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 giving the stress test you can give to your retirement plan to see how equipped it is, in case a market crash happens. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good day, everyone. This is Mike Decker and Brian Decker on another edition of Decker Talk Radio’s Protect Your Retirement. Brian Decker, a licensed fiduciary, that’s an important word if you haven’t heard it, listening to our previous shows from Decker Retirement Planning, out of Kirkland, Washington, Seattle Washington, and Salt Lake City, Utah. Excited for another show today. Quick recap, though, if you’re just tuning in for your first episode, go to Decker Retirement Planning.com or iTunes or Google Play, searching for Protect Your Retirement to catch all the previous casts.
MIKE: This is a 57-minutes, commercial-free, high-level, financial talk that we’re going through today. Today’s, what we’re talking about is the stress test. We’re going to give you some tools to give your own retirement plan a stress test to see if it will work. Isn’t that right, Brian?
BRIAN: Right. All right, let’s dive in. Let’s say that you, assume that you’ve got you income plan set. So your income plan for Decker Retirement Planning clients and Decker Talk Radio listeners, just so you know, the level that we expect is that on your income plan, it shows on the spreadsheet your sources of income. So your social security, your pension, your rental real estate, income from assets, we total it up, minus taxes, that gives you annual and monthly income with a three percent COLA to age 100, cost-of-living adjustment.
BRIAN: So that’s very, very important for you to see how much money you can draw for the rest of your lives. Most people have no clue. In fact, most people, when I say most, outside of Decker Retirement Planning clients, there’s very few people in the country that do what we do, where you can see and know how much money can draw for the rest of your life in retirement. This is very, very important.
BRIAN: Now, in the next week’s radio show, Mike, we go through all the different options in your portfolio for principal guaranteed, for savings accounts, for risk. I mean, it’s pretty, I don’t know how we’re going to squeeze, we won’t be able to squeeze that in one meeting. But, we’ll be able to go through that next time. Today, we’re going to try to squeeze in one hour, the stress test that you should put on your retirement plan to make sure that whatever life can dish out…
BRIAN: We’ve talked about it, we’ve covered it. So the first thing has to do with how much income do you want at retirement. So let’s talk about this. Mike, do you think that your expenses will go up or down after you retire?
MIKE: I think they go up. You got more free time.
BRIAN: Well, you’re one of the few. Most people think that they’ll go down. But you’re right. They will go up. Because while you’re at work, are you spending money?
MIKE: Nope.
BRIAN: No, you’re engaged, right? So when you retire, you have time and you want to do things, and doing things costs money. So we usually see about a 20 percent increase in spending. And that’s very important that you budget that. Also we want to make sure that you retire, not into a straitjacket budget that doesn’t allow you the freedom to travel and to go out to lunch and dinner. To do the things that you want to do on your bucket list, we want to point out, it’s better to work a little longer to have the freedom that you want to go and do the things that you want.
BRIAN: So on stress tests, these first three items that we’re going to talk about are more important than all the other things on the list, combined. Point number one, top of the list, how much money do you need? You need to go through and budget, talk together as spouses if you’re married. If you’re single, you want to make sure you know how much you need to spend to cover your regular expenses, plus have a travel and entertainment budget.
BRIAN: Next thing is when you retire, I just want to point this out, Decker Talk Radio listeners, if you don’t celebrate that retirement, you will have a recurring stress dream. Let me point this out. I graduated from the University of Washington, and the day that we had my graduation with 1,500 different other graduates of the University of Washington, it was a beautiful day. It was late June, and I went water skiing with a friend. I never attended. I said, mail me my diploma.
BRIAN: Because I never celebrated that event, I have a recurring stress dream where, probably once a quarter, four or five times a year, I’m asleep, and I’m dreaming that I have one last class that I’ve got to go to. It’s now finals time. I never attended the class, which by the way, I never blew off a class. It’s not in my nature to do that. But in my dream, I blew off this class, and now I’m hunting around campus for where the class is. I don’t know where it is. I know that the exam, the final starts at 11AM.
BRIAN: And it’s five to 11, and I’m still scrambling around to find where the class is. Now it’s 11:15. Now it’s 11:25. I need these credits to graduate. This stress dream, I wake up in a panic, sweaty panic. There are many clients who have not celebrated their retirement with an event, dressing up with a nice suit and your wife in a gown, where you celebrate that event. Where you mark that event so that you can have closure of that.
BRIAN: And I hate to relate this as a similarity, but the people that celebrate their retirement from their work, in their mind, there’s closure to it. It’s kind of like if you have a son or daughter that’s missing in action, or lost, if you don’t have that event of closure, meaning the funeral, that’s very difficult in leaving that chapter open in your life. So make sure that you celebrate your retirement. Have closure so that you don’t have that panic of waking up at 7:30, feeling like you should be a work by seven and you’re late.
BRIAN: Mentally, I don’t understand all the details, but if you have closure and celebrate, it makes it easier. All right, moving on. So, make sure that you know how much income you need at retirement and celebrate that as an event and have closure. The next thing has to do with inflation and stock market crashes. These two are the biggest destroyers of people’s retirement than anything else that we’re going to talk about. Inflation, we’ll take first. At Decker Retirement Planning, and Decker Talk Radio listeners, we do the planning and have five different areas of inflation protection.
BRIAN: The first thing we want to do is put in a COLA, cost-of-living adjustment. However, we want to recognize that, instead of having a three percent COLA, many times we flatten the COLA to, what is it Mike? What is it usually? Around…
MIKE: About 1.7’s more realistic.
BRIAN: 1.7, yeah. So we flatten the COLA because we know that, in your 80s, you’re not going to be doing as much, typically. Now, you might be the exception, but most people’s health really, it’s a struggle when you hit the 80s. And you’re doing less things. So we would rather push more money up to have you enjoy the healthy travel years than to have you sacrifice funds and have a bunch of money when you’re in your late 80s, early 90s and you really aren’t going to be spending that.
BRIAN: So we flatten the COLA and push more money up during your healthy travel years. But the COLA is one of five layers of protection. 1.7 percent COLA. Item number two is any inheritances. That’s an event that we try to be conservative on, both for timing and for dollars. But it’s an event that’s going to happen, and we try to put it in your plan, and that infusion of capital is something that protects you from inflation.
BRIAN: Number three is real estate. Your real estate, your rental real estate. Your residence, your vacation home. All the real estate that you own acts as a hedge because hard assets go up in value when interest rates do go higher. So higher interest rates, or inflation, beautiful hedges your residence. So we just want to point that out. Item number four is called a downsize.
BRIAN: Downsize is in your late 70s, early 80s, you’re not as interested in gardening and the stairs in the house, so you sell your home for x, buy a condo for y, and there’s an injection of capital that we don’t put into your plan, but it’s just icing on the cake extra. But, typically, there’s an injection of capital when you sell your home, and move into a condo.
BRIAN: Fifth, and final, for inflation protection, is the risk bucket that we have. We assign a six percent estimate for growth on the risk bucket, when in fact, our two-sided models have not lost money in the last 17 years and have made money in 2000, ’01 and ’02, they didn’t take the 50 percent hit. They made in money in ’03 to ’07, they collectively made money in ’08, and then, ’09 to present, net of fees, they averaged 16 and a half percent, we’re showing six.
BRIAN: So, what happens for inflation protection with our clients in the risk bucket? Well, there’s a very large cushion that is used for three different reasons. One is inflation protection. So if you have 250,000 in the risk bucket, in 20 years at six percent, it grows to around 700,000. At 16 percent, it grows to over 2,500,000. So there’s a huge difference. There’s a buffer there that we plan on to be used for inflation protection. Also for extra funds for long-term care, which we’re going to talk about today.
BRIAN: And also for extra money in case you want to do family reunions, travel around the world, and other things on your bucket list. So, Mike, those are the five things that we talk about when it comes to inflation protection. And most of our clients, if they have a concern about inflation, it’s gone after that discussion. Isn’t that your experience?
MIKE: Yeah, I mean, you’re just using math logic and historical data just to make it right. It’s simple. It’s what the distribution [balance? ] does is flow. What you guys do at Decker Retirement Planning, it should be commonsense, common practice, but it seems like this isn’t found outside of our office, often.
BRIAN: Right, there’s very few people doing what we’re doing. Okay, now let’s talk about stock market crash. In my opinion, this is the biggest destroyer of people’s retirement. This stress test is very important. In my opinion, top of the list. So stock markets, historically crash every seven or eight years. Let me go through the dates. The last time, and by the way, we define a crash mathematically as a 20 percent, or greater, drop in the market. That’s what we call a crash. A correction is 10 percent, or more. A crash is 20 percent, or more.
BRIAN: Just saying. That’s worldwide accepted for language that when we talk about crashes. The last time the markets crashed was 2008, from October of ’07 to March of ’09, that was over a 50 percent drop. Seven years before that was 2001. The Twin Towers went down, that was the middle of a three-year tech bubble bursting, where, again, markets lost 50 percent, or more. Seven years before that was 1994. Iraq had invaded Kuwait. The interest rate spiked up, the economy was in recession, and the stock market struggled.
BRIAN: Seven years before that was 1987, Black Monday, October 19, 22 percent drop in one day, 30 percent drop peak to trough. Seven years before that was 1980, 80 to 82 bear market was a 46 percent drop. Seven years before that was ’73, ‘74 bear market, 42 percent drop. Seven years before that was ’66, ’67 bear market, that was over a 40 percent drop, and it keeps going.
BRIAN: So what we’re saying is that the market’s bottomed in March of 2009, and we are in year nine of a seven-, eight-year market cycle. So we’re overdue for some kind of a drop. Not sure what it’s going to be, but something, typically, will burst the bubble about now. So let’s talk about downside protection. In fact, we had the entire previous week’s discussion, Mike, on risk and risk protection.
MIKE: Yeah, if you didn’t catch it, go to Decker Retirement Planning dot com, iTunes, or Google Play, look for Protect Your Retirement, and catch that show. Lot of great information, if you want to talk about risk and what’s in the market.
BRIAN: Right. So what we do, looking at our income plans at Decker Retirement Planning, our clients, when the markets crash the next time, our clients know that when it comes to their liquid funds, that’s savings, checking, the market’s not going to have any effect on that.
BRIAN: Point number two. The second part of their portfolio, they have safe money, which are laddered principal guaranteed accounts. How much money is lost in those accounts?
MIKE: Nothing.
BRIAN: And then we have part number three, the third and final component of anyone’s plan, which is their risk money. These are two-sided, trend-following models that are designed to make money in up or down markets. And these models have not lost money ever, when they’re combined. So this is how we are able to look people in the eye, and say the biggest destroyer of people’s retirement is not a factor, a legitimate factor, at Decker Retirement Planning.
BRIAN: Okay. Most people have the pie chart, the asset allocation pie chart that puts all of your money at risk and you have no idea how much income you can draw from that, unless they’re telling you to use the four percent rule, which I don’t have time to go into, but in our opinion, it’s the most toxic financial strategy out there and is responsible for destroying more people’s retirement in this country than any other financial strategy.
MIKE: Yeah, just Google four percent rule disasters.
BRIAN: Yeah, and you get hundreds of articles telling you, and in fact, the guy that invented it in 2009, Mike, what’s his name again?
MIKE: William Bengen.
BRIAN: William Bengen, yeah. He came out in 2009, and said it doesn’t work when interest rates are this low. He said he doesn’t use it, and he called it dangerous. Those quotes are on our Website at Decker Retirement Planning dot com. Anyhow, your banker, broker will use a discredited financial strategy to distribute your income. We use math. So in this first three points here, our clients have tremendous peace of mind, knowing how much income that they can draw from their portfolio for the rest of their life.
BRIAN: We’re talking about stress test. Make sure that your plan, that you can do that, number one. Number two, inflation protection. Does your plan have it? And number three, make sure that when, not if, when the markets crash every seven or eight years, that you’re protected in downside protection. Okay, the next thing that we’ll talk about here, is how much income is lost at the death of a spouse. This is a very awkward conversation because, in our conference rooms, our planners have to have this conversation. They look at the wife, and they tell her, June… Is that good woman’s name?
MIKE: Sure.
BRIAN: Okay.
MIKE: That works.
BRIAN: June. June, the worst time to lose Jerry. Now, Jerry, I think of because it’s ski season and you get a Jerry of the day, right?
MIKE: [LAUGH] Yeah, Jerry of the day. It’s probably one of the best things to see.
BRIAN: Okay. It’s pretty awkward. So June married Jerry, I’d say to June, the worst time, financially, to lose your husband Jerry is right now, today. So let’s assume that Jerry keeled over. June, what are you going to do? I put her on the spot, on purpose. Have her look at the assets, and she says, well, I’ve got total assets. Those transfer to me, I’ve got the house. I’ve got the rentals, I’ve got the other vacation home, whatever. I’ve got the cars. I’ve got the greater of the two social securities.
BRIAN: Not both, the greater of the two social securities, and the pension. Now the pension, if there is a pension, it depends on if there’s survivability, or not. Is it 100 percent transferable to the spouse? Or not? We find out. And if there’s any rental real estate, of course, that transfers to the spouse. But we total up the monthly cost of losing the spouse. And if they’re still working, we ask if they have insurance.
BRIAN: And we recommend insurance for three reasons. One is exactly what we’re talking about right now. We total up the loss of income, and if it’s manageable, there’s no need for insurance, in our opinion. But if it’s not, if it’s too big of a gap, we want to plug that gap by buying low-cost term insurance and we want to bang that out and make sure that the spouse has peace of mind, that in a worst-case scenario, if she loses her husband, or he loses his wife, that income replacement is there to not leave you high and dry.
BRIAN: We want to make sure it’s inexpensive, and we want to make sure that you’ve stabilized that weakness in your plan, that gap in your plan. There’s three reasons that we recommend insurance. One is income replacement. Actually, there’s two. The second is when there’s an estate-planning issue, we want to make sure that if you do want to get rid of any estate taxes that you owe, we use an ILIT, irrevocable life insurance trust…
BRIAN: Where the trust pays the estate taxes outside of your estate with second-to-die insurance. Those are basically the two reasons that our planners at Decker Retirement Planning, that we use insurance. But here, make sure to have that discussion on how much income is lost at the death of a spouse so that it’s not a surprise. You’ve talked it through, and we are comprehensive in making sure that that gap has been filled.
BRIAN: Next item. Is it necessary to take any risk to accomplish your goals? This is a very important discussion. Now we as fiduciaries at Decker Retirement Planning, Mike what do we get paid most for in the three ways that we do get paid? We get paid a planning fee only if at the very end, they like and love their plan. They’re free to walk away at any time. That’s one fee that we make. Second, is we charge 1.3 percent on the risk bucket.
BRIAN: And we get a placement fee, doesn’t come out of anyone’s capital, or principal. We just are transparent, ‘cause we’re fiduciaries, that the fees are paid to us. But in over a 10-year period, Mike, the 1.3 percent, we only charge on risk. We don’t charge it on any of the principal guaranteed accounts. Unlike, the bankers and brokers.
MIKE: Oh, yeah, I think on average, our clients receive 75 percent reduction fees when they come over.
BRIAN: Right, because they were being paid on all of their assets. Here at Decker Retirement Planning, we only charge them on the risk assets. And that’s only if they want us to manage their money. But here’s the point. Mike, we’re fiduciaries to our clients and we are the ones that shrink their risk tremendously, right?
MIKE: Yeah.
BRIAN: And, when we shrink their risk, we shrink their fees, right?
MIKE: Yeah.
BRIAN: Okay. And when we shrink their fees, we actually get paid the most on a risk bucket over a 10-year period than anything else. But we’re the ones that say, Mr. and Mrs. Client, if you have these amount of assets, and you’re telling me that you can only spend 8,000 dollars a month, why do you want to have any money at risk? Who else brings that up? Who else would shoot themselves in the foot? We’re fiduciaries, and we want to make sure that we do the right thing for our client.
MIKE: Well, I had a professor back in college that told me this, and it always stuck out with me. He said, if you start right, you can end right. But if you start wrong, you’re probably not going to have a chance to end right. And that’s with our planning. We go through the process, we go through these stress tests. We go through all this information so we can start right. And then, it’s just maintaining the plan after that, which isn’t that difficult if you stick to the plan. It’s a wonderful retirement that you can enjoy. And so it’s a wonderful thing.
BRIAN: Right. Okay, now we have some client that maybe they have social securities, they have got pension, they’ve got rental real estate. And no matter how big, or small, their assets are, they think that in their lifetime, they can only spend x amount of money, and we show that they can get much more than that. That’s when we point out that they don’t need to take any risk. And so, when presented with that option, a lot of clients say, well, if I don’t need to take any risk, I don’t want to take any risk.
BRIAN: And there’s some clients that say, well, I realize that I don’t need to take any risk, but on a portion of my plan, I do want to take some risk just to be a good steward for diversification, but yeah, I realize that I don’t need to take any risk. So we mathematically go through your plan to shrink your risk as much as possible, and for those that don’t need any risk, we point that out and make sure that they know that that’s an option. Okay, we also point out because we are fiduciaries that they don’t have to have us manage their money.
BRIAN: Who else does that, Mike? I mean, we are financial planners and we just point out that if they want us to manage the money, and most do, but, I’m just saying, we present that as an option.
MIKE: It’s very different. I think one of the big things that people see when they walk through the door, it’s just different here. It’s done how it should be.
BRIAN: All right. The next point I want to point out for the stress testing your retirement plan is to point out the obvious, and by the way, this is called placement. This strategy that we’re going to talk about right now is called placement. And it’s making sure that you know if you have, let’s say that you have a million dollars in retirement assets. 75 percent of those might be qualified assets. 25 percent might be nonqualified. Let’s just use that as an example, okay?
BRIAN: Qualified assets are retirement assets. Nonqualified assets are already taxed money. If you went into a bank, Chase Bank, Bank of America, whatever, your credit union, you pull out a thousand dollars of nonqualified money, it’s already taxed money, you owe nothing, no tax on that, it’s already taxed money. If you pull a thousand dollars out of your IRA, it’s money that is going to trigger taxes because it’s qualified money.
BRIAN: It’s qualified money, and so, what do we do for tax reasons on the division of qualified, nonqualified. This is brilliant, what we do. If I may say so, myself.
MIKE: You can say so. [LAUGH]
BRIAN: Okay. In the front part of your plan, we put, we do three things at once here. So imagine bucket one is responsible for the first five years of income. Bucket two is responsible for years six through 10, bucket three is responsible for years 11 through 20. Those three buckets, all principal guaranteed, are generating monthly income for you for the first 20 years of retirement. Imagine that we put your already taxed money in the front of your plan, so emergency cash, bucket one, and some of bucket two is already taxed money.
BRIAN: That does three things. That does two other very important things. Number one, for the first five years of your retirement, the money that’s coming back to you is just return of principal. Yes, you’re getting a lot of money in income, but you’re taxed, your AGI, your adjusted gross income is tiny small. Tiny small. That means that the taxes on your social security for that first five years go way down, and it opens a window for us to convert the IRA to a Roth.
BRIAN: Because your AGI, your adjusted gross income, is very small, so we use that window for the first five years. This strategy is called placement. Now the biggest tax-saving strategy that most people have in their lifetimes is the Roth conversion strategy. We’re not doing you any favors taking your 225,000-dollar IRA, growing it up to 700,000 in 20 years. Now you are paying taxes on 700,000 when you could have paid tax on 225,000.
BRIAN: Yeah, you’re happy with the growth, not happy that you’re paying taxes on almost triple what it was. So we at Decker Retirement Planning, we are proactive with our clients. We’re a math-based firm. We’re fiduciaries to our clients, we point out that we have no interest in converting IRA to Roth in bucket one, two, or three. The returns are too small, and you’re taking the money too soon.
BRIAN: But in the risk bucket, where the returns have averaged 16 and a half percent net of fees, that’s the account that we do, and are interested in, converting IRAs to Roth because that money, three important things in a Roth. It grows tax free, it produces income back to you tax free, and it passes to your beneficiaries tax free. This is a golden account, and we want to make sure that we proactively, not all at once, but over five to seven years, we get all this money converted from an IRA to a Roth.
BRIAN: You go to your banker and broker and ask him or her how much money you should convert from an IRA to a Roth, they’ll say, hmm, how much do you want to convert? We have it mathematically nailed down to the dollar how much all out clients should convert from an IRA to a Roth. So, again, we’re math based. But this point here, for discussion is called placement. And it’s something very important as you stress test your retirement to make sure that you’re paying the least tax as possible.
BRIAN: All right, the next part is legacy money. Legacy money is money that you have access to your whole life, but you probably won’t spend. These are for clients that say, when we point out that they could get 13, 14, 15 thousand dollars a month, they say, gosh, we really can’t figure out how we can spend more than seven or eight thousand a month, and so we put the extra money in legacy. Legacy is money that you have access to your whole life, but it’s money that you probably won’t spend in your life.
MIKE: I want to just, kind of, back up a little bit with this whole idea of legacy, as well. Brian, do you have clients that start the process worried that if they can even retire, and then they end up able to have a legacy bucket?
BRIAN: Yeah, those are fun conversations.
BRIAN: All right, tax-optimization strategies. Our clients use placement, they use Roth conversions. Now Roth conversions is typically the biggest tax-saving strategy because the difference of paying 20 percent on 225,000 and 700,000 is huge. And so that’s going to be our area of focus, where we capture the biggest, typically the biggest tax-saving strategy for clients. All right. RMDs, required minimum distributions.
BRIAN: Once you turn 70 and a half, you don’t have a choice, you are required to have a portion of your IRA, 401Ks, be taxed, or pull that money out so that they IRS can tax you. The required minimum distribution is the realization that the IRA is not a vehicle that’s in your best interest. It’s fattening the pig for Uncle Sam to tax you. It’s all about tax revenue. So this is something that on required minimum distributions, when you, at 70 and a half, are forced to pay that…
BRIAN: There is one of two ways that you can do that. I’m going to show you the typical banker, broker inefficient way of taking income in your retirement all of those years, and then every year in the fourth quarter, you get a big lump sum of RMD, required minimum distribution money and you’re paying tax on your income, plus you’re paying tax on this lump sum. You’re overtaxed because of the inefficient way that the bankers and brokers draw your money out of your retirement, or our qualified accounts.
BRIAN: At Decker Retirement Planning, we don’t do it that way, we make sure that you have your income coming back to you for the full calendar year, and every month, a portion of that money is coming from your qualified accounts, so that your RMDs are satisfied for the year, and you don’t have this big wad of cash in the fourth quarter of every year.
BRIAN: So we minimize your taxes by doing it that way. And it’s much more efficient to do it that way. All right. The next thing is, were you going to add something, Mike?
MIKE: No. I mean, you covered it great. If you want more information, though, you can always go to Decker Retirement Planning dot com. There’s a list of articles and great tools and information that you can research more about retirement planning.
BRIAN: Good. Okay. Now, the next thing is a dynasty trust. Dynasty trusts are a favorite for people that have large estates and they don’t want to give Johnny all of the estate. Let’s say that you have one or two children, or let’s say you have no children. What do you want to with your beneficiaries? Let me give you another scenario. Let’s say that you’ve got three or four million dollars in investable assets, plus you’ve got a home of another chunk of change and so you’ve got a four-million-dollar estate, and you’ve got one child.
BRIAN: There’s something called the lottery effect. And we’ve seen this happen before. The lottery effect is where when you dump lump sum, all at once four million dollars on any human being, you watch, Dr. Jekyll becomes Mr. Hyde. They become irrational, in fact, you can pull this up and Google this. It’s called the lottery effect and three things happen. Number one, when you dump four million dollars on your son or daughter, the spouse says, see ya, and takes half. That’s number one.
BRIAN: Number two, he or she will quit their job, if they’re working. And then, number three, this is the tragedy, they spend through all that money in five years. It’s called the lottery effect. So we want to point out that, in your documents, for your will or your trust, we hope that you ladder or stagger the distributions to come back to your children, so that, for example, 20 percent is distributed to your child or children on date of death. And then another 20 percent, five years later.
BRIAN: Another 20 percent five years after that, et cetera. Make sure that you ladder of stagger the distributions so that when your son or daughter blows the first distribution, thankfully, they have more money to fall back on as they become more responsible and Mr. Hyde, then, reverts back to Dr. Jekyll, the rational person. When it comes to dynasty trusts, this is also called a generation-skipping trust.
BRIAN: A dynasty trust lasts a hundred years, many generations. And it’s per stirpes, meaning it’s blood line only. So let’s say that you want, you have one or two children, and instead of dividing your estate, giving it all to Johnny, if you have one child, or if you have Johnny and Susie, you can create the dynasty trust while you’re living and fund it as you die, after you die, as a beneficiary of your account.
BRIAN: So if you have two children instead of dividing your estate by 50 percent, you can divide it by thirds, and put a third in a dynasty trust, and it’s generational. So it lasts and pays for college or tuition, or books. Whatever you want. It’s a blank slate. It can do whatever it wants, but it passes generationally down and they are forever grateful for Grandma and Grandpa Smith that funded the generation-skipping trust called a dynasty trust.
BRIAN: Now it’s called a generation-skipping trust because if you want to just pass assets directly to your grandchildren the IRS doesn’t like that, and they will charge you almost a 50 percent penalty for sending assets to the next generation, unless you declare it. Another option you have is to have it come out of your exemption, which right now is 5.4 million dollars per spouse. You can protect about almost 11 million dollars in your estate.
BRIAN: So for a lot of people, you can have it come out of your exemption, and that’s fine. But some people want to have a generation-skipping trust called a dynasty trust so that you can pass assets to your grandchildren and their children and their children. And also have no penalty. All right. Will your heirs receive the money today, at death, or a combination? We point this out as a part of the stress test because, and I guess there’s an analogy.
BRIAN: There’s an analogy that I like to use that at the Salt Lake airport, flight attendants point out something that’s not commonsense for parents. They point out that if the plane loses pressure, oxygen masks drop, and you’re supposed to do something that’s not intuitive for a parent. You’re supposed to put yours on first so that you can help those around you. At Decker Retirement Planning, we make sure our clients have their financial oxygen mask on first.
BRIAN: And if they see that they have extra, they can and should, and we promote that they have wonderful and expensive family reunions, and they gift, and they do things while they’re alive to create memories instead of just passing assets when you die.
BRIAN: Next question regarding the stress test. Will there be money left over for your heirs? We want to make sure that all our clients have peace of mind that there will be large amounts of money in transfer available for your children and your grandchildren, and we go through mathematically to make sure that they see that that transfer of assets are there and we don’t include the house in your income plan. Now Mike, what do you think of people that automatically, these are our competitors, they have reverse mortgages as part of their income plan. Do you think that’s a good idea? Standard Practice.
MIKE: Yeah, it’s just seems kind of ridiculous. I mean, it’s like getting rid of your backup plan for no reason. It’s almost unlike unnecessary.
BRIAN: Right, we view your house as sacred. That’s your residence, that’s your home. That’s where your memories have been created. Mike, in 33 years in this business, I don’t think I’ve done more than one… No I didn’t. I didn’t do that one. I’ve never done a reverse mortgage for people.
MIKE: No, you had a client that came to you already having a reverse mortgage…
BRIAN: That’s it.
MIKE: And the client did it because their son told them to.
BRIAN: Correct. That’s exactly right. So we, the fees. There’s, like 10,000 dollars in fees. It’s a high-fee product. They only give you equity up to a certain amount. You’re far better off, in our opinion, to downsize the house than to do a reverse on it.
MIKE: Well, and think of the value of the house when you die, compared to what it would be now. I mean, if you’re in Seattle, the market is insane, how much it appreciates. So, how do you want to use your investment vehicle on your house? It just, it seems silly to do a reverse mortgage.
BRIAN: Right. So now let’s talk about the bleeding heart. The bleeding heart cracks me up. But I’m deadly serious that we have seen parents who have gone through tough times, financially, and they say to each other, honey, let’s make sure our kids never have to experience what we do. So, what do they do? They make sure that they helicopter over the kids in their late teens and their 20s and 30s. Any financial shortfall, the parents are right there to write the check or pay the bill. What we want to point out, hopefully, without judgment, we’re very cautious and we want to say this right.
BRIAN: Please love your kids enough to allow them to go through the financial squeeze of life so that they can learn to postpone, do without, be frugal, learn how to budget. Those things are life lessons that are learned in the heat of financial struggles. Love them enough to let them go through the financial struggle so that they can be financially responsible adults after you pass away. That’s the parent to the child.
BRIAN: Sometimes, children are raised where the children view the parents’ assets as their own. We’ve seen this, and we’ve seen it destroy people’s retirement. Every time Bobby or Sally crashed their car, Mom, Dad, will you please buy me a new Mercedes? I’m not exaggerating this. When they need money for a down payment for their lake house. When they have any kind of financial accident or impairment, at all, they go to Mom or Dad.
BRIAN: So love your children enough to make them responsible adults by having them handle their own funds. I’m not saying to financially abandon your children. I am saying to stand guard and watch and be the safety net of last resort, but have them figure things out. So that’s called the bleeding heart. The next thing we want to talk about here is, I going to cover some of these very quickly. And then I want to spend time on long-term care. That’s going to be a 10-minute conversation.
BRIAN: Umbrella policies. We recommend that with the litigious society that we live in, that when you bump someone in the parking lot, they know they have a blank check. They grab their neck and they are going to sue you. When they fall because you have ice on your driveway or your walk and that you didn’t clear out, they know they have a blank check. We live in a litigious society. Please, please, please guard yourself and protect yourself and know that you should go call your home owners’ insurance and ask for an umbrella policy for about a million dollars.
BRIAN: It’s very inexpensive. It’s typically 250 to 400 dollars a year, and that, liability coverages follow you. Now, Mike, you might say to me, hey Brian, I already have liability coverage in my automobile insurance and my homeowners’ insurance. Well, you know those big buildings that have insurance companies’ names on them?
MIKE: Yeah. How do you think they get that name?
BRIAN: Yeah, how did they make that money? They made it by denying coverage. By denying that they’re responsible for this mishap or that accident, or whatever. There’s an advertisement right now about how a guy calls in and he wants coverage for I think his air conditioner stopped working, or something like that. And they said that they don’t cover that, but they cover zombie apocalypse. Did you hear that, have you listened to that?
MIKE: No, I haven’t seen that one yet.
BRIAN: Okay. The guy says there’ll never be a zombie apocalypse and the woman says, yes, but if there was, you’d be covered, sir. Insurance companies make their money by denying coverage. An umbrella policy follows you around and gives you liability peace of mind. So we encourage you to do that. Now we’ve talked in this radio show about life insurance, how we recommend it for two reasons. So I think we’ve covered that. If someone is already retired, if they have life insurance, keep it.
BRIAN: But if they don’t, we point out they don’t need it, if when we talk through the loss of a spouse, the death of spouse, that income replacement is not an issue. Making sure that you draw income from non-fluctuating accounts. This is very important. If you draw income from a fluctuating account, like the pie chart that bankers and brokers recommend, you are committing financial suicide because you’re compromising gains when markets go up. You’re accentuating losses when markets go down.
BRIAN: And when you do that, you are putting your retirement portfolio at risk. I’m hitting these last few very quickly. Interest rate risk. Interest rate risk is the risk that when interest rates go up, you lose money on your bond funds. Just like two plus two is four, higher interest rates produces lower bond prices. That is a mathematical fact. And yet, bankers and brokers tell you to put your safe money in bonds and bond funds when interest rates are at, or near all-time record lows for the country, the United States.
BRIAN: That makes no sense to us. No mathematical sense, no commonsense. If you have a banker or broker or an advisor telling you to put your safe money in bond funds, let me give you a couple of dates. In 1994, interest rates on the 10 Year Treasury went from six to eight percent in one year. And the average bond fund that year lost about 20 percent. In 1999, the 10 Year Treasury went from four to six percent, and that bump in rates cost people, on average, about 17 percent.
BRIAN: If we go from where we are right now at 2.4 percent on the 10 Year Treasury back to just four percent where we were not too long ago, that’s a hit to principal of almost 20 percent on what bankers and brokers say is your safe money. And we want to point out that drawing income from principal guaranteed accounts is the foundation that we at Decker Retirement Planning work on, and your safe money is not in bond funds.
BRIAN: Liquidity. Liquidity didn’t used to be an issue for us. But it has become an issue because so many of our competitors lock people up in annuities. We want to warn you to stay away from variable annuities, income annuities, life annuities, income riders, gosh, I need to take time on this. I don’t think we’re going to be able to get through everything here.
MIKE: We got about seven minutes left. And I know you want to talk about long-term care.
BRIAN: Yes, I don’t think I’m going to be able to do it. I’m going to talk about annuities. Variable annuities is where your broker makes eight percent right up front. He gets paid every year you own it. The insurance company gets paid every year you own it, and the mutual fund company’s 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 them. We don’t use them. We warn people to stay away from variable annuities. If you have them, come and talk to our planners ‘cause you have options.
BRIAN: But we want to have you stay away from variable annuities. Income annuities, life annuities, or income riders are, in our opinion, a scam. Let me give you an example. Two examples. Let’s say that I retire at age 65 and I want to, I have a choice. I have a choice of either drawing 250,000 for life, or I can take a lump sum of 200,000. Well, Brian’s no dummy, I’m going to take the higher amount.
BRIAN: 250,000, I say, and then an actuary gets involved, and they say, well, I think Brian, at 65, I think he’s going to live another 20 years. 20 into 250, Brian, you get 12,500 each year for the rest of your life. And then they take 12,500 into 250,000, and Brian, that’s a five percent return. That’s a great return these days. That’s such a scam. I just want to point out what happened to Brian just now. Brian is now paying an insurance company to get my own money back at the rate of five percent a year, and they hope I die soon so that they can keep what they don’t pay me.
BRIAN: We don’t like it. We don’t use it. And we hope that you stay away from these life income streams. Now let’s talk about income riders. This is new information that I want to pass onto you. There’s a teaser that’s very deceptive that banks and insurance companies will use on their annuities, and they float out a guaranteed rate. Let’s say that it’s seven or eight percent. Right now, these days, it’s around seven percent. Would you be interested in a guaranteed seven percent? Well, here’s the deception.
BRIAN: So, yes you get this annuity, you have this income rider attached to where you have a seven percent guaranteed rate. So over 10 years, let’s say that your seven percent, your 100,000 doubles to 200,000. Now, at 200,000, the scam works like this. They pay you for the rest of your life, with a cap. And I’m not exaggerating when I give you this example.
BRIAN: Had a client, a doctor, who, in Seattle a few years ago, found out on the phone that his eight percent guarantee that he put over a half a million dollars in, that they would guarantee to pay him for the rest of his life, with a cap of what he put in. When he heard that, he was furious. Caps, C-A-P-S, is the scam of an income rider. The second part of a scam of an income rider is time, T-I-M-E.
BRIAN: Let’s say that you put 100,000 in, you get your guaranteed seven percent, at 65, you wait 10 years at 75, you get 5,000 dollars per year for the rest of your life. Well, Mike, this is easy math. 5 into my original investment of 100, and now I’m 75, I have to live 20 years just to get my money back. 20 years, so 20 plus 75 is?
MIKE: Probably when you die.
BRIAN: 95. So these scams, we see all the time at Decker Retirement Planning. We’re fiduciaries to our clients. We want you to know that the banker, broker, advisor, or planner in this case gets paid extra commission to attach these riders, and we hope that you steer away from these. Now, back to liquidity. If all your money is liquid, it’s not working for you. If all your money is locked up, that’s equally silly. So we try to have around 30 or 40 percent of your money be next-day liquid, no penalty.
BRIAN: And we go through and provide liquidity scores with every version of the plan to make sure that you’re comfortable in the amount of liquidity that you’ve got. I don’t have…
MIKE: We just got a minute and a half left.
BRIAN: All right. Let’s talk about current advisory relationships. When you come in at Decker Retirement Planning, and you keep your other advisor, they speak a different language. They come from a different place. So, for example, in February of this year, I had an ACL tear, and I had, I didn’t go to a dentist because, and a dentist is a doctor by the way, he not trained to do what I need. So I went to an orthopedic surgeon, and he did what I needed.
BRIAN: If you have two cooks in the kitchen, Mike, how does that go?
MIKE: If you have two cooks in the kitchen, it’s just impossible. There’s miscommunication, too many people giving direction. I mean, it’s [LAUGH]. Enjoying cooking, myself, if someone comes into my kitchen and starts giving orders, I get very frustrated, personally.
BRIAN: Right. We are fiduciaries to our clients. We are focused on income planning and distribution planning. We have two-sided risk models. I don’t know of any other company in the United States that does what we do. So when we have this focus in our practice of retirement planning and you get someone that uses a pie chart, and they’re both going to be advising you. We and this banker, broker, it’s going to be very confusing. We just want to give you the heads-up.
MIKE: All right. So we’re going to wrap up the show here, real quick. Tune in next week, same time. KVI 570 in the greater Seattle area or KNRS 105.9 FM in the greater Salt Lake area. This is Protect Your Retirement with Decker Talk Radio. Have a great rest of your Sunday. Take care.
