s 16 percent. And so we point out, being fiduciaries like we are, we point out the deception of that statistic. They count even one day in hospice, in hospice, as being in a long term care facility. We’re just saying that you have much lower odds of going into a facility than 70 percent. Okay now let’s get into life insurance. This catches us up.
BRIAN: So Mike, we’re 25 minutes into the program and we’re just starting new information.
MIKE: That’s typical. Lots to say, lot to tell.
BRIAN: All right, so life insurance. If you have it, keep it. If you don’t, you typically don’t need it. So we are licensed to sell life insurance and we rarely do because we are fiduciaries to our clients. A fiduciary is someone who’s required by law to put our client’s best interests before our company’s best interests. There’s three reasons we would use life insurance, but typically, at work you have life insurance. If you have it, keep it. It’s there to get you across the finish line into retirement. That’s very very important. So that’s one of the reasons that we like to see life insurance in place to make sure that lost wages are…
BRIAN: recuperated to the surviving spouse in case a breadwinner passes. So if you have insurance, keep it. Once you’re retired, you really don’t need it. But again if you have it, keep it. If you don’t, you don’t need it. Second reason that we use life insurance is if you have, say one spouse has a very large pension that dies with him or her. So income replacement is the second reason that we would recommend life insurance and that is spouse A dies, takes 60,000 a year in pension money with him or her and now that leaves the other spouse in financial distress.
BRIAN: So we want to make sure that we plug that hole and put together a solution so that that spouse has peace of mind for the rest of their lives and income replacement on that pension. Third and final way that we typically have recommended life insurance is to pay estate taxes. But now they’ve doubled the estate tax exclusion. Now for portfolios over 11 millions dollars, one of the options is to use an [eyelet?], it’s an irrevocable life insurance trust where you have life insurance pay the estimated estate tax.
BRIAN: It’s a very common strategy and we do that here at Decker Retirement Planning for clients that have life insurance, I’m sorry estate tax exposure. So those are the things that we cover on asset security and how to properly distribute your estate. Okay, when it comes to asset protection, part of the things that we want to protect and maintain is the relationships that your children have when you pass away. Now we covered this, gosh probably Mike two or three radio shows ago…
BRIAN: But I just want to remind you that part of what we’re trying to preserve, we’re not attorneys, we cannot give legal advice, but we do have to clean up the mess that comes from the way that some of these documents have been drafted. Let me give you an example. In your will or distribution instructions on your trust, the boiler plate language says under tangible assets quote tangible assets are to be equally divided. Quote unquote.
BRIAN: That might sound like yeah that makes sense. Until I remind you what tangible assets are. Tangible assets is your house, your car, your furniture, your jewelry, your artwork, etcetera. Now how in the world if you have three children and they’re all three piano players and you have one Steinway, how in the world can you equally divide that? You cannot. And it creates problems, because it’s not fair how the… It’s not fair two different ways.
BRIAN: it’s not fair to put one of your children as executor to try to make sense of this to your children and to be the ringleader in dividing these assets up. He or she, whoever that is, I feel sorry for them because the other children won’t be happy with them because it’s not fair. How in the world if you have two cars and a house and three kids, one car is a 67 Chevy, another car is a Porsche, a 2018 Porsche, and then the house is a million dollar house. You’ve got three kids, you try to divide that up equally. You can’t do it.
BRIAN: And it divides children. They say it’s not fair and it’s a problem. So what we recommend is common sense and that is there’s solutions to how to properly draft and properly distribute these things. Another problem in your documents is the compensation clause in your trust and power of attorney documents that says that your agent and your power of attorney is deserving of quote reasonable compensation. Well again, let’s say that you have two or three kids…
BRIAN: Johnny’s your agent, and they read that the power of attorney of the trust grants him or her compensation, reasonable compensation, they’re going to be asking well what’s reasonable, how much did you cut yourself a check for, and it’s not fair because you’re getting that money on top of the other distribution of assets. We recommend that you delete the compensation clause, talk to your attorney about this of course, but it causes problems. Keep the reimbursement clause, but get rid of the compensation clause.
BRIAN: But definitely talk to your attorney. I can tell you that it causes problems. The next thing is the trigger clause or the activation clause of your power of attorney documents and your health care directive. Your healthcare directive has ridiculous in boiler plate language that say things like you can pull the plug on your spouse when quote he or she no longer recognizes you. A little sarcasm added, not to mention that they might last another ten years when quote when he or she is diagnosed with a terminal illness.
BRIAN: There’s the sarcasm. Forget about the point that maybe it might kill them three or four years later. There’s just some ridiculous common sense things that we would recommend you take this to your attorney where your activation clause or your trigger clause on your healthcare directive says when two doctors determine that you’re kept alive artificially. Or in your power of attorney documents that when two doctors determine that you’re no longer capable of handling your financial or your healthcare affairs.
BRIAN: That’s more common sense. Other things where your documents… Gosh there’s so much more, but we can help you in working with your attorney in common sense changes to your will, your power of attorney, your living will, and your trust documents. So under asset security, we want to maintain the relationship that you have with your children after you pass away. By the way, Mike, this is probably a good point where, because I’m not going to go back to this, if they have questions about their estate documents, all of our planners at Decker Retirement Planning are ready and able to help on these points.
MIKE: Yeah. Ok, you’re listening to Decker Talk Radio’s Protect Your Retirement…
MIKE: On K-B-I 570 in the greater Seattle area and K-N-R-S 105.9 in the greater Salt Lake area. Brian.
BRIAN: All right.
MIKE: Lot more to still cover, so let’s keep going.
BRIAN: All right, we’re half way done. Okay the four parts that are essential to be in your retirement plan. We covered income, all the components of income. We covered tax minimization comprehensive. We covered asset security to keep what you’ve taken, to keep and protect what you’ve taken a lifetime to accumulate.
BRIAN: Now the fourth and final part, essential part, of anyone’s retirement plan is comprehensive risk reduction. By the way, if you’re with a banker or broker as your advisor in retirement, first of all I feel sorry for you because they are paid, first of all they’re no fiduciaries. Mike, how do we know if they’re a fiduciary or not? I think there’s a test, right?
MIKE: Yeah, there’s three questions we can ask.
BRIAN: Yeah, go through it.
MIKE: Well, the three questions you can ask, first and foremost, what’s their license? If they’re a series 65 license, they could be a fiduciary because that’s a fee base only.
MIKE: Those that have series seven, 63, other licenses only make money on commissions, which means they only make money when you take risk. Okay? So first, series 65. The second question you got to ask is they have to be independent. And that makes sense, right? You don’t want someone in the back office who has someone else telling them what they can and can’t sell, you want someone who can actually help you without any of these back office restrictions or guidance that they have to follow. Independent gives them the freedom to then talk to you on a one on one basis and give you what you want. And the last one is they must be, the independent company has to be a registered investment advisory firm.
MIKE: And Brian, why is the R-I-A so important for this list?
BRIAN: That’s the structure that’s recognized by examiners, state auditors, FINRA, the S-C-C, as the corporate structure that is available for fiduciaries, so you can’t be one of the three. You have to be all three. You have to hold a series 65 license, be independent, and have an R-I-A corporate structure to be a fiduciary. Many bankers and brokers tell you that they’re fiduciaries when then factually they are not.
BRIAN: So in comprehensive risk reduction, right out of the shoot, if you have a pie chart, you’re not dealing with a fiduciary because no fiduciary would ever, ever ever, recommend all of your money to be at risk. Now I was trained in the banker broker model, I came up through the ranks of the stock broker side, and my manager would come by and say Brian we get paid for keeping our clients at risk. He would let us know on a regular basis. Brian, we’re paid to keep people at risk.
BRIAN: So that’s why your banker and broker keeps all of your money at risk because that’s how they get paid. Is that in your interest? No. That’s in their interest. Because they’re not fiduciaries and they’re series seven licensed, they can hid a lot of the hidden fees in things like non traded REITs, where the banker broker gets paid 10 to 12 percent commission. Now you don’t see it because on a fixed-on a non traded REIT, they don’t price that thing, they don’t reprice that for years.
BRIAN: So they don’t show the price drop of 10 or 12 percent of your money that just went to your banker and broker for non traded REITs. I hope that we get the message out there that that is not in your best interest to do that. That’s in the banker broker’s best interest to make 10 or 12 percent commission right off and you never see it, it’s hidden, it’s not disclosed because they don’t have to because they are not fiduciaries. The second most ridiculous, horrific hidden fee commission product is the variable annuity, where the broker makes eight to 10, makes seven or eight percent right up front.
BRIAN: He gets paid every year you own it. The insurance companies get paid every year you own it. The mutual fund companies get paid every year you own it. Three layers of fees that usually add up to five to seven percent before you make a dime. We don’t like it, we don’t use it, we warn people to stay away from variable annuities because they don’t do anything, they don’t do anything good. They lag the markets when the markets go up. They lose more money because of fees when markets go down and the way that they’re quote unquote sold to you is it’s a way that you can have a guarantee and still invest in the markets.
BRIAN: Well the problem that they don’t tell you about is you have to die to get that guarantee. It doesn’t benefit you in your lifetime. And you get the high water mark. So let me… I’m going to stay [PH] this back sarcastically, you’re giving an insurance company your money and allowing them to charge you five to seven percent in fees a year and yeah they’re happy to give you the high water mark back after they’ve milked the account for all of those years. So we don’t like it. We want to warn people about it.
BRIAN: The third and final way that bankers and brokers historically typically hide fees is they use C as in Charlie, C share mutual funds. If you looks at your recent statement from your banker and broker and it says I shares or A shares, then that’s good. If they say C as in Charlie, that’s not good. Here’s what just happened to you. You told your banker and broker you didn’t want any front end or back end loaded funds, he or she said fine, and they give you C share mutual funds where they just tacked on one percent to themselves and they never told you, they never disclosed it to you.
BRIAN: C share mutual funds just doubled your fees where you’re no longer paying 1.5 percent, you’re paying 2.5 percent and you never allowed it. They just did that. C share mutual funds are so toxic that Schwab Fidelity, Vanguard, and T-D Ameritrade will not even allow them to be transferred into their organization. They’re required to be sold before those funds come in. That’s how toxic they are. So when it comes to risk reduction, the first thing we do as fiduciaries is we bring your risk way down.
BRIAN: So at Decker Retirement Planning, one of the things that we do is we’re a math based firm, we use a spreadsheet as a distribution plan to show you how much income you need and want for the rest of your life, how much income can be drawn for the rest of your life, and where it’s coming from. We have principal guaranteed accounts laddered in bucket one, two, and three, that’s responsible for your income for the first 20 years. So guess what? The only risk money that you have or need is money that can grow for 20 years before you need it.
BRIAN: So this is very important because typically our clients see a 75 percent reduction in risk when they come to our firm at Decker Retirement Planning. Let me say that again. A 75 percent reduction in risk at Decker Retirement Planning because of how we put the plans together. That also means a 75 percept reduction in fees because the banker broker model has you all at risk, they’re charging you on all of that money.
BRIAN: I mentioned it top of the program that is financial malpractice for a banker and broker to tell you to put your safe money in bonds or bond funds when interest rates are this low. You have interest rate risk. Interest rate risk is the amount of principal that you lose when interest rates go up. So for example in 1994 interest rates spiked from six to eight percent on a 10 year treasury in one year. The average bond fund that year lost 20 percent. 20 percent. In 1999 the 10 year treasury went from four to six percent in one year.
BRIAN: The average bond fund that year lost 17 percent according to Morningstar. If you go from where we are now at about 2.8 percent back to just 4 percent, that’s a hit to principal of almost 15 percent on what banks and brokers say is your safe money. When we want to point out that when interest rates are this low, near all time record lows, interest rate risk is at or near all time record highs and how in the world can a licensed financial advisor look you in the eye and tell you to put your safe money in bond funds when interest rate risk has rarely ever been higher.
BRIAN: Now let’s talk about stock market risk. Buy and hold in the stock market makes absolutely no sense. Now the bankers and brokers, they get their money from convincing you to be a long term investor, in other words for this is don’t try to time the markets, no one can time the markets. They will say to be tax efficient because if you never sell you never have to pay taxes and ride the markets and be a long term investor. Well you can do that in your 20s, 30s, and 40s. That’s fine. You’re in your accumulation years.
BRIAN: You can take a hit like 0-8 because you’re getting paychecks and you’re averaging in and your 401k all of that is fine, but when you take that last paycheck you’re ever going to take and you take a hit like 0-8, where from October of 0-7 to March of 0-9 that’s a 50 percent drop, you can’t afford to do that anymore. This is common sense. I’m going to come at this on different angles. When you buy and hold stocks, you have market risk of typically every seven or eight years the market’s going to come in and take you down about 35 percent.
BRIAN: 2008 that was a 50 percent drop. Seven years before that was 2001. Twin towers went down. That was the middle of a three year bear market, again 50 percent. Seven years before that was 1994. Iraq had invaded Kuwait, interest rates spiked, the markets were in-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 peak to trough. Seven years before that was 1980. The 80 to 82 bear market was a 46 percent drop.
BRIAN: Seven years before that was 73, 74. That was a 42 percent drop. Seven years before that was 66, 67. In 1966 and 1967, that was a 40 percent plus drop. And it keeps going. So seven years from the market bottom in 2009, March of 0-9, was 2016. We’re on borrowed time, this is a mature market. Markets typically rotate every seven or eight years and we are currently in year 10 of a seven, eight year market cycle.
BRIAN: Also I mentioned top of the program that we hit 25 times earnings. Any financial advisor to tell you to ride the markets out and to just suck it up makes no common sense number one, no mathematical sense number two. There’s been portfolio models, these are called two sided risk models, these are called trend following algorithms, that have been around for 20 years. These are not new. And they trend with the market, they ride with the market when the markets going up, they’re designed to make money when markets go up.
BRIAN: And they are designed to make money when the markets go down. Of the six managers that we are using, collectively they made money in 2000, 0-1, 0-2, and in 2008. They made money every year when the markets had been dropping. They’ve had bigger years than the S and P when the markets are going up. That’s a huge deal because 85 percent of money managers of mutual funds underperform the S and P every year. These beat the S and P and collectively they have made money every year. Let me give you another statistic.
BRIAN: 100,000 invested in the S and P January 1 of 2000 with dividends reinvested grows to a little over 300,000, average annual return is about four and a half percent. 100,000 invested in these models net of all fees grows to over 900,000. Average annual return is over 16 and a half percent net of all fees. When we talk about these models at Decker Retirement Planning, most people number one don’t have them. Most people number two are never told about them and we want to be very open having people come in, we’ll show them the names of all the managers, we’ll show them the returns, we’ll break it down for them net of fees, and we want to be very transparent.
MIKE: Now, just to be clear, this is huge, I mean these are managers, this is very transparent what we’re doing here, so pick up the phone right now so you can have not only a safer approach to your retirement, but get some transparency you deserve and really just see-compare notes to what you’re currently doing and what you could be doing.
MIKE: Brian, we got about 10 more minutes left before the show ends.
BRIAN: All right. So as far as risk reduction goes, what we do at Decker Retirement Planning is we reduce your risk, your stock market risk by about 75 percent and we also reduce your fees by about 75 percent. We eliminate interest rate risk because we don’t use any bond funds and we have reduced your credit risk. Your credit risk is the risk associated with your municipal bonds and their ability to pay principal back at maturity.
BRIAN: Now, when it comes to credit risk, this ties us into statistics that everyone knows about and that is 49 out of 50 states have taken on pension obligations they can’t possibly pay back. It’s beyond the mar… By the way, Mike, tell the listeners, because I know you know, what is the one state out of the 50 that is in the green in the black that has not taken on pension obligations they can’t possibly pay back. There’s only one.
MIKE: Yeah, I, gosh, it’s… I know which one it’s…
MIKE: But I’m just having trouble. Is it North Dakota?
BRIAN: It’s North Dakota, that’s right. So North…
MIKE: See I always get North and South mixed up for this question. But North Dakota because of fracking.
BRIAN: Right, North Dakota 18 months ago had a referendum to remove the state income tax because they simply didn’t need the money. They were doing so well. So the other… Before 2008, we had recommended and had used municipal bonds. After 2008, we have not. We recommend that clients if they, well…
BRIAN: There’s an e… Because of credit risk and this is the risk that pension obligations tie into municipalities and the state obligations, we are wary of the risk now that municipal bonds have for a couple reasons. One is the health of the state and its municipalities are tied into that. Second is the very weak coverage that the big corporate bond insurers have that cover the insurance, so [Ambac?], [Fidgick?], and M-G-I-C are the three biggies that cover municipal bond insurance when you have a [trip land?] insured bond.
BRIAN: They have on average about 17 cents on the dollar in assets exposure to their obligations. it’s very weak in their coverage and we want to make sure that clients know that they’re hoping, I guess, that all the chickens won’t come home to roost at the same time, but that’s not how it works. All the chickens usually do come home to roost and there’s a contagion domino effect typically when it comes to the credit risk situations. So if you have municipal bonds what should you do?
BRIAN: You should and mark this down, this is very important. When you get your monthly statement, look at the bond price. If you have a three, four, or five percent coupon bond, depending on its maturity it should be priced around 1-0-9 to 112, 1-1-2 to 1-0-9. Par is 100.00. If you have a municipal bond that’s trading below par and it’s got a three, four, or five percent coupon and its maturity is more than two years away, there is a problem and I hope that you pick up the phone and sell it.
BRIAN: I hope you don’t pick up the phone and call the banker or broker that sold it to you because they will justify why they sold it to you, there was no mistake, you should hold on and you’ll hang up the phone saying gosh I didn’t sell it, all right I’ll just trust them. Now we’ve been giving this advice for over 10 years. Four years ago, the bond prices of Puerto Rico started to break par. Now you know today Puerto Rico is trading at 20 cents on the dollar and everyone knows they’re broke. So we hope that you look at your bond prices every month and if they break par, you pick up the phone and sell it.
BRIAN: Now, right now today, here’s the following of some regions of the country that are breaking par in their municipal bonds right now. Chicago, New York, New Jersey, Los Angeles, and some of the California municipalities. There are many municipalities that are breaking par. We ho… Remember this is supposed to be your safe money. We hope that you treat it as safe money and try to salvage what you can and just flat out sell. So in comprehensive risk reduction, we’ve talked about credit risk, interest rate risk, stock market risk.
BRIAN: No more pie charts. That’s where all of your money is at risk and this has got to make common sense on why we want to reduce risk. Now some people will say well I’ll just use stop losses, I’ll just automatically put a 10 percent stop loss in. Well if you did that, markets came down just last week, took out your stop losses and now are going back to new highs. When that happens to you four or five times, where your individual stocks get stopped out, turn around and go on to new highs without you…
BRIAN: then human nature after five or six times of that, you will have mental stop losses. So let me tell you how this works out. Mental stop losses is where you see the market lose five percent, seven percent, 10 percent. At 10 percent you tell yourself if the markets get back to even that’s when I’ll start lightening up, but this time because we’re in a mature market, it doesn’t. Now you’re down 15 percent. Next thing you know, you’re down 20 percent and you’re losing sleep because you can’t afford to lose this kind of money.
BRIAN: Now you’re down 25 percent and you’ve got a gut ache and you’re not sleeping well. Now you’re down 30 percent, 35 percent, and finally you’re down 40 percent. You can’t take it any more and you just sell. I just described what I’ve seen many, many, many times. In my 32 years in the business I’ve seen this, human nature keeps people from doing the right thing in investing because of two emotions. Mike, what are they? What are the two emotions that keep people from making money in the stock market?
MIKE: Oh gosh, it’s greed and fear. Greed keeps you in the market longer than you should be and fear keeps you out of the market longer than you should be. It’s just…
BRIAN: Right.
MIKE: It’s that simple.
BRIAN: Fear tells you to sell at the bottom. Greed keeps-has you buying back in near the tops. So, it’s a statistic that the S and P in 100 years has averaged eight and a half percent. Guess what the average individual investor has averaged in the stock market? Not eight and a half, not seven and a half, not six and a half, not five and a half, not four and a half, not three and a half.
BRIAN: Three percent. Less than half the markets because of fear and greed. So do we use individuals for risk money? No, absolutely not. The best returns have come from computer algorithms for over 20 years and because we’re fiduciaries loyal to our clients, we use the highest performing net of fee risk managers out there. Now another one… Gosh, Mike, I don’t know if we have time for this. I’ll say it quickly. Another way that people in retirement say that they’re going to have their risk money invested is that they’re going to just buy the S and P.
BRIAN: And just let her rip. They’re going to buy the S and P for three reasons. One, because you’re diversified over 500 of some of the best companies in the world and that’s true. You own the index that beats 85 percent of money managers and mutual funds every year. Well that’s true. And number three, you can own it through E-T-Fs or exchange traded funds and pay only 0.05 percent or five basis points in fees and it’s almost you hardly have any fees.
BRIAN: So why not buy the indexes instead of paying an advisor to beat the indexes when most of the time they don’t. Well we as fiduciaries have one pushback to that and that is you have no downside protection with that strategy. So every seven or eight years, you’re going to get nailed. So in 2001, 0-1 and 0-2, you lost 50 percent with that strategy, you made it all back in 0-7 and then you lost it in 0-8 again, 50 percent October of 0-7 to March of 0-9. It took you 13 years. October of 2013 for you to get your money back. That doesn’t work. Not in retirement.
BRIAN: Mike, why don’t you close up the show and next week we’re going to talk about once you have your income plan, we want to hammer your income plan with the 22 biggest problems that you’ll face in retirement. We’re going to talk about each one. Stock market crash, inflation protection, death of a spouse. We’re going to cover all 22 things.
MIKE: Absolutely. So stay tuned next week. Also, you can tune in on iTunes or Google Play. We release the show Friday first thing. So you have that to look forward to if you want to catch it early.
MIKE: This is Decker Talk Radio’s Protect Your Retirement. We look forward to talking to you next week. Have a great rest of your weekend everyone and take care.
