Today on Decker Talk Radio, Mike and Brian Decker discuss the Trump Tax Plan, what happened with Italian Prime minister Matteo Renzi, year-end dues and are challenging bankers and brokers to hold them to a high standard. This week is jam packed with information so sit back and enjoy.
MIKE: Good morning, and thank you for listening to Decker Talk Radio’s Protect Your Retirement, a radio program brought to you by Decker Retirement Planning. This week, we’re talking about the Trump Tax Plan, what happened to Renzi, year-end to-do’s, and we’re challenging the bankers and brokers to hold them to a higher standard.
MIKE: 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, from Decker Talk Radio’s Protect Your Retirement. We’re excited for the show today, and Brian Decker, I wanna introduce him again. He’s a wonderful fiduciary planner-that’s an important word, fiduciary, from Decker Retirement Planning, out of Kirkland, Washington. So, we’re grateful to have him on the show today, and we’re gonna get right to it, starting with Trump Taxation, Trump’s plan and how he wants to move forward with our nation and his taxes. So, Brian, let’s kick it off right there. What is Trump trying to do with his tax plan?
BRIAN: Okay, so let’s talk about economics. Econ 101, that I learned at the University of Washington, teaches that there is a breakpoint, it’s called the Laffer curve, of where, if you raise the taxes, the revenue actually goes down.
BRIAN: So, for example, let’s say, Decker Talk Radio listeners, you’re working hard, you’re providing for your family, and your taxes are at 30 percent. The government thinks, well, why don’t we generate more tax revenue by raising taxes to 40 percent? So, 40 percent is what they’ll take now. You’re still working hard to provide for your family. You’re keeping 60 cents on the dollar. They decide they need more income, so they raise it to 50 percent. At 50 percent, some people will say it’s not worth it.
BRIAN: At 60 percent, some people will say it’s not worth it. At 70 percent tax rates, some people will say it’s not worth it going to work. At 80 and 90 percent… during the Carter years, the top tax rate was at over 90 percent. So, you take people out of the workforce that decide that they’re not gonna work their butts off where 50 cents on the dollar or 60 cents on the dollar goes to the government. So, that’s called the Laffer curve. The Laffer curve sees revenue go up to about 35, 40 percent and then it drops.
BRIAN: People leave the workforce and would rather not go to work if they’re gonna give 40, 50, 60 cents on the dollar to the government. So, that’s one thing, the Laffer curve. The second piece of information, before we talk about the Trump Plan, is that taxes… well, actually, I’ll just get into it. The tax plan has established three brackets: 12 percent, 25 percent, and 33 percent, and the top rate kicks in with incomes at 225,000.
BRIAN: So, right off the top, there’s a seven percent reduction in the top marginal rate. Here’s what I was going to say before. I wanted to give the rates first and then say this: there was more revenue generated in the U.S. government tax revenue when Reagan cut taxes than there was during the Carter years when tax rates were much higher. So, the economics, Econ 101, taught in any school, shows that the Laffer curve has been seen as something that has been used and demonstrated for decades.
BRIAN: Secondly, money goes where it’s treated best. So, it’s no accident that a lot of companies are establishing themselves in Ireland. Mike, guess what the corporate tax rate in Ireland is?
MIKE: I’m just gonna take a stab in the dark here and say 20 percent.
BRIAN: 15 percent. 15 percent, yeah. And so, money goes to countries where it’s treated best.
BRIAN: It’s treated best, meaning, where you can employ more people. Employment is higher when tax rates are lower, corporations thrive. It’s not a matter of… well, I won’t even go there. I don’t want any politics into this, but anyhow, the Trump tax plan has a 12 percent, 25 percent, and 33 percent tax rate, with the top tax rate kicking in at 225,000. The standard deduction will be raised from 12,600 to 30,000, which means that anyone who wants to itemize their deductions, when you have a standard deduction of 30,000, that’s high enough that it takes away a lot of mortgage interest, and also people running around collecting receipts for tax credit.
BRIAN: So, it will; simplify our tax code with three rates. Raising the standard deduction will also be helpful as fewer people will itemize. On the corporate side, the corporate tax rate for the United States, is the largest in the world. Trump wants to lower it to 15 percent. The lower the rate, it broadens the base, collects more revenue, and maybe re-collect and repatriate some of those off seas funds that are out there right now.
BRIAN: Trump wants to apply that not just to sea corps, but also pass-through entities such as LLc’s, S-Corps, and partnerships. That, in a nutshell, is the tax plan as we know it right now from the Trump campaign president-elect.
Now, let’s get into free trade. Trump talks about how he likes free trade, but the press is talking about some of the ways that… like, with the Carrier deal, and NAFTA, of where, Trump wants to renegotiate some of the free trade agreements.
BRIAN: I’m not an apologist for Trump. Free trade is something that benefits countries. What I understand Trump to be saying about the trade deals like NAFTA and TIPP, is that, free trade is okay as long as the United States is not left carrying the bag and being dumped on by other countries in their trade agreements. I think that’s my interpretation of why he wants to renegotiate some of these trade agreements.
BRIAN: Okay, now let’s get into Renzi. Renzi was voted out last week, week ago, today, and the Italian people saw Renzi as establishment and voted him out. Renzi, in my opinion, was a chance for the Italian governments to be simplified and made it possible so that the people could get things done. There has been about 63 different governments in 70 years in Italy, making it virtually impossible to get any changes-very important changes, done in Italy because of their intricate and very complex political process over there.
BRIAN: The reason this is important is because the banks in Italy have more non-performing loans than any other country, with the exception of Greece, and Germany cannot afford to handle all of the loan losses for its country plus Greece, plus Italy. And then we have Spain and Portugal waiting in the wings. Portugal, Italy, Greece, and Spain, PIGS, the PIGS, those four countries have non-performing loans which, if loans were marked to market, meaning that if they were recognized as real value today, and actualizing defaulted loans for what they actually are, many banks in the European Union would be rendered technically insolvent.
BRIAN: We don’t wanna do that because there’s a potential for contagion around the world with many banks who have shares or loans that are shared with the Italian or Portugal or the EU banks. It makes it very difficult for banks around the world and would be a contagion risk, or a domino risk, for them. So, with Renzi out, the expectation was that there would be a huge hit on the banking systems around the world. It started to, but it didn’t happen. On Monday morning, the world markets recovered very quickly, kind of like Trump, when the markets were down 700 points, 800 points, and then the day after the election, the markets rallied.
BRIAN: So, we’re having an anti-establishment vote with Brexit, with Trump election, and now with Renzi being voted out. And now, also with the South Korean president, Park, being ousted for corruption. Brazil is ousting their president. Around the world, there is very much a populace movement where people are taking their countries back. It’s very interesting to watch. Okay, now, Mike, I’d like to get into three things that Decker Talk Radio listeners need to do by year-end.
BRIAN: There’s a 12-31 deadline that’s just three weeks away, and we wanna make sure that our listeners know there’s three very important things that need to be done by 12-31. Can we jump into that or do you…?
MIKE: Absolutely.
BRIAN: Okay.
MIKE: Let’s transition to that here really quick, but I do wanna point out, just before we get into this, that this is not something you wanna take care of on December 29th. These are things you wanna take care of ASAP because, for the first one we’ll talk about, which is required minimum distributions, you have to submit the request and then actually have it processed, and sometimes these companies can take a day or two.
MIKE: So, procrastination is not key here. You absolutely wanna take care of these things first. And, Brian, can we jump right into RMD’s as the first one?
BRIAN: Yep. RMD’s are required minimum distributions. Once you’re 70½-years old, the IRS requires that you take a certain percentage out of your IRA so that the government can tax you on it. Now, I always thought that IRA’s were fantastic until you throw in the component of required minimum distributions. Imagine that the government wants you to get that account as big as possible so that you can retire on it.
BRIAN: It sounds all philanthropic and wonderful until you know that, at the very end, the government will want to tax you on that. So, would you rather pay tax on a 30,000-dollar IRA or a 300,000-dollar IRA? Would you rather pay tax on a 300,000-dollar IRA or a 1.5 million-dollar IRA? Obviously, the lower the number, the better. So, we’ll talk about conversions next, but the required minimum distribution is where you take your total value of your IRA’s in your name, as of 12-31 of the previous year, 12-31-15, and divide it by the divisor that you can find online, under required minimum distributions, called factor.
BRIAN: So, if you’re 70½-years old, you’ll be given a factor. You divide your total value of your IRA’s as of 12-31-15, and it gives you a number… let’s say it’s 15,000. That’s your required minimum distribution. You have to at least take 15,000 dollars out and process that by 12-31, which is three weeks away. Hope you do this because if you don’t, the penalty is 50 percent. So, let’s say that your required minimum distribution is 20,000, and you pull out 10, you have a 5,000-dollar penalty, and then you’re taxed on the other 10,000 that you have to pull out to make up.
BRIAN: This is a big deal, so we wanna make sure, Decker Talk Radio listeners, that you are on it, that you call whoever your custodian is; your banker, broker, Schwab, Vanguard, Fidelity, TD Ameritrade, whoever your custodian is, call them, and ask for this information, if you’re 70½-years old in calendar year 2016. If so, you’re required by law to pull a portion of your money out of your IRA, and that deadline is three weeks away. Any other comments on that, Mike, before we move on to the next thing?
MIKE: No, you said it perfectly. The next one, which a Roth contributions/Roth conversions, that one I feel, goes hand-in-hand with planning and with taking care of these year-end to-do lists. So, let’s keep going with Roth conversions and Roth contributions.
BRIAN: Roth IRA’s, Roth conversions… let’s talk about Roth accounts in general. Roth IRA’s grow tax-free, they distribute income back to you tax-free, and they pass on to your beneficiary as tax-free.
BRIAN: We have this as a golden-colored account in our planning because it is fantastic what that account can do. Roth IRA’s should be in your fastest-growing account, your longest-term account. And so, we don’t use that in our buckets, one, two, and three, where we’re distributing income in the first 20 years of retirement. We use that on our fastest-growing account, our risk account, so we know to the dollar, mathematically, how much money you should convert from an IRA to a Roth.
BRIAN: The money that our clients have that is Roth money goes into the risk accounts, and then any other money that’s IRA money, we convert, not contribute, we convert from an IRA to a Roth, so that we can grow that money tax-free. What we do-and this is very important, Decker Talk Radio listeners, we call our clients, we find out where their income is for 2016, we try to take out any adjustments and tax credits and deductions. We look at the AGI, the estimated Adjusted Gross Income, minus the standard deduction, and we look at your tax brackets, and without raising your bracket, we convert what we can from an IRA to a Roth.
BRIAN: So, every year, we chip away at this. So, over five to seven years, we get all your money converted from an IRA to a Roth in your risk bucket. So, not all of your investment money, but in this one account is specifically where our clients convert the IRA to Roth. That conversion has to be done by deadline, 12-31, three weeks away. So, Decker Talk Radio listeners, we hope that you’re on it. Call your banker, broker, financial advisor, or your custodian, and have them help you with this with the outline we just gave you.
BRIAN: Look at your Adjusted Gross Income, see how much room that you’ve got before you raise in your next bracket, and take that money. You’ll be taxed as income this year, and then you’ll be able to, every year, move more money over from your IRA to a Roth. You’re proactively paying tax at the lower level so that accounts can grow tax-free.
MIKE: Brian, I’ve got a quick question for you. When you do your extensive planning with the clients and people that go through Decker Retirement Planning, your office in Kirkland, this is a conversation you have with every single person.
MIKE: How often are you surprised or how often do you see people that are aware of this? Because, from what I’ve seen and experienced, people wanna grow, like you said earlier. They wanna grow their Roth, and if you said that we took someone’s IRA account, they wanna see their IRA grow. And if you took someone’s IRA account from 100,000 and grew it to 1,000,000, they always say, or they typically would say that they’re happy with you. So, when you’re planning with people, how often are people aware of this when you’re working with them at Decker Retirement Planning?
BRIAN: We try to give ‘em advice, Mike, and as a matter of fact, we’re onboard with the same thing.
BRIAN: I’m gonna split this up into two parts. If you’re 55 and older, you do your Roth conversions like we’re talking about, where we identify your long-term money and you convert IRA’s to Roth’s. There’s different ways to convert it. We can convert it usually just straightforward with the IRA being converted and taken as income. We wanna be careful on making sure we don’t cross brackets. But, let’s talk about, Mike, in answer to your question, the 55 and younger group.
BRIAN: We hope that they’re contributing to their Roth accounts, not converting, contributing to their Roth accounts, number one. Number two, if their employer has a Roth option, we hope that you’re using it to maximize the amount of money that’s going into your Roth, so that in your 20’s, 30’s, and 40’s, you are handling this and maximizing the amount of money that’s growing tax-free. So, Mike, did that answer your question?
MIKE: That did, yeah. Thank you.
BRIAN: Okay. All right. So, now, the last thing: with a 12-31 deadline, is something called tax-loss selling. Tax-loss selling is where you’ve got gains in your account that you know that you paid tax on and to minimize the tax, the capital gain, you look through your portfolio and see if you can offset those gains with some losses. Let’s say that this year, you’ve got gains of 60-70,000 in a combination of short and long-term capital gains, but you’ve got this one dog.
BRIAN: It’s just a dog. It might be a gold stock. Gold stocks have gone way down this year. Bank stocks have gone down this year. Italian bank stocks have gone really down. They’ve gone down 85 percent so far, this year. But, let’s say that you have some dogs. You can sell them, wait 30 days, and you can re-buy them next year. It’s called tax-loss selling. You have to be out of the stock for at least 30 days, or else it’s called a wash sale, and you cannot count the loss to offset the gains to minimize your tax.
BRIAN: Tax-loss selling has a deadline of 12-31, meaning that the sale has to be done before year-end, or else any losses sold next year count as calendar year, 2017 losses. So, go through your portfolio, try to minimize your taxes and offset some of the gains that you’ve taken this year, and you do that by selling your dogs before 12-31. Those are the three things that have a deadline for this year: Required Minimum Distributions, Roth conversions, and tax-loss selling.
BRIAN: Mike, the rest of the program, and we’ve got 35 minutes, the rest of the program, I wanna throw down the gauntlet and challenge the banks, brokers, and financial advisors to be fiduciaries to their clients. I can’t tell you how many times that people come in here and they say that their banker and broker told them that they were fiduciaries. So, we’re gonna be crystal clear on what it takes on how they should be acting and how they should be treating you if they really are fiduciaries. We’ll show quite a contrast.
MIKE: Before we do that though, I wanna extend an offer for the year-end to-do lists here. If you’re banker, broker, or financial advisor, whatever they wanna call themselves, is not talking to you about strategic Roth conversions, they’re not giving you all the information that you probably should have. And they’re not doing everything in your best interest.
MIKE: All right, so, Brian, let’s get started with throwing down the gauntlet. Should we define what a fiduciary is before we hold them to that higher standard?
BRIAN: Yeah, let’s define what a fiduciary is. A fiduciary has to have three things that are working. Number one, a fiduciary has to be an independent company.
BRIAN: A company that is not being told-where the advisors are not being told what they and can’t offer to their clients, to their customers. So, number one requirement for a fiduciary is independence. Number two, is that the license that they carry is a Series 65 license. A Series 65 license is one that, on the Securities side, cannot take a commission. Commissions are buried, for example, in things like, non-traded RIT’s, things like, variable annuities.
BRIAN: Those are some of the highest commissioned products out there at eight percent, nine percent, 12, 14 percent, in the case of non-traded RIT’s, and is one of the reasons Elizabeth Warren threw down the DOL regulations for more transparencies so that clients can see the raping and pillaging that’s being done by these bankers and brokers with their clients, just gouging them with horrible costs that are being hidden and are non-transparent. A Series 65 person who is a fiduciary, cannot charge security commissions.
BRIAN: Everything has to be above board and visible. So, we cannot take any commissions on mutual funds, on variable annuities, nor on non-traded RIT’s. By the way, all three of those things are not a part of our practice anyhow. The third and final part of a fiduciary requirement is that the structure of their portfolio is that it’s a registered investment advisory firm, an RIA.
BRIAN: Registered Investment Advisory firm is the corporate structure. Series 65 is the licensing and there must be independence with their people. Now, let me give you a contrast. If I worked for XYZ Brokerage Firm, I’m gonna be told to use XYZ mutual funds. And I don’t wanna use company names here, but those brokers are paid more to offer their firm’s own mutual funds.
BRIAN: We see this all the time with Oppenheimer brokers using Oppenheimer mutual funds. Are Oppenheimer mutual funds the best funds based on performance, based on protection of assets in a down market? By the way, those are the only two real standards for risk money. Number one, is when markets go up, a fiduciary wants to have their clients receive the highest returns in a up market, and when the markets go down, a fiduciary wants to make sure that those accounts have some asset protection, so that you don’t get hammered every seven or eight years when the markets drop.
BRIAN: The models that we use are tracking with the S&P when the markets go up, and they have protection of capital measures when the markets go down. Let me say this differently. By the way, Mike, this would be a good time to bring an offer in for Decker Safer Retirement Radio listeners because you need to see this. Do you know that Vanguard says that 85 percent of money managers and mutual funds underperform the S&P every year, every year, so when you see that on the upside, the models that we are using are tracking with the S&P when the markets go up, and when the markets go down, like they did in 2001, ’01 and ’02, and ’08, those were two 50 percent drops, if you take ’08 to include October of ’07 and March of ’09.
BRIAN: And then you include the 50 percent drop from March of 2000 to March of ’03. Those are two 50 percent drops and yet the models that we’re using today made money in every year in the last 16 years. If you don’t know about these models, these are called trend-following models, you should give us a call. You should see these managers and how they work. We’re fiduciaries. We are offering these models because they’ve been available for a long time. Trend following, two-sided strategies have been around for 30 years, and we as fiduciaries, want to optimize client assets and we’re one of the few that are offering these.
BRIAN: All right. So, we talked about the three requirements of a fiduciary, and I used as an example how banks, brokers, financial advisors… if you were to ask someone, this would be great. Ask your banker, broker, or financial advisor, why did you recommend these mutual funds or this money manager to me? I would be curious to see what kind of answers that you get. Here’s our answer: we’re mathematical in our practice here at Decker Retirement Planning in Kirkland.
BRIAN: What we do is we go through the Morningstar database, biggest database of mutual funds in the world, and we go through the Wilshire database, the biggest database of money managers in the world, plus we use Theta, and TimerTrac [PH], to see who in the world is beating the six managers that we have. And, by the way, we only look for two things. One is keeping up with the S&P when the markets go up. We want the biggest gains in upside markets, and number two, we want to actually make money when the markets go down.
BRIAN: We want that combination, and if you’re not getting that, you are not dealing with a fiduciary. So, in our mathematical approach, every time we go out and we look for this combination, we get around 60 or 70 that legitimately beat the managers that we have, but they fall into four categories. Number one, yes, they’re beating us, but they’re closed to new investors, I can’t use them. Number two, their hedge funds and we won’t use them. Why won’t we use a hedge fund? The reason is because hedge funds have a philosophy that is toxic to the retirees.
BRIAN: Let me give you an example. The fee structure in sense high risk. What I mean by that is, let’s say that we are a hedge fund manager out of Los Angeles, and we get paid two ways. One percent fee keeps the lights on, that’s one part of the fee. But what puts Ferrari’s in our garages is the two and twenty. We split 80/20 all returns above two percent for the client. And what that does is, let’s say that it’s November 1st, 2016, we’re down five percent-I’m just making this up, what are we gonna do?
BRIAN: Predictably, we, as managers, because we get the big money only if we get the accounts above two percent, that’s where we make our big money. We’re gonna goose the portfolio with options, futures, derivatives, and leverage, to get that thing up there, and if we blow up the fund and have big losses, ahh, we could always start another one, it’s no big deal. We can’t have our clients have that kind of philosophy, so we hope that you don’t have hedge funds in retirement. There’s two-sided strategies that make far more money than the hedge funds and we can cut your costs dramatically.
BRIAN: We know what’s out there. We’ve seen managers that have 10-million-dollar minimum and their returns are far less than the managers that we’re using. So, we’ve done our homework. But, anyhow, there’s four reasons that some of these managers are beating us but are not on our platform. One is because they’re closed to new investors, two is because they’re hedge funds and we won’t work with a hedge fund, and three is when their per-account minimum is three million dollars or more. It’s hard to diversify that.
BRIAN: And number four is just plain volatility. Volatility is split in two; there’s upside volatility. You want all of that you can get. It’s the downside volatility which is, in easy terms, that’s just losing money, that we wanna minimize. We measure risk by volatility. There’s two mutual funds, the Bruce fund and CGM focus that qualify to be on our platform, but we can’t use them because in 2008, they both lost over 40 percent, so there’s no downside protection. So, of all the mutual funds and money managers that are out there, we look at them each quarter. We scan through since January 1 of 2000, we try to find who has better net-of-fee performance.
BRIAN: So, let’s talk about fees for a second. Here’s another thing that we as fiduciaries talk about. Let’s say, Decker Talk Radio listeners, you give your spouse a dollar, and he gives you a $1.10 back-he or she gives you $1.10 back, and you give me three dollars and I give you six dollars back. Who are you happiest with? Well, you’re probably happiest with me, and your spouse would say, wait, he’s three times more expensive, and you would say, it’s all about net-of-fee performance. It’s all about net-of-fee performance.
BRIAN: We don’t let the fee tail-wag the dog because if we did, we would put all of your risk money in the S&P 500 ETF, symbol is SPY. You have four basis points in fees, and you have diversification of 500 different companies, and you outperform 85 percent of money managers and mutual funds every year anyhow. But, in the last 16 years, 100,000 took two 50 percent hits and 100,000 grows to about 200,000 today. Average annual return is about 4½ percent.
BRIAN: 100,000 in the last 16 years, invested in the models that we’re using right now, grows to over 900,000, average annual return is 16½ percent net-of-fees. There’s a huge difference between a fiduciary… when someone asks us why we have the managers that we do, it’s because, mathematically, these are the best that we can find and we define best as tracking with S&P in the up markets and protecting principal in the down markets. Ask your banker or your broker or your financial advisor why he or she has chosen the mutual funds or the money managers that he or she has for you.
BRIAN: If they don’t give you the same answer that we just gave you, they are not acting as fiduciary for you, in finding the best managers that track with the S&P on the upside and protect principal on the downside. Okay, here’s another active fiduciary that is gonna be very, very important. And that is, when it comes to the rate of return-or the amount of risk. Let’s go with the risk first. Bankers and brokers have the asset allocation pie-chart model, keeping all of your money at risk.
BRIAN: Now, when you’re in your 20’s, 30’s, and 40’s, you can put all your money at risk ‘cause you’re getting a paycheck, and if you take a market hit you can always make it back. And your 401k is adding every month, your dollar cost averaging into the market. Everything is fine. It’s an accumulation strategy and it’s okay to use. But, if you use the pie chart when you retire, that means that you have all of your money at risk, strike one, you take significant stock hits when the markets rotate up and down and cycle every seven or eight years, for 80 years, the stock markets, for 80 years.
BRIAN: Every seven years, the markets get creamed. You can’t do that in retirement. You take a 30-percent hit every seven years in retirement, now, that rocks your world. Now, you have less money that you can pull in retirement and you’ve gathered a big nest egg, so 30 percent of that nest egg is quite a big chunk of change. It makes no mathematical sense, that’s strike two. Strike three is when the bankers and brokers tell you that to distribute your money, they’re gonna pull money out of a fluctuating account.
BRIAN: That means, when the markets go up, you compromise your gains, and when the markets go down, you accentuate your losses ‘cause you’re pulling money out of principal-guaranteed accounts, and you are committing financial suicide. The guy who invented the four-percent rule retracted it, said that it doesn’t work, and yet the bankers and brokers, since 2009, when he retracted it, still use it. In all of those areas, and that would be strike three, bankers and brokers and financial advisors are not acting as fiduciaries to you.
BRIAN: So, Mike, let’s take a break right now at Decker Talk Radio, Decker Retirement Planning in Kirkland. I wanna have people see in contrast-have them come in and see what a distribution plan looks like where the left side of this spreadsheet is all their sources of income. Their rental real estate, their income from assets, their pension, their social security, we add it all up, gross income, minus taxes, is annual and monthly income, with a COLA, Cost of Living Adjustment, up to age 100.
BRIAN: The left side allows clients to see how much they can draw for the rest of their life. That is priceless. The right-side shows, in the distribution plan, how much income they can draw for the first five, 10, 15, and 20 years from principal-guaranteed accounts and then their risk money, so that their risk account… we don’t have all their money at risk. We just have about 25 percent of their money at risk, 75 in principal-guaranteed accounts. We significantly shrink the client risk.
BRIAN: Mike, I just want people to be able to come in and see in contrast to the banker, broker, failed retirement model, we wanna show them what a fiduciary works with and what it’s like.
MIKE: Absolutely.
BRIAN: Okay. All right, so let’s continue. Here’s another way that the banker, broker, non-fiduciary model hurts you in retirement, and that is, they put your safe money in bond funds.
BRIAN: So, I just wanna point out that we’re all for having some of your money on the safe side, we get that, but, when interest rates are at or near 100-year lows and you put your safe money in bond funds, what you’re doing is you are putting… and by the way, they use what’s called the Rule of 100 to define how much money you should have in safe money like bond funds. The Rule of 100 says that if you’re 60-years old, you should have 60 percent of your assets in bonds or bond funds, 65-years old, you should have 65 percent, 70-70 percent, etcetera.
BRIAN: So, imagine that you have, with interest rates this low, you have 65 percent of your money, two-thirds of your money earning almost nothing, that’s a killer right there. This makes no mathematical sense, I’m just saying. And then on top of that, the bankers and brokers will tell you that your safe money is in bond funds. Bond funds lose money when interest rates go up period. It’s mathematically true. Bond funds-let me say this again, bond funds lose money when interest rates go up. The AGG, which is the Barkley’s Bond Index, lost four percent in the month of November, and that’s your safe money?
BRIAN: When you annualize that loss, four percent times 12, that’s huge. Four percent loss in one month. Interest rates around the world are starting to go up. Two months ago, our 10-year Treasury in the United States was at 1.6 percent, now it’s at 2.4 percent. That’s a huge percentage move. But that’s happening with most all countries around the world. Interest rates are starting to go up. When interest rates went up from 1965 to 1980, that 15-year period, the banker/broker model would have lost you huge amounts of money every year when interest rates went up, almost every year for 15 years.
BRIAN: Now that interest rates have been going down since 1980, so for 36 years, interest rates have been going down, now they’re starting to trend up again. So, you’re not paid much money when interest rates are this low, and you’re probably going to take double-digit losses on your safe money. Again, I just get passionate about this because you, Decker Talk Radio listeners, if you have bond funds in your financial plan, in your portfolio, and your advisor is telling you that its safe, it’s like a math teacher telling you that two plus two is 20.
BRIAN: It’s demonstrably false. Now, it’s not okay to say, hey, Brian, I don’t have any bonds or bond funds. That’s even worse ‘cause now all of your money’s at risk and we’ve gone seven years without a market correction. What’s the definition of a market correction? It means a 20 percent peak-to-trough stock market drop. We are now in the second-longest period from 1990 to March of 2000, I think that 10-year period is the longest period ever without a 20 percent correction.
BRIAN: I think that’s right. So, we are now in the second-longest period… it’s like being in musical chairs when the music’s been playing for quite awhile, and you know that the music is gonna stop pretty soon. So, we’ve gone the second-longest period of time without a market correction, and to say that, in retirement, to boast that you don’t have any bonds or bond funds, that’s like saying I don’t have any parachute. I just feel great. You need to have safe money, but we are condemning the bankers and brokers for telling you that your safe money is in bond funds or bonds when interest rates are this low.
BRIAN: There are vehicles… and Mike, this is another offer that we wanna make, because these are the three major pieces that are missing most people’s retirement. Number one, to use two-sided trend-following models that are designed to make money in up or down markets so that our clients can have exposure to the risk markets and not take the hits when they come around every seven or eight years. Number two, to use a distribution plan so that they can see how much money they can draw and we can shrink their risk as much as possible.
BRIAN: And number three is to make sure that they know about safe money investments that are principal guaranteed and can give you some good returns. Before 2008, we used to use CD’s where we could get five percent on a 5-year CD, seven percent on a 10-year. After 2008, those rates were crushed, and we’ve switched over, being fiduciaries and looking at all the options that are available, such as CD’s, Treasuries, corporates, agencies, municipals, even fixed annuities.
BRIAN: We looked at anything that gave us a fixed rate investment and when fixed rates plummeted, we as fiduciaries, did not anymore recommend that our clients lock in a fixed-rate. A 10-Treasury or even a 10-year CD right now is 2½ percent. That’s not the best thing. That’s not the highest rate that we feel that our clients can get. There’s something called an equity-linked CD or an equity-indexed account. Here’s how these work.
BRIAN: And by the way, just like a golf bag has 13 golf clubs, we don’t put all our client’s money in this. It’s a good thing, but we just use it for some of your account. Equity-indexed accounts or equity-linked CD’s are offered by banks and insurance companies and when you put money in them, you make about 60 percent of the index gain. Let’s use the S&P 500 as an index. When the index goes up, you capture around 60 percent, historically around 60 percent of the gain, when the markets go up, and when the markets go down, you lose nothing.
BRIAN: In the last 25 years, these have averaged 7 percent. In the last 16 years, they have averaged around 6½ percent. We like them because they are mathematically objectively factually, the highest-returning principal-guaranteed investments out there. Mike, we should offer Decker Talk Radio people to come in and see what we’re talking about. I’m a visual, I like to have them see that there are safe-money options out there that can give you good returns, and if your banker and broker hasn’t told you about this, I will tell you why, it’s because they don’t offer any security commissions.
BRIAN: They’re not incented to tell you about these. So, these are called equity-indexed accounts, equity-linked CD’s. Some of the ones that we’re using right now this year are up over nine percent this year, and these are principal-guaranteed accounts. I wanna talk about the differences in the principal guarantees, the integrity of the guarantee themselves.
MIKE: Absolutely.
BRIAN: All right. So, let’s now talk about the different types of guarantees that are out there. We like to combine them into three different types. I’m gonna do the David Letterman three, two, one. The lowest one is called a corporate guarantee. This is Ambac, FGIC, MGIC. These are the corporations that step in and guarantee typically municipal bonds and they’re stamped AAA and insured because a company like Ambac, FGIC, or MGIC steps in and guarantees that those investments will pay at maturity.
BRIAN: The problem is, we used to use these before 2008, after 2008, so many states have signed on to pension obligations they can’t possibly pay back, that we feel very uncomfortable having our clients having any exposure to the municipal bonds. We’re not saying that all municipal bonds are going to go broke, we’re not saying that. What we are saying is that there is going to be a day of reckoning for the states to include all state obligations and have to go through a Chapter 7 or Chapter 11 type of reorganization so that the states can climb out of their debt.
BRIAN: It’s untenable. It’s unsustainable to have these pension obligations and all the debts that are tied to each state. So, we don’t want any part of that train wreck. Right now, the corporations with municipal bond exposure have about 17 cents on the dollar exposure. That’s far too low for us. We feel uncomfortable with the risk exposure currently, along with the other state debt with municipal bonds, plus the rates are so low anyhow that we just have steered clear of that entire sector.
BRIAN: The next thing has to do with FDIC. This is an assumed guarantee. We’re fine with it. We’ve used CD’s in the past. There’s no money there, it’s an assumed guarantee because you assume that the federal government’s gonna bail out your bank with tax-payer money. We’ve used it before. We’re comfortable with it, it’s just that with rates so low, we’re not really interested. The highest guarantee in the world… Mike, how much time do we have for this last piece here?
MIKE: We’ve got four minutes.
BRIAN: Okay. The highest guarantee in the world is a reserve guarantee. A reserve guarantee is where the bank or the insurance company takes your investments and these equity-indexed accounts or equity-linked CD’s, and they reserve five percent against your investment. Your investment is kept in short-term guaranteed instruments, such as banker’s acceptances, commercial paper, overnights. A third party, usually the CPA firm goes around every quarter and signs off with criminal liability that those reserves are there and marked to market, so that if the company shell goes down, the bank or the insurance company were to have trouble or to get in to trouble, those reserves are separate, and your money is kept safe.
BRIAN: That’s layer of protection number one. Layer of protection number two is at the state level, because every state captures a portion of the money and puts it into a reserve fund, such that, if there needed to be a backstop, if your money was compromised in any way, that the reserve fund can kick in at the state level. All fifty states have this reserve fund for the equity-indexed accounts or equity-linked CD’s, to make you whole in case you are compromised at the company level.
BRIAN: Third and final part of this guarantee is, all the states also require for all the banks and insurance companies that are involved in equity-indexed accounts, that they have a consortium agreement to make each other whole and cross-insure each other, so that if one company got into trouble, those clients could be made whole by the others that are involved in the same investments. So, there’s no higher guarantee in the world. It’s called a reserve guarantee. There’s no higher return right now available for principal-guaranteed accounts.
BRIAN: There’s no higher integrity of the guarantee. We as fiduciaries use these, and when you call us at Decker Talk Radio, and come in to our offices in Carillon Point in Kirkland, we’ll show you these. We’ll show you how they work, how they piece into the plan, and how we use them, and how they’re a very important part of making sure that our clients don’t get nailed and taken out of retirement when the markets crash every seven or eight years. Mike, do I have time to talk about how the pattern of the last seven or eight years, for decades, has been going on?
MIKE: You’ve got one minute. Can you do it in one minute?
BRIAN: Uh, I don’t think so. I’ll try. 2008, markets were down. Seven years before that, 2001, Twin Towers go down, middle of a three-year 50 percent bear market. Seven years before that was 1994, Iraq invaded Kuwait. Energy prices went up, interest rates went up, economy went into recession. Seven years before that was 1987, Black Monday, October 19; 30 percent drop in a day. Seven years before that was 1980. ’80 to ’82, in two years, the markets dropped over 40 percent.
BRIAN: Seven years before that was ’73, ’74; bear market, 44 percent drop. Seven years before that was ’66, ’67; over a 40 percent drop and it keeps going. Seven years plus the market bottom of March of ’09 is anytime. So, we are warning you, Decker Talk Radio listeners, please have a plan in place, if you’re retired, to protect your risk assets, ‘cause we’re due.
MIKE: That about wraps up our show today. For more information, go to www.deckerretirementplanning.com.
MIKE: Also, tune in every week, it’s KVI570 in the Seattle area for this radio show, or go to iTunes or Google Play to subscribe to this show via podcast. Take care, have a great week. Talk to you next week.
