Welcome back to Protect Your Retirement! On this episode, we will be going talking about the common misconceptions of retirement and debunking some of the most common retirement planning strategies in our opinion. We see many retirees, or soon to be retirees, make these mistakes and we want to make sure that you protect your retirement. Be sure to tune in next week for a new episode of Protect Your Retirement!
MIKE: Good morning and thank you for listening to Decker Talk Radio’s Protect Your Retirement, a radio program brought you to by Decker Retirement Planning. This week Brian and I will be discussing and debunking some common misconceptions in retirement planning strategies. 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, and we’ve got a wonderful show lined up here today. Brian, who’s a fiduciary, a planner, from Decker Retirement Planning out of Kirkland is going to be debunking today a lot of common theories and philosophies that people are using in the retirement stage of their life. When they entered retirement. So we’re gonna go over debunking from an article that claims how to avoid running out of money in retirement.
MIKE: So Brian, let’s get right to it with the first one. The first one talks about… I really have a hard time even saying this, so I’m just gonna read it. It says that you should have more stock exposure when you’re retired. Now as a fiduciary, what do you have to say about that?
BRIAN: Okay, so let me say it this way. This article here, and Mike, I’m kinda worried about us quoting the article because we’re gonna shred it. I don’t wanna get sued or anything, but this is a common article that is out there, and probably would fall in the category of highly respected, let’s put it that way.
BRIAN: So in this eight-page article here, the first one is avoid going broke in retirement. The average life expectancy is higher than ever, which makes it more difficult to have your money last even longer. And so, 70 percent of Americans are planning on working longer, and so with that, here’s some strategies, and Mike, you hit the first one, gradually hike up your stock exposure.
BRIAN: This flies in the face of all common sense. So, Decker Talk Radio listeners, you’re advised in this highly-respected article by this professor and a partner of an advisory group to go out and increase your risk over time because stocks, if you time it right, gosh, I gotta be careful in quoting this. I wanna make sure that I’m fair to the writer here.
BRIAN: I want to say what this is and read some of his quotes, and then we’ll talk about common sense. I think that common sense, without any training of finance or Wall Street experience, common sense will tell you that this is wrong. According to this professor, instead of going for a downward slope in terms of your equity exposure, you should actually go for a U-shaped approach with stock component of your portfolio gradually going up after you retire.
BRIAN: This way when the market returns are not good in early years of retirement, you will add more stock exposure to your portfolio and can benefit you later in retirement after the market rebounds. So, there’s two problems with this. Actually, there’s several problems with this. One is when you have a paycheck coming in in your 20s, 30s, and 40s, you can take a stock market hit because you have income and you have time.
BRIAN: You have a paycheck and you have time on your side. When you retire and it’s the last paycheck you’re ever gonna take, and your investment portfolio is what is going to see you through the rest of your retirement years, first of all, you’re drawing income to generate your paychecks for the rest of your life. Sure, you have social security, hopefully you have a pension.
BRIAN: Maybe you have income from real estate, but your portfolio that you’ve saved all your life from your 401Ks and your IRAs, that is what is producing some money for you to supplement your income in retirement. So, two problems with this idea of increasing your stock exposure. Number one, it requires that you cut the level of your income so that you can put that portion of your income in to the stock market.
BRIAN: If you take this out to age 100, then you’re not spending a lot of your money so that you can increase your portfolio, and you’re sacrificing your income. Let me say it cynically another way. Let’s make sure that your stock portfolio gets big and sacrifice your income so that your standard of living and your quality of life is secondary to building up your stock portfolio in retirement, that makes no sense.
BRIAN: That makes no sense.
MIKE: Now Brian, can I interject here for a second?
BRIAN: Yeah.
MIKE: Because they make that comment, which is sure, common sense would suggest otherwise, but I feel like they follow up with claiming that you just adjust each year how much you can take, so if the markets tank, you just have to make what they phrase it as, almost slight adjustments to your income. But when you have a market hit like in 2008, that’s not a slight adjustment, that’s almost cutting your income in half, and that’s a drastic change.
BRIAN: Okay, and that’s a good point, Mike, I wanna bring that. So, all things being equal, markets going up and down, you’re sacrificing your income, or a portion of your income, to consistently feed more money in to your stock portfolio. At some point, you’ve gotta pull money out of your stock portfolio. So, this is nonsensical because you’re feeding the same portfolio that you’re pulling money from.
BRIAN: Now let’s add history. Every seven or eight years the stock market gets creamed, right on schedule every seven or eight years, 2008, 2001, ’94, 1987, 1980, 1973, 1966, ’67, those were all bear markets. And like clockwork, if you get creamed every seven or eight years in retirement and you have a 30 or 40 percent drop, by the way, seven plus the bottom of the market was March of ’09, so seven years plus that, we are due.
BRIAN: I hope that you know, Decker Talk Radio listeners, that when you’re in retirement, here’s what is common sense, you should shrink your risk. Not increase your risk, shrink your risk, number one. Number two, if you draw income from a fluctuating portfolio, you are compromising the gains as the markets go up and you’re accentuating the losses as the markets go down, and you’re committing financial suicide.
BRIAN: Number two, number three, every seven or eight years, you’re gonna get creamed, and then what? You’re gonna get a call from your financial advisor and say, this year Mister and Missus Retiree, you can’t spend any money because we’re down 30 percent. That’s ridiculous, it’s against common sense. So, when it comes to your retirement portfolio, there’s four key components. One is your cash.
BRIAN: You should have emergency cash, all our clients do. You should have a portion of y our portfolio that’s set aside for water heaters going bad, cars going down. You should have a roof being re-fixed. Anyhow, you should have some emergency cash, key component number one. Key component number two, you should have some safe money. Safe, principle-guaranteed money. So, that when interest rates go up or down, you don’t lose money in your bond funds, which by the way, bankers and brokers will tell you is your safe money.
BRIAN: That also is against common sense and loses credibility. Any financial advisors that tells you that your safe money is in bond funds, take a look at your portfolio of your quote, unquote safe money for the last 60 days. Most bond funds, quote, unquote safe, are down three or four percent, and that’s if they’re not high-yield bond funds. I looked at a high-yield bond fund yesterday that was done more than 10 percent in the last three weeks.
BRIAN: So interest rates, ladies and gentlemen, are starting to go up. Not only here in the United States, but in the UK, around the world, Japan. The general level of interest rates is going up, back to that in a few minutes, but staying on this ridiculous article that’s telling you to increase your stock exposure when you get older, doesn’t make sense. So I told you there was four key components of your portfolio, one is cash, two is your safe money.
BRIAN: In the planning that we do, we ladder maturities of principle-guaranteed accounts that produce income so that when interest rates go up or down, we have zero interest rate risk. When the stock market goes up or down, our clients have zero stock market risk and are not blown out of retirement by the stock market getting creamed every seven or eight years.
BRIAN: Number three, you should have some risk in your portfolio, you can’t live on CDs at two percent, we get it. You should have some risk money, but there are models, and we use them because we’re fiduciaries, Decker Talk Radio listeners, there are models that are trend-following models that have been around for over 30 years, this strategy, and they are designed to make money in up-markets and down-markets.
BRIAN: In 2000, ’01, and ’02, most people lost 50 percent in the tech rec. The models that we use for our stock portion of the portfolio went up every year. In 2003 to 2008 when the markets doubled, so did these. They doubled also. And when the markets got creamed in ’08, these models collectively that we’re using now, the six models collectively actually made money.
BRIAN: And then when the markets more than doubled from ’09 to present, so did these. If you’re not using two-sided strategy in a two-sided market that goes up or down, you’re not getting good advice.
MIKE: Excellent. Now chances are from what we’re reading in this article, we’re going over today, you’re talking too much risk.
MIKE: You’re using a one-sided model for a two-sided market, so we look forward to having that conversation with you during our visits in the upcoming week. And we’ll even be flexible for those that are calling in. Next week is Thanksgiving week, so if you can’t come that week, we’ll work with your schedule for the next two weeks for those callers. Now Brian, I wanted to ask you about these two-sided models, the safe, principle-guaranteed that you’re using, and the side cash there.
MIKE: This is a part of the planning process that you do at Decker Retirement Planning, correct? I mean, you take every client through this?
BRIAN: Yes, and the fourth portion of the planning is the other sources of income that a client has, we plan with that and around that. Social security, pension money, rental real estate. Those four key components of the planning are foundational. So, that you have income, the income you need and want for the rest of your life.
BRIAN: This is very, very important, that your approach be distribution-focused instead of risk-focused, and by the way, I will just say, Mike, jump in here, I interrupted you. I’m gonna go off on a tear I’m worried.
MIKE: It’s okay, I wanted to ask you really quick about something you said earlier, and that is you were talking about quote, unquote U-shaped approach.
MIKE: Now is that code, are we putting lipstick on the pig by saying the U-shaped approach, is that code for buy and hold, or what does that actually mean?
BRIAN: No, a U-shaped approach, it’s where you put the same amount of money in the market on a regular basis so that you are spreading your investment over a market cycle, so you’re buying low when the market’s down, and then yes, you’re buying high when the market’s up.
BRIAN: But it’s an approach that is used and should be used during your 20s, 30s, and 40s. It is used in your 401Ks, you’re making regular market investments on a smoothed basis. But back to the rant, I believe that Decker Talk Radio listeners need to know that the reason that your banker or broker or financial advisor keeps you at risk is because that’s how they get paid.
BRIAN: They don’t get paid with money that is not at risk. And so sadly, tragically, they will keep you fully invested, we had a client in just the other day that when asked directly, What’s your plan with my money? The shocking response was, all in, which meant all invested in the market.
BRIAN: And that account was pulled. So, Mike, we’ll move on here, but this fails the common-sense test to increase your risk exposure, according to this article, based on averaging in to the markets on a regular basis once you’re retired, and increasing your stock portfolio. So, should we move on to the next one?
MIKE: We’re gonna move on to the next point here, which quite frankly, I like how they start here because I think most of us can see the value in saving, while you’re working, while you’re preparing for your retirement, you should save.
MIKE: It should be common sense that you don’t spend everything that’s in your paycheck, you put funds away for retirement. What drives me crazy though with this next part is that after one or two sentences of saying it’s good to save, they then go and say, save until your target rate of X, and then you can just take four percent out of that, and that’s fine.
MIKE: Now that’s the four percent rule that they’re referring to here, and what actually absolutely drives me crazy is you can’t actually know how much you can draw unless you mathematically calculate it out. Now Brian, we’ll go in to this, two parts, first, why the four percent rule doesn’t work, and then the second part is how in the world can you mathematically calculate how much you can take, because no one knows what the stocks are going to be doing next year or the year after or the year after that?
BRIAN: Okay, so I’m gonna jump in and I wanna fairly represent this next point that the author puts out there.
BRIAN: Decker Talk Radio listeners, this is a prominent company that is putting this out here, and this professor says, and I wanna fairly represent his point. Those still in the workforce can avoid running out of money in retirement by saving steadily throughout their careers, we agree with that. Maximize your 401Ks, maximize your matching that you’re getting from employers.
BRIAN: Save in addition to your 401Ks. The more that you save and put away, the better off you are in retirement, we fully agree with that. The conventional approach is to try to accumulate a certain target wealth amount that will help you withdraw at a specific, safe, and sustainable rate, say four percent. This professor needs to know that the four percent rule, which by the way, Decker Talk Radio listeners, the four percent rule says stocks have averaged around eight and a half percent for the last 100 years, and that’s true.
BRIAN: Bonds have averaged around four and a half percent for the last 36 years, that’s also true. So, let’s be really safe and just draw four percent from your portfolio for the rest of your life, and you’ll be fine. The problem with that is that works beautifully in a bull market. Stock markets don’t trend, they cycle. And when you have the last hundred years of the DOW Jones, you will see, visually, you’ll see that stocks don’t trend, they cycle.
BRIAN: We call it the 18 year cycle chart, from 1946 to ’64 there was a nice bull market. 1964 to ’82, 18 years of flat. ’82 to 2000, the biggest bull market we’ve ever had. And since January 1 of 2000, not a lot of people have made a ton of money. It’s been very flat. So right now you have a situation where if you use the four percent rule in a bull market from ’82 to 2000, you are in fat city.
BRIAN: But if you retired let’s say January 1 of 2000, you retire with four million dollars, I’m just making up a dollar amount. That’s the good news, you retire with four million dollars January 1 of 2000, the bad news is you lose half from 2000, ’01, and ’02, the equity portion of your portfolio, tragically you lose half in the tech rec. But you’re worse than that because your financial advisor, your banker or broker, told you to draw four percent.
BRIAN: So four times three, three years. You’re down 62 percent going in to ’03, but good news, markets go up, they double from ’03 to ’07, but you don’t get all that because you’re drawing four, four, four, four percent every year for that period, and then you take the hit in ’08, down 37 percent, plus the four percent that you draw, and you’re done.
BRIAN: In fact, in 2009 we all saw the grey-haired people coming out back to work, fast food, banking, Walmart. They had to sell their home, they had to move in with their kids, they had to go to plan B because the four percent rule destroyed their retirement, and the guy who invented the four percent rule, and you can go in to our website, www.deckerretirementplanning.com, and read quotes from the creator of the four percent rule who said it doesn’t work, it’s dangerous, he doesn’t use it, it doesn’t work when the market’s interest rates are this low.
BRIAN: He debunked it, he said it doesn’t work, he discredited his own strategy, and yet the banks and brokers continue to use it today. The guy who invented the four percent rule has discredited his own strategy, and yet the banks and brokers use a discredited strategy, and this professor uses the four percent rule as his distribution strategy, in my opinion the four percent rule has destroyed more people’s retirement in this country than any other piece of financial advice.
BRIAN: And here it is in this article again. Again. This professor says, considering that a portfolio of stocks and bonds tend to be volatile, it means you can’t safely say where you’ll end up. Instead, looking at a savings rate because of its mean reversion tends to be much less volatile in terms of what’s consistently working. He said, Baseline of 16 to 17 percent as a savings rate might be a good starting point.
BRIAN: We agree with that, in your 20s, 30s, and 40s. Once you’re retired, most people are spending what is coming in. And then he continues here, Another disadvantage with focusing on a safe withdrawal rate is that this rate, if set during a time when portfolios are benefiting from a long bull market, it’s not likely to be sustainable. Well, what we have to say is that our clients don’t focus on saving in retirement, they focus on spending in retirement.
BRIAN: And we want to make sure that our clients have the income they need and want for the rest of their life. One last point on this, Mike, before we move on. If you don’t know how much you can draw from your portfolio in retirement, I hope you give us a call, because we will mathematically show you. We have a spreadsheet, it’s called a distribution plan, and it looks at your social security, it looks at your pension, looks at your other sources of income from rental real estate, from your portfolio, and we mathematically take the assets that you have to age 100.
BRIAN: And we find out how much you can draw minus taxes at an annual and monthly income with a COLA, cost of living adjustment, where every year you get more money to help fight the higher food and energy costs that are typical. If you don’t know how much you can draw from your portfolio, you should give us a call, we will run the numbers for you. We’ll show you exactly how we come up with the numbers and the estimates we give you on how much you can draw for the rest of your life.
MIKE: Brian, that’s a perfect transition to the next point, which is saying that you need to adjust your withdrawal rates, or essentially adjust your income. And what they’re saying here is adjusting it according to what the stock market is doing. However, what you’re saying right here, which is huge, this is so important. There’s a cost of living adjustment, you need to be able to spend a little bit more each year because of how things are adjusted. Life gets more expensive with cost going up.
BRIAN: Mike, I need to interrupt you.
BRIAN: I need to interrupt you.
MIKE: Sure.
BRIAN: Your pie chart from your banker and broker doesn’t tell you how much you can draw.
BRIAN: And unless you run the numbers like we do, you can’t know this.
MIKE: Yeah. Absolutely, I just wanted to make this quick point and then we’ll extend an offer here. The point is if you’re drawing four percent out of a flat market and you’re gonna do what this article is claiming, we’ll talk more about this in a second, but just drawing four percent each year, if you’re not making any money in the stock market because we’re in a flat market and you’re withdrawing, essentially your income, it’s less and less every year.
MIKE: Whereas when we run a distribution plan you can spend a little bit more each year and actually keep up with the cost of living adjustments. And that’s huge, this is absolutely critical for our Decker Talk listeners.
MIKE: We’re in a flat market, correct?
BRIAN: Correct, we have been since January 1 of 2000.
MIKE: And so most people haven’t made a dime since about 2000?
BRIAN: A lot of people are making back now what they lost in ’08, and a lot of people because the market cycles might have some gains to show, but we’re ready to give all those back when we rotate in to the next drop in the markets. The markets cycle, they don’t trend 45 degrees, markets cycle. Every seven or eight years the markets get creamed, so probably in 18 months or so we’ll be back to January 1 of 2000 type levels again.
MIKE: So Brian, let me ask you this, when you’re meeting with clients at Decker Retirement Planning and they talk about how they wanna withdraw income, do any of them actually have a mathematical plan before they come in and see the distribution plan, or is it just simply they’re guessing year by year?
BRIAN: We live in Boeing country, in Microsoft country, there’s a lot of Microsoft engineers, software engineers, and Boeing mechanical, electrical, design engineers that are very mathematical in their nature.
BRIAN: And they have spreadsheets that they’ve set up. But when they see ours, they really like it, they really like it. So I’ve never had someone come in in all the years of doing this where they said, Got that, you’re not showing me anything I don’t know. Never once.
MIKE: That’s a pretty big statement.
BRIAN: Okay, so let’s go in to this next point. Periodically adjust your withdrawal rate.
BRIAN: So in this article from this professor, I’m not shocked, I’m not surprised, but this again fails the common-sense test. Here, again, I’m gonna read some of this so I fairly represent what he’s trying to say. This is in retirement, Periodically adjust your withdrawal rate. Once you set up a certain withdrawal rate, the conventional retirement approach is to stick through it throughout retirement over a period of time that could last as long as 35 years, and then he quotes a head of retirement research with Morning Star, the Chicago investment research firm, who says, quote, The two unknown variables in an income strategy is how long you’re gonna live and what your market returns are.
BRIAN: If we knew that, we could give you exactly how much you could take from your portfolio. I don’t know what to say to that, that’s like a duh. He says that retirees would be better of readjusting their withdrawal rate periodically in a dynamic manner rather than sticking to a specific withdrawal rate, and that you should reassess. Okay, so cynically I’m gonna repeat this back, once you’re in retirement, when you’re in your good market years, then you can spend normally.
BRIAN: And after the markets get creamed, you’re gonna get a call and say, Yeah, you used to be able to spend 8,000 dollars a month, not anymore. Now why don’t you spend 3,000 dollars a month? For a lot of people, retirements have budgets. And when you have a budget in retirement, it’s not really doable, logical for you to have to adjust your withdrawal rate.
BRIAN: Our clients don’t. Our clients, because they’re drawing from principle-guaranteed accounts, when markets go up or down, they have tremendous peace of mind. In 2008 when the markets got creamed, our clients that did the planning, they didn’t have to change their lifestyle, they didn’t have to change their vacation plans. They didn’t have to move in with the kids, sell their home, none of that.
BRIAN: It is not about accumulation, your accumulation years, of taking risks, were in your 20s, 30s, and 40s. Do our clients benefit from the markets going up? Yes, absolutely. I would say mathematically our clients make more with the portfolio designs that we have than the banker, broker model that uses the rule of 100 and has 60 or 65 percent of your portfolio in bonds or bond funds, our portfolios make a heck of a lot more, and instead of all of your money being at risk, we cut your risk down to typically, Mike, I would say typically 25 percent.
BRIAN: Imagine that, 25 percent. The odds are, you’re taking too much risk in your retirement. The odds are because you’re talking to a non-fiduciary banker or broker who gets paid to keep your money at risk. Those days should be over, common sense tells you to not, capital N-O-T, not have all your money at risk, common sense tells you that. Okay, Mike, enough said, are we ready to go to the next one?
MIKE: Well I wanna go to the next one, but I wanna include what we just were talking about because this next point talks about budgets – well, it doesn’t say specifically budgets, but it says you need to have essentially a ceiling and a floor for how much you can take. And so Brian, I wanna repeat back, when the markets are down and if all things were equal and you were taking 8,000, now you can take 3,000, but what this is saying is no, instead of 8,000, just take 6,000.
MIKE: That’s taking a higher percent of your portfolio, which correct me if I’m wrong, accentuates even more the losses you just took.
BRIAN: Oh yeah.
MIKE: Is that right?
BRIAN: Mathematically, when you draw income from a fluctuating account and the markets just went down 30 percent, and you’re still drawing from those dollars, you’re taking out of your portfolio dollars that can no longer recover when the markets go up, and you are committing financial suicide, absolutely.
BRIAN: Absolutely. Okay, the next one talks about setting upper and lower limits for withdrawals, it kinda is the same thing.
MIKE: Well, that’s what I was just talking about, yeah.
BRIAN: So here the article says that mutual fund giant Vanguard, their dynamic approach to portfolio withdrawals is based on a combination of two tactics. A, or number one, starting off with a specific dollar withdrawal and adjusting it for inflation each year.
BRIAN: We do that. That’s exactly what we do. Withdrawing a certain percentage of your portfolio annually. No, that’s called the four percent rule, and that’s been debunked by its creator in 2009, seven years ago. So we don’t do that. What Vanguard is doing is keeping you invested, all your money at risk, and pulling money out, a certain percentage or a certain dollar amount.
BRIAN: When you pull money out of a fluctuating account, you compromise when the gains when the markets go up, and you accentuate the losses when the markets go down. Mathematically you are committing financial suicide. So we’ve already covered this, I think this is just another different way to say the same thing, but he goes on to say, “For example, if you withdrew 30,000 from your portfolio in 2015 and find that 2016, withdrawals could be 30,300 based on a one percent rate of inflation, instead of going with this defined dollar withdrawal, instead based on a two and a half percent floor you could draw a percentage out.”
BRIAN: So he’s transitioning from a dollar amount to a percentage amount. Both of those approaches work in distribution planning when you’re pulling money out of principle-guaranteed money. Neither of them work when you’re pulling money out of a fluctuating, at-risk portfolio. Mike, anything else to add to that before we go on to the last couple points?
MIKE: No. Let’s go on to the next section here, this one, I appreciate how they start, and it talks about how academic may put out a bunch of theories, a bunch of ideas.
MIKE: But they may not actually be the best for practical use. So, Brian, do you wanna talk about what’s being called the ivory tower approach and how it might not work?
BRIAN: Yeah, the ivory tower approach is where they claim that studies may have some significant shortcomings as far as how you can actually use them. To model things based on assumptions may be hard to determine, they note that it’s hard to model things like taxes, government transfers like social security. So, when academics are evaluating one strategy over another, they almost always do not take in to account when it could be quite important.
BRIAN: For instance, the amount of income retirees will need to maintain their standard of living expressed as a percentage of their pre-retirement income is often geared to a one size fits all approach based on certain assumptions. We 100 percent agree that the ivory tower approach not only may not work, it does not work, one size does not fit all when it comes to retirement planning and distribution planning approaches.
BRIAN: Banker, broker model has a one size fits all, four percent rule type of distribution. We’ve already talked it through in this hour enough times, but this ivory tower approach, absolutely we agree not only it may not work, we have found in our experience that it doesn’t. And individual approaches are what we do at Decker Retirement Planning.
BRIAN: Go to our website, we have it loaded with information, www.deckerretirementplanning.com, on why the banker, broker model can hurt you. Why the banker, broker model is a one size fits all approach, and how distribution planning, what we promote, is much more of an individual approach. So now let’s go to the last couple of points here.
BRIAN: This is kind of interesting, Mike, do you wanna introduce the next one?
MIKE: Yeah, the next one I like, it’s a great idea, but I feel like the article from a very reputable source does not back it up, they just say hey, this is a good idea, and I’ll share it right now, it says you don’t wanna confused eligibility with ability. And that’s to say just because you’re getting old and you have a certain lifestyle doesn’t necessarily mean you can just retire.
MIKE: And so it’s talking about the calculations, knowing your budget, your expenses, and the lifestyle you wanna live, and making sure that you can do that. However, what I don’t understand is how they can know without running the calculations that we talked about earlier with the distribution plan. So, Brian, when people come in to the office at Decker Retirement Planning, is this a big issue? Where they think that they can retire and they can’t, or they think they cannot retire and in fact they could’ve retired five years ago?
BRIAN: Yeah, this is a big deal.
BRIAN: So let’s take these, there’s three different things going on here. One is people believing that Medicare is gonna pay more than it actually does. Number one, number two that what they spend after they retire is going to be less, and that number three, that their portfolio is going to be able to see them through a longer time than what they expect, so in all three cases, people in retirement naturally are way too optimistic.
BRIAN: So let’s take ‘em one at a time. A lot of people think that their income and their spending once they retire is going to be going down. That’s only partially true, just think of this, when you’re at work, you are not spending money because you’re at work, you’re doing things, you’re earning money, you’re at work. When you’re retired, you like to do things, and doing things costs money. So, a lot of times we see people’s spending going up, not down.
BRIAN: However, there’s an offset. You’re no longer putting money away to your 401K, so we find out how much they’re spending by looking at how much net they’re receiving, and a lot of people are spending what they’re receiving. So, we find out how much they’re spending and how much they need by backdooring what their spending habits were before. And then adding 20 percent. That’s very important, adding 20 percent.
BRIAN: So what we do at Decker Retirement Planning in Kirkland is we run the math to see if you can retire. Version one of the income plan is where we take the assets that you have for investing, we take them to zero at age 100 to see what the largest starting amount is in portfolio plus social security plus pension plus rental real estate.
BRIAN: All your sources of income minus taxes gives an annual and monthly income amount with a COLA for the rest of your life. We look at the top line and we see what that number is and we ask you if you can live on that. That’s how we find out if you can retire. That’s a mathematical approach. Most people we have a good meeting with, and they say, Yes, my gosh, I can retire. Those are fun meetings. Some meetings we find out, and I guess it’s a good meeting too, that they can’t retire.
BRIAN: But we’ve avoided the train wreck tragedy of having people leave the workforce too soon and have to try to reenter in their 70s and try to earn money because they found out too late that they could not afford to retire.
MIKE: Absolutely, and this includes people that are currently retired. Because if you’re currently retired, you should know how much you can spend so you don’t have a train wreck situation like Brain was just talking about.
MIKE: Brian, anymore with that last point?
BRIAN: Yeah yeah. I wanna hit two other points, so number one, the optimism that people have on their portfolios is usually a little too optimistic, and we wanna run what numbers they’ve been spending.
BRIAN: And if there’s a big gap, if someone has been spending 8,000 dollars a month net of tax and they think that they can retire on 4,000 dollars a month, probably not. Probably not. But you have two options, you can work longer and we can help you know how many years you need to work for those assets to grow to your quote, unquote number. Your number that will give you 8,000 for the rest of your life. Or you can cut your budget, but I just hate to see that, you know, you don’t wanna retire in to a straitjacket type of budget.
BRIAN: We want to see people have enjoyable, wonderful retirements. This next point on Medicare, people being optimistic that Medicare pays more than it does. Our practice used to hire people internally to make them Medicare experts, and we got some pretty good satisfaction from that from our clients. And then we hired someone outside who that’s all he did.
BRIAN: Was Medicare reimbursement, structuring your Medicare reimbursement. But the best thing that we’ve done now, good, better, best, the best thing that we’ve done now is to use, believe it or not, YouTube. If you go in to YouTube and in the subject line type in Medicare reimbursement plans, forget about what’s on the right side of YouTube.
BRIAN: The top two YouTube videos are spectacular in the content, and you can slow it down, you can rewind it, you can replay it, you can pause it. And you can get some tremendous information and receive fantastic information on how you should structure your Medicare reimbursement options. How you should structure yourself, so that’s point two, we wanna make sure that Decker Talk Radio listeners are getting the best information, and that’s where we’re finding the best information, the first two talks or videos on YouTube, and the way YouTube works is the first two are the top rated.
BRIAN: That’s why they’re up there. So, we talked about mathematically if you can retire, we talked about getting the best information for Medicare. And then we’ve also talked, number three, about accurately estimating your expenses in retirement. So, Mike, I think we’re done with that one.
MIKE: So the last point of this article from a very reputable source, Brian, if this was the debunk World Series, this is essentially me throwing you just an underhand lob that you can smack outta the park.
MIKE: Annuities, they’re talking about variable annuities and what seems like they’re claiming is the best thing since sliced bread. Now Brian, I’m gonna make this really simple; do we like variable annuities? I’m saying that sarcastically.
BRIAN: No. And these are income annuities, life annuities, which we also call a scam. So let’s talk about annuities. Variable annuities is where the broker makes eight percent commission on your money right up front.
BRIAN: He gets paid every year you own it. The insurance companies get paid every year you own it. And the mutual fund companies get paid every year you own it, three layers of fees that typically add up to five to seven percent total. We don’t like them, because of the high fees, they lag performance when the market’s going up, and when the markets go down, they drop faster than the market because of the fees.
BRIAN: They offer no downside protection, and the way that they’re deceptively sold to you the consumer is the come on is hey, Decker Talk Radio listener, you should have a guaranteed way to invest in the stock market, here you can do this and you have a guarantee so that if you die, you can have the high-water mark delivered to your beneficiary. Here’s what that means.
BRIAN: I’m going to cynically say this back. The insurance companies and the mutual fund companies and the brokers are getting two percent, huge fees, and are happy to deliver when you die the high-water mark of the portfolio, in other words, the highest it’s ever been. So, this is something that doesn’t benefit you in your lifetime, you have to do to get the benefit.
BRIAN: We have no use for variable annuities in our practice, we’ve never sold one. We warn people constantly to stay the heck away from variable annuities, they’re toxic. Okay, it’s no wonder annuities have a bad name. Now we’re gonna talk about life annuities, income annuities, and income riders, and by the way, that’s what the article here is promoting. Let’s say that I am a Boeing engineer, I retire at 65 years old.
BRIAN: And the company offers me a choice between taking 250,000 dollars for life, or 200,000 lump sum. Well, I’m a smart guy, I’m gonna take 250,000 for life, 250’s more than 200, I’m taking the 250. So, the actuaries at the company will say well, we think Brian’s gonna be around 20 years, so 20 in to 250 is 12,500. Brian, you get 12,500 for the rest of your life, and by the way, 12,500 divided by 250, that’s a five percent return.
BRIAN: You can’t beat that. So, here’s what’s just happened, Decker Talk Radio listeners. Brian now is paying an insurance company to get my own money back at the rate of five percent a year, and they’re hoping I die soon so that they don’t have to pay me what’s left. We don’t like them, we don’t use them. Very cynically, income annuities, life annuities, and income riders is where you pay an insurance company to get your own money back.
BRIAN: Typically there’s a 16-year break even. So, let’s look at this. If I’m getting 12,500 for life. I take 12,500 and I divide the lump sum option, which I could get 200,000 today. Divided by 12,500, that’s a 16-year break even, in other words, if person A takes the 200,000, person B, the 12,500 for life, person A gets delivered the money today that person B gets paid over 16 years.
BRIAN: There’s three reasons why we would tell you to go with the lump sum. One has to do with rate or return. So, if you put a three percent rate of return on the lump sum of 200,000, you can’t live long enough to where the lines are going to cross. The rate of return for the lump sum person will always be higher than the person who gets 12,500 for life, so that’s number one, rate of return.
BRIAN: To take a lump sum over a lifetime of income. Number two has to do with estate risk. Let’s say that you have survivability on your lifetime income, where if you die, your income goes to your wife. And let’s say that couple A took the lump sum. Couple B took the lifetime of income. And tragically, couple A and couple B were both out on a hang gliding excursion and both couples died, all four of ‘em.
BRIAN: It’s a horrible story, but I wanna emphasize that the 200,000-dollar lump sum is still in the estate of couple A, and it’s passed on to their children. Couple B, that money is gone. Both couples have died, the payments of survivability and a lifetime of income has stopped. So, you have estate risk in a lifetime of income that you don’t have in a lump sum, so that’s the second reason to favor taking a lump sum over taking a lifetime of income.
BRIAN: Third and final, and Mike, I know we’re short on time here, it has to do with company risk. Pan Am is the posterchild of company risk, pilots worked for Pan Am throughout their career, took their pensions, and then Pan Am went bankrupt. But fortunately, the pension benefit guarantee insurance corp stepped in, and they retrieved 40 cents on the dollar of the pilots’ pensions, United Airline pilots got less.
BRIAN: You have company risk when you’re dealing with these lifetime income payments. We’re running out of time, Mike, next week I wanna talk about social security, because we didn’t get to that. Which is the last part of this, and how income annuities, I just wanna finish up, how bad they are, it’s where we, the consumer, pays an insurance company to get our own money back.
BRIAN: So I want to hammer those for a little while longer.
MIKE: Absolutely, so next week stay tuned for our Seattle listeners, KVI570 at nine AM every Sunday. For those listening to our podcast or our first-time listeners, subscribe to our podcast, this radio show, Protect Your Retirement, which is found on iTunes or Google Play. Next week will be packed with finishing up today’s conversation, as well as much more. For those also that would like to continue reading, our website is packed full of information, and you will find this radio show, past radio shows, and a number of articles at www.deckerretirementplanning.com.
MIKE: We wish you a wonderful week and a happy Thanksgiving, Chances are from what we’ve talked about today, you’re taking too much risk.
MIKE: And until next week, have a happy Thanksgiving, everyone. Take care.
