On this episode of Protect Your Retirement, we talk about the six areas you are taking too much risk and what you could do to reduce this risk. At Decker Retirement Planning Inc., we want to help protect your retirement and your money in any way that we can. Tune in and here how you could reduce your risk!
The following is a transcript from the Radio Show “Decker Talk Radio – Protect Your Retirement. The following comments are of the opinion of Brian Decker and Mike Decker.
MIKE: Good morning everyone this is Mike Decker
BRIAN: And Brian Decker.
MIKE: And we are on Decker Talk Radio the program Protect Your Retirement KVI. Sunday morning nine a.m. Brian Decker is a financial advisor in case you didn’t get the memo there. He’s from Decker Retirement Planning and so great opportunity that he’s here today and he’s going to give us some great advice. We got a great show lined up today. So excited because today we are going to talk about the six areas where you are probably taking too much risk. And this is phenomenal because chances are you are taking too much risk. Isn’t that right Brian?
BRIAN: Right. So let’s start. Let’s dive right in because I hope that we can get through all six. But these are six places, six areas in people’s financial life where they’re taking way too much risk and I’ll start off with the biggest one of all. And that is: people are taking too much stock market risk. They have too much of their portfolio in the stock market. [Predictably?], why would they do that?
BRIAN: Because when interest rates are at one or two percent and CDs are one or two percent of course they’re going to want to go in and try to get a higher yield with a dividend at three or four percent in the stock market. But they know, Mike, that they’re taking too much risk and they’re just wincing but they’re thinking “Gosh I’ll just ride it out.” People… I’m going to say this again. People are taking too much risk in the-with their stock market exposure.
MIKE: Now do you think that’s their decision? Are they saying, “Yeah I’m a gambling kind of person.” Or do you think it’s just bad advice they’re receiving and they don’t know better.
BRIAN: I think it’s bad advice and they’re thinking that they don’t have any other choice. So in accumulation planning which is the asset allocation pie chart, totally fine in your 20s, 30s, and 40s. You can take a stock market hit of 30 plus percent, take four or five years to get your money back and move on. When you’re over 50 years old, 55 years old within five or ten years of retirement you can’t play that game anymore.
BRIAN: You’ve got to transition, this is our opinion, you’ve got to transition from accumulation mentality to a distribution mentality. Distribution planning is where you’ve got your… A spreadsheet, a distribution plan that shows the assets that you’ve got, so the investable assets separate from your home to create an income stream for the rest of your life. We show your social security, we show your pension, we show your rental real estate, your rental income, total it up minus taxes.
BRIAN: It shows the income that you can draw with a COLA, cost of living adjustment, for the rest of your life. It answers two big questions. Well, three in this case when we’re talking about risk. Number one: How much income can I draw for the rest of my life?
MIKE: Isn’t that the number one fear in the nation right now? Or close to it?
BRIAN: Number one fear in the country right now is running out of money before you die. Our clients don’t have that fear because they see how much money they can draw. Mike I know that you’re on top of this but we… this is something that we should do for listeners.
BRIAN: Should we say five?
MIKE: Lets talk about the three year and then… Distribution planning that’s really a foundation for a good retirement. So lets go over the three-year and then we’ll do five… Protect your year we’ll do a one on one. We’ll explain that here in just a second.
BRIAN: I just described the… I just described on air the distribution plan what it is. There’s three things that are very important. Number one people see how much they and earn and draw for the rest of their life. Number one. Number two they see how much the can draw.
BRIAN: So you can see if for example you can retire or not. You can see…
MIKE: That’s a good question.
BRIAN: Yeah. So if you have a question if you can retire or not we run the distribution plan and if you need 10,000 a month and we see that you can make 11 or 12 then that’s a good meeting. Very beneficial and we can tell you that yes you can retire.
MIKE: But burrow [PH] quick on that question “can you retire or not?” I mean I could of retired today but I would make… I’d have lived of off pennies. Right?
BRIAN: Right.
MIKE: What does it mean, “Can you retire?”
BRIAN: Can you retire means if you need x, if you need 5,000 a month or 10,000 a month or whatever it is that you need to pay the bills. We take the assets that you have, run them to age 100, and find out if you can get the 10,000 from your portfolio. And include the other sources of income. We run the math. This is just math it’s not Brian’s opinion or Mike’s opinion it’s just math. So we run… hold on.
BRIAN: We run the portfolio to see if people can retire. It’s also extremely beneficial to find out if they cannot. Because one of the worst things Mike, that can happen is to have a client who pulls the ripcord too soon and then what? At 75 years old tries to reenter the workforce. That’s a disaster.
MIKE: That’s tough and we don’t want to have people jump and ship too early or anything like that. So this is huge. So… but just to recap it’s…
BRIAN: But I said there were three.
MIKE: There are three. Okay.
BRIAN: The third one in the distribution plan is to show how much risk exposure they should have. It is math. We have a laddered principle guaranteed account for their income for the first 20 years and then for years 21 on we have the risk money coming to them. Twenty-year money should be in the market in our opinion. Twenty-year money allows clients to have the risk exposure that’s right for someone who is not going to get a paycheck again for the rest of their life.
BRIAN: So we find out objectively, factually, mathematically how much risk exposure you should have in your portfolio.
MIKE: So you have enough money but you know that you have it for the rest… for as long as you live and that you’re not going to retire too early. I mean this is huge.
BRIAN: Who is paid to have all of your money at risk? The asset allocation pie chart has all of your money at risk. Totally fine if your 20s, 30s, or 40s, but in the asset allocation pie chart all your money is at risk. It’s in the-either stock or bond funds and brokers get paid for that. I got to tell a quick aside, a quick story, my… Today I had a meeting with a client who had $800,000…
MIKE: When you say today you mean when we record this show. [LAUGHS]
BRIAN: Yeah, it’s not Sunday.
MIKE: We don’t meet on-we don’t meet on Sunday morning.
BRIAN: At nine o’clock.
BRIAN: Okay. When we… This week met with a client who was talked into putting 500,000 into a variable annuity that grows for 10 years and pays out for 10 years. We did the math. Do you know how much he gets at the end of 20 years?
MIKE: I don’t know the details of it so just let me know how bad is it.
BRIAN: 500,000 in 20 years grows to-grows six percent a year to 786,000 and then gets quote on quote ten years paid certain.
BRIAN: We did the math on the amounts that they were offered and it’s $497,000. He looses $3,000 in 20 years. And the fees on it were three and a half percent. And the investments were in bond funds so the three and half percent fees didn’t cover the pithily amount of interest that the bond funds are making. So every year the actual account for the variable annuity with three and a half percent…
BRIAN: It’s like a stockbroker saying “Mike you should put $500,000 into a CD at one percent with fees of three and a half.” It makes no sense. Okay that’s a quick aside. You don’t get that kind of nonsense when you deal with a fiduciary. We don’t… we… by law we can’t do stuff like that but this is we unwind all the time when clients come in. We see this all the time. But on this first point: too much risk exposure in your portfolio. We run the distribution plan to see how much you should have.
BRIAN: It’s just math.
MIKE: So that’s number one. And it’s simply put right? Okay very simple.
BRIAN: Should we move on?
MIKE: So let’s go to number two which is interest rate risk.
BRIAN: Okay interest rate risk is the risk to your bond funds of losing principle as interest rates go back up. Since 1982, so for what is that? 34 years interest rates have been declining. 34 years of interest rates going down. At some point they’re going to level out and start back up.
BRIAN: When they do, not if they do, when they do, when interest rates start going back up people will lose money in their bond funds. It’s math. Again it’s just math. When interest rates go up bonds go down in price. Bankers and brokers… This is financial malpractice; bankers and brokers tell their clients to put their safe money in bond funds, bonds and bond funds. And they use something called the Rule of 100.
BRIAN: The Rule of 100 Mike is where if you’re 65 years old you should have 65% of your investable assets in bonds or bond funds. If you’re 70 years old you should have 70% of your portfolio. And they’re telling people, bankers and brokers are telling people that that’s your safe money. Two problems. One is you’re not earning hardly anything on 65 or 70% of your portfolio. That’s problem number one. Problem number two is far bigger.
BRIAN: When interest rates go up and they eventually will you will have 65% or 70% of your portfolio that can loose a tremendous amount of money. In 1994 the 10-year treasury went from six to eight percent in one year. Didn’t sound like a big move. According to Morning Star the average hit to a bond fund was over 20%. In one year. In 1999 the 10-year treasury went from four to six percent. The average hit was 17%.
BRIAN: If we go from where we are right now on a 10 year treasury at one point five percent back to just four where it was just a few years ago the average hit to a bond fund is well over 25%. And that’s what bankers and brokers are telling you is your safe money. Now you got to question or…
MIKE: I’ll just say real quick this is so fascinating, for those that are tuning in this is Decker Talk Radio with Brian Decker here from Decker Retirement Planning and we’re going over the six… These are six points, six areas where you are probably taking too much risk. We talked earlier about too much exposure that’s probably in your portfolio.
BRIAN: Stock market exposure.
MIKE: And stock market exposure and now we’re talking about interest rate risk. This is something that I personally believe a lot of people don’t realize.
BRIAN: Right.
MIKE: And so this is just crucial. So keep going. I just wanted to include those that just tuned in with us.
BRIAN: Okay. And we try to be community oriented and offer pro bono things on the radio show. On the interest rate risk I would love to have you come in, look at your portfolio, you’d meet with me and I can show you alternatives to CDs, treasuries, corporates agencies, municipal bonds, and bond funds.
BRIAN: There’s alternatives out there in a low interest environment where you can make some good money and have zero downside risk. But anyhow back to interest rate risk. The reason we expect interest rates to go up Mike is because there’s a very tight correlation between the consumer price index and the CPI and the amount of debt that the Treasury has put out there.
BRIAN: In 19-from 1950 to 1975 the Fed printed a lot or money. The CPI not a first, just wavered around a little bit but eventually skyrocketed and it was Paul Volcker who, the cigar smoking Fed Chairman, who got in front of things and started to get things under control. And they’d been doing fine sine 1982 the monetary base, the money supply, the CPI, or the general interest rate environment has been in synch since 1983-84.
BRIAN: However in 2008 there’s a hockey sticks spike where the Fed is printed a lot of money. We went from seven billion, I’m sorry, seven trillion to where now we are over 19 trillion in our monetary base, through our money supply and the CPI, the general interest rate levels have not gone up yet but they will.
BRIAN: And when they do the people who were told by their financial professional that their safe money is in bond funds are in for a horrible surprise. They will lose a ton of money when interest rates go back up.
MIKE: Now just for those that might… Bonds are kind of complicated thing to understand sometimes. For those that don’t understand how bonds work. If you just think of it like a teeter-totter. One side are rates, one side are the value. If rates go up what happens to the other side of the teeter-totter?
BRIAN: It goes down.
MIKE: It goes down. That’s the simplest way I’ve been able to explain it to people. So when rates are at all time lows right now, which they are right Brian?
BRIAN: Right.
MIKE: What has to happen to your funds if they come up?
BRIAN: Interest rates are expected to go up. In fact I’ve got… I printed something up.
MIKE: Lets hear it.
BRIAN: That I didn’t tell you. But on the subject of interest risk I just want to-I just want to point out Mike that when rates go up they’ve got to… People just have to know that their bond funds are not safe. So in a laddered maturity situation we benefit from higher rates in our planning. We benefit from higher rates. We don’t get hurt.
MIKE: All right this is fantastic. So we’re going to move on to number three, which is…
BRIAN: Stock market risk.
BRIAN: Stock market risk is different from market exposure. Market exposure the number one that we talked about is having way too much exposure to the stock market, too risk assets. Now that you’re in the market do you have any protection when the markets go down? In your 20s, 30s, and 40s it’s totally fine to ride out a hit like 2008. When you are 55+ and your baker or broker tells you to ride o a stock market hit of 30+% and take four or five years for you to get your money back this makes me angry.
BRIAN: They are not looking out for their interest-for your interests. They are looking out for their interests. They do not get paid unless you are in the market. So they are not looking out for you. They are looking out for themselves and they don’t get paid if you’re in the money market or in some safe assets. They can’t charge you their annual fee. So what we want to do is point out… There’s a great book written by Jake O’Shaughnessy called “What Works on Wall Street.” He spends over 300 pages talking about his mutual funds and fundamental analysis.
BRIAN: And how the markets work. At the appendix a in the back of the book, I guess hoping that know one will ever look. Appendix A is the biggest study ever done on what works on Wall Street. And since 1950 he did a study of all the different strategies to invest. All the top 10 not the top three or five. All of the top 10 are two sided risk models. Models that are designed to make money in up markets and down markets.
BRIAN: These are quantitative computer driven models that have been around for over 30 years. Mike if you put what we are promoting as fiduciaries to our clients is to simply use technology that’s been out there for decades. For three decades in fact, over 30 years to simply use them in our portfolio. These are models that are computer driven models that have algorithms that when the markets go up you invest into typical sectors.
BRIAN: Like technology, biotechnology, healthcare, energy, transportation things like that. But when the markets start down again these computers will move your money into the following: the things that are going up. Typically gold, treasuries, consumer stapes, utilities, cash, and the VIX. What is the VIX? The volatility index. The VIX is like your teeter totter Mike, it goes up when the markets go down. These models are designed to make money in up or down markets.
BRIAN: Let me say this several different ways. The models that we are using have made money in 2001 and ‘02 when most people lost half their money. Then from ‘03 to ‘07 when the markets doubled so did these and then when the markets went down in ‘08 these made money. And then when the markets doubled again from ‘09 to present these did as well.
BRIAN: So 100,000 invested… should I give you a break?
MIKE: This is so huge and you’re thinking, “Why isn’t everyone doing this?” Because you deserve to know if you’re at huge stock market risk or if you’re using the right kind of models.
BRIAN: Well let me address that. There’s several reasons why not everyone is doing this. Number one some of the models that we use are no-load mutual funds. What broker do you know Mike that is going to recommend no-load mutual funds that he doesn’t get paid on?
MIKE: That makes no sense.
BRIAN: Zero. Number two what baker or broker is going to recommend modes that tell you what to buy, when to buy, and when to sell? Now you don’t need your baker or broker. But number three is the biggest reason. And there’s actually four reasons but number three is the biggest.
BRIAN: There’s a very important reason why bakers and brokers do use the asset allocation pie chart. It’s not in your interest it’s in there’s. Think of how it’s constructed. You’re given a risk questioner to fill out and based on how you filled out that risk questioner you submit that and it’s-the computer spits out a recommended portfolio, an asset allocation pie chart portfolio. And then you’re given an investment policy statement that you signed and dated. Now when the markets get creamed you can’t sue your broker.
BRIAN: Because you created that portfolio. So the reasons that bankers and brokers won’t do this is because they use the asset allocation pie chat for liability reduction. And I guess number four is the big mutual funds like Fidelity and Vanguard they’re not going to… Their business model is to create hundreds of funds to gather billions in assets. They’re not going to the 15 or so that you really do need. They’ll always have the bigger picture that benefits them in mind.
MIKE: Makes sense.
BRIAN: Those are the four reasons why not everyone is doing this. But I want to go back. 100,000 invested in the FSP since January 1 of 2000 to present grows to about 200,000. Average annual return is four and a half percent. 2001 and ‘02 is a 50% drop. Markets doubled to October of ‘07. Dropped 55+% to March of 09 markets doubled again. 100,000 doubles between now and then; 100,000 in these portfolios that didn’t take 250% drops.
BRIAN: When you don’t take 250% drops you can roll that cumulative return up pretty fast. 100,000 grows to over 900,000 averaging return is about 16%. We use these models the way that I get them. In fact I think a lot of KVI listeners will be surprised when… I’m going to just be transparent and tell people how we choose our managers.
MIKE: That’s gutsy but I mean that’s what a fiduciary would do.
BRIAN: Okay. Here goes.
BRIAN: Every quarter I used the Morning Star database and I just want to know since January 1 of 2000 who’s beating us. Who’s beating the portfolio that we already have in place? And I use the Wilshire Database, biggest database in the world of money managers, and I use theta and timer track. I cast my net as wide as I can using the databases to find out who out there’s has better net of fee cumulative returns than what we’ve got.
BRIAN: And every quarter Mike I get about 60 who legitimately beat us. But they fall into four categories. Number one yeah they’re beating us but they’re closed to new investors. They’re not taking any new money. I can’t use that. Number two they’re hedge funds and we’re not going to put retirement money in a hedge fund. Should I elaborate?
MIKE: People know what hedge funds are I think, It’s just… It’s…
BRIAN: They’re way too risky.
MIKE: It’s not… yeah. It’s not the retirement model you’re going to want to use.
BRIAN: Maybe on another radio show we’ll talk about hedge funds.
BRIAN: Number three the minimum… Yeah they’re beating us but their per account minimum is 3,000,000 or more and I can’t diversify that. And number four is yeah they’re beating us but they’re high beta or high volatility funds or managers. So for example in the Morning Star database there’s two mutual funds that legitimately beat what we have. And they’re called the Bruce Fund and CGM Focus. They do. They beat us.
BRIAN: However in 2008 they lost over 40%. We can’t use them because they have no downside protection. So what we have and what we use for our clients is mathematically legitimately factually the best managers we can find when we use the biggest databases to compare our current managers and funds to.
MIKE: And for those KVI listeners that are just tuning in right now we’re talking about stock market risk and these beautiful models that make money in up markets, protect in down. But this… Today’s radio show is Decker Talk Radio Protect Your Retirement.
MIKE: Today we are talking about the six areas where you’re probably taking too much risk and the stock market is definitely one of them. Number one was taking too much exposure in your portfolio in the market.
BRIAN: Just stocks.
MIKE: Number two was interest rate risk.
BRIAN: In the bond funds.
MIKE: Bond funds and then right now we’re talking about…
BRIAN: Stock market risk. The risk of having no protection when the markets go down. Okay I just want to finish up stock market risk with… If you do not have any downside protection markets have a pattern and have had this pattern for decades.
BRIAN: Every seven or eight years the markets crater hard. So we have 2008 and seven years before that was 2001 it’s the middle of… That was when the Twin Towers went down middle of a three-year bear market 50% drop. Seven years before that was 1994 recession, higher interest rates, stock market dips. Seven years before that was 1987; black Monday October 19 that was a 30% drop in one day. Seven years before that was 1980, ‘80 to ‘82 was a two-year bear market. Over 40% drop.
BRIAN: Seven years before that was ‘73 ‘74, a horrific bear market 45% drop. Seven years before that was ‘66 ‘67 two-year bear market over 40% drop and Mike it keeps going. What… the markets bottom in March of ‘09, what’s seven years plush March of ‘09?
MIKE: Soon.
BRIAN: Right. I hope KVI listeners I hope that you have downside protection because the markets are going to get nailed.
BRIAN: There’s a divergence right now in the stock market that’s a predictor of stock market crashes and that has to do with stock market direction and earnings. Did you know that in the last five quarters FSP reported earnings have dropped? Five quarters in a row. And yet the stock market today registered a new high. So when earnings aren’t there to support it you have what’s called PE expansion. Price earnings expansion that with the low interest rates around the world capital is flooding to the United States looking for a home.
BRIAN: But it’s not… Stock market is not supported by earning. Earnings have been going down for five quarters in a row. Well that’s a whole new… I’ll just leave it at that.
MIKE: One thing I want to insert here real quick to KVI listeners is we do love to hear from you. If we’re talking about a topic and we don’t go in depth enough you can email us at [email protected]. Those will go straight to me and if you have suggestions or topics you want to hear on the radio we’d love to hear from you. If you have… If you want to talk to Brian directly please email us. We would love to hear from you as well.
MIKE: I know we’re kind of going through these six topics kind of fast but we only have so much time.
BRIAN: You’re right. All right anything more on stock market risk?
MIKE: I think we got to move on to the next one.
BRIAN: Okay this is liability risk.
MIKE: So this is number four.
BRIAN: This is number four. Liability risk is the risk that Mike you and your sweet wife Alexandra retire at 65 and you’re driving away from your last day at work and Alexander…
MIKE: Alexandra.
BRIAN: Alexandra. I call her Alex.
MIKE: Yeah.
BRIAN: You guys are…
MIKE: People usually put the i on there. Alexandria. But it’s just Alexandra.
BRIAN: You guys live happily ever after and pulling out of the garage you T-bone someone. Most of the time they’re going to sue you. Or lets say that you’re nice enough, you’re the great friend of the neighborhood. You have a trampoline in your backyard and the neighbor kids without your permission hop the fence jump on your2 trampoline and one of those kids sadly hurts themselves. You will get sued.
MIKE: Well people sue for everything. Did you hear about some people in Ireland are suing DC because they didn’t like how the story was for their new movie?
BRIAN: Yeah. I heard that.
MIKE: [LAUGHS]
BRIAN: Okay. True story two and a half years ago a client of ours bumped someone in the parking lot down at… I won’t say where. Bumps someone in the parking lot. The client was nice enough to get out and look and see that there was no damage to either care but just graciously checked to see if the guy was okay. He was already on his cell phone to his attorney when he rolled the window down and was asked if he was okay.
BRIAN: He was said, “By law I don’t have to answer that question until you send me a net worth statement. Here’s my email.” And he was right. I just want to warn you KVI listeners we live in a different world and if you don’t have liability risk if you don’t have liability coverage you are exposing all that you’ve worked for to unnecessary risk. So how do you cover this risk? It’s very easy. For four or five hundred bucks a year you can ask for an umbrella policy. It gives you an extra million dollars of liability coverage.
BRIAN: And it’s a rider on your homeowners insurance. I hope you have it. If you have it great if you don’t have it we strongly recommend all our clients have the umbrella policy for liability coverage.
MIKE: What’s the… Who do you talk to? How do you get one?
BRIAN: Look at your homeowners’ insurance, find out who it is, call that company or your agent, ask for a quote on a million dollars of umbrella coverage and your set. Should be around four or five hundred bucks a year.
MIKE: Excellent. All right.
BRIAN: Anything else on that?
MIKE: That’s nice and simple.
BRIAN: All right.
MIKE: So just to recap real quick number one was too much risk exposure in your portfolio in the stock market. Number two was interest rate risk. Number three was stock market risk with the models that you’re using. Number four was liability risk. And now number five?
BRIAN: Six areas where you’re probably taking way too much risk. Number five is spousal risk. Spousal risk is being married to someone that has lets say a pension where it dies with them. And lets say a fantastic social security that… where both spouses have large social security.
BRIAN: I’ve seen it where one client for example had a pension of $70,000, both of them had annual social securities of $35-$40,000. Well when one spouse died they took with them $100,000 of annual income. Six figures died with them. That’s called spousal risk.
MIKE: That’s a huge change in lifestyle.
BRIAN: Yeah. That’s… And so you have to replace that risk. You have to replace that income. Sorry not risk.
BRIAN: You have to replace that income and so you look at options. One of the wa-one of the easiest was that we go to replace income like that is just simple life insurance. We as fiduciaries we sell life insurance but most of the time we tell people “If you have it keep it. If you don’t have it, once you retire, you don’t need it.” Let me say that again.
BRIAN: As one who sells life insurance we say most of the time once you’ve crossed the finish line of retirement that you… If you have it keep it. If you don’t have it you don’t need it once you retire. Unless you’re talking about huge gaps in your income because one spouse is going to the grave with six figures in income. When we work with clients before they retire we help them choose 100% survivability on their pension. What does that mean?
BRIAN: It means that when they die 100% of that pension goes to their surviving spouse. It doesn’t die with them. And so we can minimize spousal financial risk by having the clients get survivability. Lets say Mike that you’re offered in your pension $3,000 a month with 100% survivability, $3,500 a month with 50% survivability, and $4,000 a month with no survivability.
BRIAN: A lot of people think, “Well I’ll take the four and that extra thousand dollars I’ll invest in life insurance.” So great planning on the chalkboard. Never quite transferred into reality. We see this all the time. So we want to help people make sure that both spouses are covered and it’s part of the planning that we do. We make sure that there’s no gaps in income once there’s a death of a spouse.
MIKE: That is smart. That is smart. Wow. Well lets… well this is just amazing.
MIKE: Going over again the six areas where you’re probably taking too much risk and we’ve got the first one: too much risk exposure in your portfolio. Second one: interest rate risk. Third one, which is: stock market risk. Then we just covered four: liability. And five: spousal risk. So we’re going to cover now the number six one and then we’re going to do a little bit of recap here. And the sixth one I think… Well this one you hear it a lot but I don’t think a lot people maybe fully grasp if they need it or not so I’m going to let the cat out of the bag here and say long term care risk. That’s our number six here.
BRIAN: Yeah. Number six risk where people are taking way too much risk is the risk that one spouse is going to bankrupt the other because of health care cost. There’s typically six different options that I’ll go through to handle your long-term care risk. But our of the chute… do you want to… okay. The six different ways that you can plug that gap on your medical cost exposure… The most popular has to do with traditional long term care.
BRIAN: And by the way I want to back up, Mike. There’s some scare tasks that we don’t like. Scare tasks that are used by the long term care community that say that 70% of Americans will end up using… Will spend time in a facility. And it’s… I don’t like it because they’re counting even hospice in that statistic. So if you spend one or two days in hospice that’s counted. If your strip out 30 days or less of hospice that statistic drops dramatically.
BRIAN: To where now 70% of Americans don’t spend any time in a facility. They just die or have a heart attack, stroke, automobile accident. Sorry to be morbid but we don’t spend any time in a facility. But lets hope for the best and plan for the worst. The worst situation that financially you can face is a healthy body with Alzheimer’s. And there’s typically three parts to the journey that you will go on. One is the first part a spouse will be taking care of their spouse because you don’t check them into a facility if they forget an anniversary. It’s just a slow degeneration.
BRIAN: But the one spouse will take care of the other. Is there cost to it? No it’s a labor of love. The second part of the three-part journey of an Alzheimer’s case is where now the spouse needs help. And in home care-in home care is not $10,000 a month but it’s on an as needed basis. And in this second part Mike this is where it starts low and it builds as the need for help builds.
BRIAN: At some point the Alzheimer’s patient needs full time care. And will go to a facility that really is in present day funds around $10,000 a month. How do you pay for that? Well we… there’s six different ways that traditionally are available to pay for it. But we recommend… Well I’ll get there in a second. Number one, the first most popular way is to use traditional long-term care. This is where you are given four-five hundred dollars a month premium.
BRIAN: And they call it by the way… the premium is called a Guaranteed Level Premium. And you’re going to pay this guaranteed level premium of four or five hundred dollars a month per spouse until you get the quote on quote letter. What’s the letter? In your late 60s early 70s you’re going to get a letter that says that your long term guaranteed level premium has just gone up by around 60%. Why 60%? Because that’s the maximum that the Washington State Insurance Board will allow.
BRIAN: So as medical cost go up there’s cohorts of long-term care policyholders that are allowed a reprieve. And people will tell me Mike “Hey no it says guaranteed level premium.” Well that’s a little deceptive. I’m being nice. Little deceptive.
MIKE: [LAUGHS]
BRIAN: And so what the insurance company want you to do… You can tell that I’m a skeptic. The insurance company wants you to panic and cancel.
BRIAN: So now they’ve kept years of premium with no risk. Or panic and cut your premium in half so then they have half the risk and they’ve kept the premium.
MIKE: I kind of feel like it’s the, you know, the different TV providers that say, “Well for the first two years it’s good but after that we can mark it up no problem.” But this is more of a need.
BRIAN: Right.
MIKE: What they’re doing there.
BRIAN: Right.
MIKE: So… And for those that are just… KVI. For those that are just tuning in here this is Decker Talk Radio’s program Protect Your Retirement with Brian Decker from Decker Retirement Planning and Mike Decker here.
MIKE: And we are talking about the six areas where you are probably taking too much risk and just so you all know if your just tuning in late here you can go to our website www.deckerretirementplanning.com and you can get this recording of this show right afterwards as well. So you can re-listen to it. And if you have questions or comments we love to hear from you. Feel free to email us at [email protected].
BRIAN: All right. So now for traditional long term care we council people if they have it we tell them about the letter. If you have it we keep it. You’ve got access to around 400,000 in-in benefits that you can use.
BRIAN: Okay. So if you have it we build a plan around it. We don’t want you to panic. We tell you about the letter. The second option… The second option is-has to do when an insurance guy comes an says… The insurance guy comes and says, “Hey, you know, if you just die or get hit by a bus you don’t get your 400,000 in benefit. You know you should have is universal life or a whole life policy with a traditional long-term care rider.
BRIAN: That’s what you should do because then you have access to your 400,000 either way and whether you die or you go in a facility you’re going to use that 400,000.” So it sounds good on the chalkboard but in reality it’s very expensive. It’s very expensive. It’s typically over $1,000 a month per person and it’s just really really tough. So Mike we know about this option but we don’t use it very often because it’s just too expensive. Okay then next option number three for long-term care is called asset based long-term care.
BRIAN: It’s a great option for some people because it allows them to put aside 10,000 a year into an account. It’s totally liquid. Over 10 years you are able to accumulate 100,000. The death benefit is 2x so you’d get 200,000 if you died during that period. The long-term care benefit is 4x; you get around 400,000 in long-term care benefit. The problem that we have with this one Mike is that not a lot of people can save $10,000 in retirement per year per spouse for 10 years.
BRIAN: If they can we use it if not then we don’t. So that’s number three. Number four is called Safe Harbor Trust. Safe Harbor Trust used to be a genius idea, this is where Mike you say, “Well dang, I think that my spouse is going to come down with huge healthcare benefi-healthcare costs. I’m going to move all of my assets into the name of my brother and this is something that I can avoid. Being nailed with healthcare costs. And after my spouse passes then I’ll call for my assets to come back and I’ll have tax payers be on the hook for the costs of my healthcare.
BRIAN: While we go on this journey.” The problem is the IRS wised up. That’s bad English.
MIKE: [LAUGHS]
BRIAN: And said that they put in a five year look back so that you have… If your diagnosed within that five-year period that you moved money to a Safe Harbor Trust they’ll call it all back. They’ll… It’s called a claw back provision. So a five-year look back with a claw back provision keeps you from using the Safe Harbor Trust as it was intended. Also some common sense here.
BRIAN: Lets say that I’m your brother Mike and you put your million five with me. I can tell you “You know Mike I really like these assets. I’ve decided to keep them.” So it’s not a wise way to avoid exposure to health care costs. Number six. Is it number six?
MIKE: I think we’re on five.
BRIAN: Five. Number five. I knew that. Number five is sad. And that’s where people that can’t afford a solution to long-term care they will just divorce. They will just say, “You know I’ve got to protect myself he or she doesn’t know my name anyhow.”
BRIAN: Sadly they’ll just divorce to protect the assets. Number six, the last one is the one that we use most of the time Mike and that is self-finance. So here we are, we sell long term care but most of the time, and I’m talking not 51%. I’m talking 90% of the time I personally do not recommend long-term care because we have provisions in their plan to fund their long-term care investment.
MIKE: So what you’re saying is don’t buy things you don’t need.
BRIAN: Right. We try to save people money and show them in their planning that they have that taken care of. For example we show people that… Do they have an inheritant? So we account for that. We talk about how much equity they have in their home, in their rental real estate and we are very conservative in the planning where our avera-the average annual return for the stock market exposure that we have is six. We use for planning six percent when the managers like I’d mentioned on this show of average 16%.
BRIAN: So there’s an extra build up of assets that 20 years from now in the equity of their home, in the extra money that they have in their-in their portfolio more than pays that expected $400,000 benefit. So we just simply show clients their options, they choose. Most of the time we sell finance.
MIKE: That’s really nice and simply put. What I’d love here… I hope the KVI, you guys are paying attention to this is the… Brian is suggesting you do not buy something that you don’t need. That’s the sing of a true fiduciary.
MIKE: All right so just as a quick wrap up Brian I know you did bring some notes here that you wanted to talk about as a wrap up of the six things or six areas on where you’re probably taking too much risk.
BRIAN: Right. All right these are just kind of some miscellaneous points at the end. Mike how much do you think global government debt has jumped from 2007 to 2014? That’s the latest statistic we have from McKinsey. How much do you guess?
MIKE: I mean it’s…
BRIAN: By the way it was 33 trillion in 2007. How much do you think it is now?
MIKE: I’m going to guess it’s doubled or something because China and the US are not doing so hot and…
BRIAN: Right.
MIKE: There’s Greece and there’s just a ton of countries that are just not in good shape.
BRIAN: Government debt has jumped 75% from 33 trillion in 2007 to 58 trillion in 2014. Ballooning government debt should have brought about higher key work much higher interest rates but central banks bought bonds in their respective governments and corporations to try to artificially drive interest rates down to help governments, global governments pay the interest.
BRIAN: And so this is an artificial game that is going to end soon. We don’t know when. Some companies or some countries resort to negative interest rates. Why? Because they want to destroy their currency or their word devalue their currency because they’re an export nation like Japan. Japan benefits from a lower value of their currency because then their goods that they ship out are cheaper and they have that export advantage. If the global economy was doing great interest rates would not be where they are today.
BRIAN: This is a major point. Interest rates would be higher. Now Europe the world’s second largest economy they agree to use the same central bank and each country… oh we only have two minutes darn it. Well I’ll just say that I find this stuff interesting. Each country went on there spending money that they individually wanted. Some were frugal like Germany others Portugal, Ireland, Italy, Greece, and Spain went on spending binges. And so that’s why you have the Brexit.
BRIAN: Darn I wanted to talk about Brexit.
MIKE: Well we got some time but we can promise that we’ll talk about it next week as well because the big question I have right here is how does this affect an individual retirement plan?
BRIAN: Well interest rates are eventually going to snap out of the artificial control that the central banks have. They will eventually snap out to where they are market driven not artificially controlled. And when that happens it’s going to be very interesting.
BRIAN: I want to just say on Brexit, the main reason for UK breaking off their EU membership was… what would you say? Immigration.
MIKE: Is it immigration?
BRIAN: It’s immigration.
MIKE: I thought it was going to be something to do with just the Greece situation. Having to back up countries that aren’t being as responsible but if it’s immigration then there you go.
BRIAN: Immigration number one and financial exposure and responsibility to the spending binges of Italy, Greece, Portugal and Spain.
BRIAN: They just didn’t want any part of financing the irresponsibility that was shown by that… By the way most of the banks of Italy are insolvent.
MIKE: Oh.
BRIAN: Insolvent. So there’s a contagen…
MIKE: Can you describe what insolvent is just for those that don’t know what that means.
BRIAN: Insolvent just simply means they have more debts than they do equity. They…
MIKE: Basically a not good situation.
BRIAN: They have negative net worth. They owe more money than they have assets.
MIKE: Sounds like a bank you want to have your money in.
BRIAN: Yeah.
MIKE: Sarcastically speaking.
BRIAN: Little sarcasm there. All right I have more time.
BRIAN: I want to cover something on how the Italian banks are set up… oh.
MIKE: If you can do it in 30 seconds.
BRIAN: Okay. I can’t.
MIKE: Okay so we’re going to talk more about Brexit next week and the Italian banks. For those listeners this is Decker Talk Radio Protect Your Retirement. KVI nine a.m. every Sunday morning. For feedback we’d love to hear from you at [email protected]. This is Mike Decker…
BRIAN: And Brian Decker.
MIKE: And we’ll see you next week. Thank you so much.
