MIKE: Good morning and thank you for listening to Decker Talk Radio’s Protect Your Retirement, a radio program brought to you by Decker Retirement Planning. This week, we’re talking about tax minimization, risk reduction, and potential problems you may face in retirement. 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 at Decker Retirement Planning. They’ve got offices in Kirkland, Washington, Seattle, Washington, and Salt Lake City, Utah. This is KVI 570 and KRNS 105.9. Brian, let’s get started right away. We got a lot to cover. I know we won’t get through the whole show, but tax minimization, risk reduction, and then we’ll start a favorite segment for our listeners, the potential problems in retirement, which will be part one of a multiple part series there. But let’s dive right into it. Tax minimization, Brian, why is this so important for retirees?
BRIAN: Actually, Mike, right before tax minimization, I want to start with the topic… something that has caught my attention. We did a seminar here in Salt Lake City last night, and this came up. Did you know, Mike, that, and Decker Talk Radio listeners, that the stock market right now is valued at 25 times trailing earnings? Price earnings ratios allow people to see how expensive or inexpensive the stock market is. We’re now at 25 times trailing earnings. Mike, you know this. There were only two times where the stock market was valued higher. Do you remember what they were?
MIKE: Yeah, wasn’t it right before The Great Depression?
BRIAN: 1929.
MIKE: Yeah, and the other one was right before the tech wreck, correct?
BRIAN: 1999, correct. So, those two times are the only times in U.S. stock market history that the market has been valued higher than what it is today. So, the scary statistic that I want to share [CLEARS THROAT] with Decker Talk Radio listeners so that they can change their approach because the next 10 years, there better be a different way to make money in your portfolio.
BRIAN: Because, historically, from 1929, 10 years forward, people didn’t make money in the stock market, and from 1999, 10 years forward, people didn’t make money in the stock market. So, right now, today, the valuation of the stock market, where are you going to make your money in your portfolio if you’re retired? Because, historically, the 10-year forward returns are negative. Let me say that differently.
BRIAN: There’s never been a time in the history of the United States stock market that people have made money over the next 10 years with the approach of buying and holding stocks and indexes in the stock market. So, your approach better be different. Our clients at Decker Retirement Planning in Seattle, Kirkland, and Salt Lake City, our clients will make money with a market that is negative over the next 10 years. Here’s why.
BRIAN: We have three parts of the portfolio, and this is part of risk reduction and I’m going to just touch on this and get back to it. Number one, we have… there’s three parts to anyone’s portfolio in retirement. Cash, and we have emergency cash set aside for all of our clients, and we try to maximize the rate of return. And we’ll just tell you up front how we do business. We’re fiduciaries, and we try to maximize the returns for our client’s portfolio.
BRIAN: There’s three… no, there’s four different entities that pay 1.25 to 1.3 percent money market rates for our client’s cash. We try to do our homework and check it out. Goldman Sachs does it, Synchrony does it, CIT does it, and Capital One. So, those four are where we talk to our clients and have them set up so that their emergency cash and any of their liquid money they can at least earn 1.25, 1.3 percent. The second part of their portfolio is safe money.
BRIAN: Safe money is where we have a bucket system, a laddered, principle-guaranteed approach where we can ladder bucket one is responsible for the first five years of our client’s income, bucket two is responsible for your six through 10, bucket three is responsible for years 11 through 20. So, when the markets crash every seven or eight years like they do… when the markets crash, our clients don’t even feel it in buckets… their emergency cash, and not in buckets one, two, and three.
BRIAN: Which, by the way, is 75 percent of our client’s… approximately about 75 percent of our client’s portfolio. They have laddered, principle-guaranteed accounts. Now, before 2008, the highest returns that we got for clients were in CDs. We plugged ’em right in. CDs were earning five percent on a five year CD, seven percent on a ten year. It was a no-brainer. After 2008, this was… any of the fixed rates have… are trading right now at or near all-time record lows.
BRIAN: CDs, treasuries, corporates, agencies, municipals, any of the fixed-rate investments are really low right now. We’re fiduciaries to our clients. We do our homework at Decker Retirement Planning in Seattle, Kirkland, and Salt Lake. We know the highest returns right now are not coming from CDs, treasuries, corporates, agencies, municipals. They are coming from equity-indexed accounts, equity-linked CDs.
BRIAN: And by the way, that’s the highest taxable returns. The highest tax-free returns we’re getting through IULs, indexed universal life, where the average returns, tax-free, are six and seven percent tax-free. So, we know that when the markets over the next 10 years are… And by the way, our firm is a math-based firm. There’s one company out of all the IUL, indexed universal life, companies that give us competitive rates of return.
BRIAN: And out of all the hundreds of equity-indexed accounts and equity-linked CDs out there, of all of them, there are only three that we would use for our clients. And so, with a math-based approach like that where we do the homework, we would reject because of fees and caps probably 98 percent of everything that’s out there as not being competitive.
BRIAN: So, at Decker Retirement Planning, we have a math-based approach that when it comes to safe money, our returns for the last 10 years have averaged 6.4 percent taxable and over seven percent, or right at seven percent tax-free for the principle-guaranteed tax-free accounts. Those are really good returns. Those are good returns, and in the next 10 years, if the markets do what they did in 1929 and 1999, our clients, over that 10-year period, will make, not lose, money, on their principle-guaranteed accounts.
BRIAN: Then finally, any good portfolio… we talked about cash, I told you were we get the best returns, 1.25, 1.3 percent principle-guaranteed accounts, or your safe money. Banks and brokers will put your safe money in bonds or bond funds. With interest rates this low, you’re not paid hardly anything, and if interest rates go up, you lose money on your bond funds. That makes absolutely no sense to us at Decker Retirement Planning. When it comes to risk money, also we have a math-based approach.
BRIAN: We go through the databases, the Wilshire database, largest database of money managers in the world, we use Morningstar database for mutual funds, and we use TimerTrac and Theta. And we just want to know, out of all the different money managers out there, who is beating the six managers that we currently are using, who’s better than us, ’cause we’ll use ’em. We’re an independent company. And, by the way, you would expect your fiduciary to do this homework. We do it four times a year. We check the databases and what we are looking for are two things.
BRIAN: One, keep up with the S&P when the markets are going up. By the way, that’s a very high bar. 85 percent of money managers and mutual funds don’t do that. And two, protect principal when the markets go down. Who do you know that made money in 2008? The six managers that we have, they collectively have made money every year in the last 16 years. So, that includes making money in 2008.
BRIAN: A 100 thousand put in the S&P, January 1 of 2000, is currently worth about 240 thousand. Average annual return is four and a half percent. A 100 thousand with the six managers we have is worth over 900 thousand. Average annual return is 16 and a half percent, net of all fees. The reason is because these managers are two-sided strategies, computer algorithms that are called trend-following models, and they’ve been around for decades.
BRIAN: These are available for anyone. We’ve just done our homework. We know where they are and we’re using them for our clients. So, to the point, Mike, that we started the radio show, to this point, these managers over the next ten years, if the market chops or trends down like we expect that it will, our clients will make, not lose, money.
BRIAN: We’re fiduciaries, we’ve got the math, we have relationships down in Phoenix and Scottsdale where, on a weekly basis, the actuary runs all the different principle-guaranteed investments out there and he tells us Wednesday at eight A.M. mountain standard, we have a conference call, and he lets us know the highest returning net of fee principal-guaranteed accounts.
BRIAN: I don’t know, Mike, anyone else doing what we do. I ask Morningstar if anyone else is making the calls. They say no. If anyone at Wilshire… I ask them if anyone is making the calls, and they say no. So, I don’t know why other people aren’t doing what we are, but we are making the regular mathematical calculations out there on what is the highest returning principle-guaranteed accounts and the highest returning net of fee risk managers out there.
BRIAN: All right, so, now, let’s talk about [comparance?] of tax minimization strategies that we use at Decker Retirement Planning. First off, once we get your income plan set, then we go in and first… there’s four parts to this.
BRIAN: Number one, we look at your lines eight and nine on your 10-40, and that’s where you have dividends and interest that settle in there. If we see 10 or 15 thousand of dividend and interest, it’s coming from typically the reinvestment that you’ve got on your mutual funds. That’s an inefficiency that we point out, where you’re spending three to five thousand dollars a year in tax on that 10 or 15 thousand dollars, and you’re getting taxed on money you never even touched. So, we either fix that one of two ways.
BRIAN: Either we repurchase those mutual funds in retirement accounts so that you have the benefit of those funds with dividend reinvestment but you’re not taxed on it every year, or we just turn the spigot on. Instead of reinvesting, take that income as cash because it’s an inefficiency to be taxed on money you never even touched. So, that’s number one. That’s a small thing. We usually save people a couple… two to five thousand dollars a year in taxes on that. The second thing is usually the biggest tax-saving strategy in your lifetime.
BRIAN: This is a huge, huge deal, and that’s the conversion of the IRA to the Roth. Now, by the way, we’re a math-based firm. We know exactly, to the dollar, how much money you should convert from an IRA to a Roth. So, in our buckets, of course we don’t convert emergency cash, buckets one, two, or three, from an IRA to a Roth because the returns are too low and you’re taking the money too soon. It’s only the risk bucket, which is about 25 percent of clients’ money.
BRIAN: That’s where we’re getting very high returns. Roth accounts are golden in three important ways. First off, a Roth IRA grows tax-free. It distributes income back to you tax-free and it passes to your beneficiaries tax-free. These are golden accounts. The point that we want to bring up is you can be proactive… well, actually, let me ask a trick question. So, think of this answer to yourself, Decker Talk Radio listeners, as you’re listening in the car or at home.
BRIAN: Would you be happy with this if we grew your IRA from 350 thousand dollars to 1.2 million over 20 years? That’d be about a six percent rate of return. Would you be happy with this, growing your IRA from 350 thousand dollars to 1.2 million? Now, I said it’s a trick question. Almost everyone’s going to say, “Duh, yeah, I am happy.” But now, when it comes to paying taxes, you’re typically in your late 70s, early 80s, and we’ve now put you in the top tax brackets because required minimum distributions have it you pay tax on 1.2 million when you could have paid tax on 350 thousand dollars.
BRIAN: So, that, again, it’s math. You save a lot of money paying tax on 350 instead of paying tax on 1.2 million. Typically, this is the biggest tax-saving strategy. Now, we don’t pay tax and convert it all at once. We do it over five to seven years, and we look at your… we estimate your income for the year, minus deductions, and every year, we look at the brackets and, without raising your tax bracket, we convert what we can from an IRA to a Roth. That’s how we do it.
BRIAN: Now, there’s another trick that we have for comprehensive tax minimization. Every client we have typically has a mix of retirement and non-retirement money. We call it qualified or retirement money, non-qualified, already-taxed money. When you take a thousand dollars out of Bank of America or Chase, your bank account, you’re not taxed on that. It’s already-taxed money. When you take a thousand dollars out of your IRA, you are taxed on that. So, guess what we do? And this is genius in how we help minimize your taxes. [CLEARS THROAT]
BRIAN: If you have a 50-50 split of IRA money and already-taxed money, qualified, non-qualified, we put the already-taxed money in the front part of your plan, in emergency cash buckets one and two. So, that means, in the first 10 years, the amount of tax that you owe on that first 10 years of income is going to be very small. So, for the first 10 years, guess what, your AGI, your adjusted gross income, goes way down. So, the taxes you pay on your social security are way low.
BRIAN: And we create a 10 year window to convert the IRA to a Roth. It is genius. Now, some of you think, “Wait a second, I’m not working. I don’t qualify to contribute to a Roth.” No, we’re not talking about contributing to a Roth, we’re talking about converting IRAs to Roth. There’s no income prohib… there’s no income levels prohibiting you from converting from an IRA to a Roth. There are income levels that keep you from contributing, but we’re talking about converting.
BRIAN: So, this is a huge deal where we dramatically lower the income… or, where we dramatically lower the taxes for our clients. So, here’s what effectively has… The first 10 years, we’re able to dramatically lower the taxes on our client’s portfolio. Years 11 through 20 is where we pay required minimum distributions to clients, and years 20 on, the money is tax-free because it’s all coming back to you from the Roth conversions that we did.
BRIAN: So, this is very, very important, this second point, the IRA to Roth conversion. We are a math-based firm and we know, and I want to emphasize, to the dollar, we know how much money each person should convert from an IRA to a Roth. Okay, the third point is where we want to minimize the taxes for transferring an estate to their next generation. These are estate taxes.
BRIAN: Do you live… here’s some questions. Do you live in a state that has an inheritance tax? Do you have state estate taxes, and if so, what is the level? So, Washington has an estate tax, or a state estate tax. Utah does not. The federal estate tax level is on assets above 5.4 million per spouse, so they can shelter about 10.8 million dollars in federal estate taxes if they do their homework.
BRIAN: We make sure, number one, that the exemptions are there in their will and trust so that the 5.4 million dollar credit or exemption is… that language needs to be in your will and your trust to shelter that when the first spouse dies. If not, then you have just given away a lot of money unnecessarily in taxes. Let me give you an example. Let’s say that your estate is seven million dollars and you don’t have that critical exclusion language in your will and trust.
BRIAN: So, when you die, you lose your exemption and the IRS waits, licking their chops, waiting for the second spouse to die. And when he or she does, that second spouse to die gets that 5.4 million dollar exemption on your portfolio assets, your investable assets, your real estate, your residence. They total it up and, in this case, seven million dollars has 5.4, but guess what?
BRIAN: You just gave away the difference between 5.4 and seven, so 1.6 million, about 50 percent of that goes away in taxes, 800 thousand dollars in taxes, when just two paragraphs in your will and trust could have saved you that money. So, we want to make sure that under estate tax planning, that we have your exemption language in your will and trust. And then also for estates over the estate tax limit, whether it’s state or federal, we ask you the simple question, do you want to zero out your estate tax?
BRIAN: Mike, it’s not a surprise, but half our clients, very, very smart people, half of them say no. I don’t want to… anything that Johnny or Sally, our children, get, net of the estate tax is more than we ever got. So, no, just let it go and let the state and the Feds have their estate taxes. When it comes to… the other half our clients say, “No, I want to do something.”
BRIAN: It’s not about getting Johnny and Sally more money, it’s about after a lifetime of paying taxes that the Feds are going to tax me again just for dying. I want to make sure that doesn’t happen. So, that’s when we use estate tax strategies such as an ILET, an irrevocable life insurance trust, where we set up the second-to-die life insurance, whole life, outside of the estate, so that when the second spouse dies, the estimated estate tax comes to you tax-free in cash to pay for the estate taxes, and all of their estate passes to their children without having to liquidate properties or securities.
BRIAN: It all passes to their children. So, this is something that’s very important that is commonly done, and it’s part of part three here that we’re talking about, is zeroing out your estate taxes as estates transfer from one generation to another. The fourth and final part of minimizing taxes and comprehensive tax minimization strategies that we do for Decker Retirement Planning clients in Seattle, Kirkland, and in Salt Lake is we use Nevada corporations, foundations, and family-limited partnerships strategically with your CPA to minimize taxes on your income.
BRIAN: There are ways that… if you have a high amount of rental real estate coming back to you, does it make sense to have those in family-limited partnerships and in LLCs? We would make the case “yes.” Are you still running a corporation? Should that corporation be in a Nevada corporation? And if you have high assets with charitable intent, does it make sense to set up a foundation?
BRIAN: So, those are simple ways that we can help you, and working with your CPA, in minimizing the taxes in retirement for estates… this last part is for estates three million or over, to minimize, comprehensively minimize the taxes that you pay in retirement.
BRIAN: Okay. So, the next point… we’ve talked about comprehensive tax minimization, now we’ll talk about comprehensive risk reduction. So, in risk reduction, there’s several different risks that are out there. Let’s talk about interest rate risk. Interest rate risk is the risk that, as interest rates go higher, you will lose money in your bond funds. Just like two plus two is four, interest rates going up produces lower bond prices.
BRIAN: Had to take a drink of water, Mike.
MIKE: I was going to say.
BRIAN: [LAUGH] So, when it comes to interest rate risk, it makes no sense to us, when interest rates are at or near all-time record lows, that banks and brokers are recommending that they put your “safe money,” quote unquote, in bonds or bond funds. I guess there’s no big deal if they have a laddered strategy on individual bonds or CDs, but when it comes to bond funds, we do have a problem.
BRIAN: In 1994, the 10 year treasury in one year went from six to eight percent. In one year. And on average, people lost about 20 percent on their bond funds. In 1999, the 10 year treasury went from four to six percent and, on average, people lost about 17 percent on their bond funds. The 10 year treasury right now is at around 2.2 percent. It’s only been to two percent once before, and that was 1940. It’s been below two once, and that was last year.
BRIAN: It got down to 1.6 percent. That’s the lowest ever in the history of our country. So, when interest rates are at or near record all-time lows, interest rate risk is at or near record all-time highs. If you have bond funds with interest rates this low, you’re not paid much on them and you have tremendous interest rate risk. When interest rates on the 10 year treasury go higher, and we expect that they will…. Let me explain why we expect that they will.
BRIAN: There’s a very tight correlation between the CPI, the consumer price index, and the monetary base of the money supply. This is what the Fed prints and puts in circulation. They seem to move together. So, for example, I wish you could see this, I know you can’t on the radio, but if you could see this, from 1960 to 1975, the Fed printed what used to be a lot of money. Although not at first, interest rates wobbled around for about three or four years and then they started to go up quickly.
BRIAN: It took Paul Volcker, the cigar-smoking Fed chairman, to get in front of rates and proactively raise rates to bring inflation down. And we got that tight correlation between the CPI and the monetary base back to normal, which they traded together until 2008. 2008, there’s a hockey stick spike in the monetary base, which is caused from TARP QE1, QE2. We now have 20 trillion in our monetary base, and yet the interest rates haven’t gone up yet, but they will.
BRIAN: And when they do, the people that have been told by their bankers and brokers, their, quote unquote, “advisor,” to put their safe money in bond funds are going to get hurt, seriously hurt, double digit hurt on what they call their safe money. They use what… bankers and brokers use something called the rule of 100, and it says that if you’re 65 years old, you should have 65 percent of your money in bonds or bond funds. If you’re 70, you should have 70 percent of your money in bonds or bond funds.
BRIAN: Now, we’re all about having safe money, now, don’t get us wrong, [COUGH] but it makes no sense to us… I want to be crystal clear. At Decker Retirement Planning, it makes no sense to us for a banker or broker to tell you to put your safe money in bond funds when interest rates are this low. One more point on this. By the way, we believe specifically that it’s financial malpractice to tell you, in using the rule of 100, to put such a high amount of your money in bond funds, because you’re not paid hardly anything.
BRIAN: And when, not if, when rates go higher, you will lose money. There is an article that we use in print. Bill… what’s his name, Mike… darn, of PIMCO…
MIKE: Bill Gross.
BRIAN: Bill Gross, yeah. Bill Gross used to run PIMCO. He now works with Janus. One of the brightest minds on bonds in the world, he makes four important points in an interview last year in April with Barron’s.
BRIAN: He says that, number one, interest rates are kept artificially low by the central banks around the world, number two, that it’s not sustainable, number three, when interest rates go up, people will be hurt, and number four, you’re not paid for the risk that you’re taking right now. This is all called interest rate risk. Our clients at Decker Retirement Planning do not own bond funds. We are constantly warning people to stay away from bond funds when interest rates are this low.
BRIAN: If you have bond funds and they’re in your portfolio and you wonder what your alternatives are, come and see us. That’s something that we can help you with because there are ladder principal-guaranteed accounts that, in the last 10 years, are averaging six and a half and seven percent, and you should be looking at those, not bond funds that are paying you one or two percent and will lose money when interest rates go higher. So, that is all interest rate risk.
BRIAN: We have eliminated interest rate risk at Decker Retirement Planning by using laddered principal-guaranteed accounts, so that when interest rates go up it actually benefits our clients because we can lock in higher rates because we have money coming due on a regular basis. The next point I want to talk about when it comes to comprehensive risk reduction is credit risk. Credit risk is the risk that your municipal bonds, your tax-free municipal bonds, don’t come due or mature with all of their principal.
BRIAN: That’s called credit risk. 49 out of the 50 states have signed on since 2008 to pension obligations they can’t possibly pay back. This is not new news to anyone. You all know that. By the way, Mike, trick question. Or actually, this is a good question. I know you know the answer. Out of the 49 states, there’s one state, it’s not Washington, it’s not Utah, it’s not Alaska, there’s one state that hasn’t taken on pension obligations they can’t possibly pay back, and they’re currently in the black.
BRIAN: Tell the audience what that one state is.
MIKE: Yeah, before I give it away, let’s just take a moment. Take your guess right now. All right, now if your guess has to do with the state that might be with fracking, you’re pretty close. [LAUGH] That’s usually the one that gives it away, right, Brian? The fracking?
BRIAN: A little bit. They get one of them, either North or South Dakota. So, it’s South Dakota. South Dakota’s the only of the 50 states that’s in the black. All the others have taken on pension obligations they can’t possibly pay back. Because we are fiduciaries, we are not going to steer our clients towards an obvious train wreck that is going to happen.
BRIAN: Our clients will not be part of that train wreck. So, this is something that’s very important to us. As fiduciaries, we want to give you a very simple way that you at Decker Talk Radio, that you can… you may want to pull over and jot this down, because if you have a municipal bond portfolio, I’m going to give you some advice right now that can save you many, many, many thousands of dollars. There’s one reason that your municipal bond portfolio will trade below par when interest rates are this low.
BRIAN: If you have a municipal bond portfolio with three, four, or five percent coupon interest, and it’s trading below par, there’s a problem. When interest rates are this low, the only reason that bond prices will drop below par, 100.00… every month you get your statement from your baker, your broker, and you can read down the prices. There’s only one reason that bond prices will drop below par, and that is when there is credit risk that will hurt you when the bond matures.
BRIAN: So, let me give you an example. Four years ago, we saw the bond prices of Puerto Rico start to break par. We advised people to pick up the phone and sell them. Don’t ask your broker, “Hey, I saw the bond price drop below par. Is [everything?] wrong?” He or she will not know, and he or she, to save face, will justify why they sold you that bond. I hope you don’t go there.
BRIAN: I hope that you just pick up the phone and sell them, and that way that will allow you to save what principal that you can. By the way, right now there are bonds breaking par in California municipalities, Illinois municipalities, Connecticut, New Jersey, New York. There are bond prices that are dropping below par. The reason that we are concerned about municipal bonds… and we have not bought a municipal bond for clients since March of 2008.
BRIAN: We have been a seller of municipal bonds since then. Because of credit risk, that’s never been higher. This is a train wreck that we want to steer people away from. If clients have three, four, or five percent municipal bonds and a laddered portfolio, we ask them about how they feel about their risk. We talk to ’em about their risk. And we have a current client right now, he’s got a eight million dollar portfolio. We’re going to keep his municipal bonds.
BRIAN: But we’re going to watch them on a monthly basis to make sure that those bonds do not break par. This is very, very important. Credit risk is very real and very high right now. It’s never been higher in the United States than what it is right now. And that’s how we zero that out. Now, let’s talk about stock market risk. Every seven or eight… We talked about interest rate risk, we talked about credit risk, now let’s talk about stock market risk.
BRIAN: Stock market risk is the risk that, every seven or eight years, the market gets creamed and it destroys your retirement portfolio. Let me give you some dates, just to show how reliable this seven or eight-year market cycle is. Every seven or eight years, the markets have been creamed, and that starts in 2008. From October of ’07 to March of ’09, the markets got nailed, 50 percent. Seven years before ’08 is 2001, Twin Towers went down. It’s the middle of a three-year bare market, 50 percent drop.
BRIAN: Seven years before that was 1994, Iraq had invaded Kuwait. Interest rates skyrocketed. The economy went in recession and the stock market struggled. Seven years before that was 1987, Black Monday, October 19. That was a 30 percent drop in one day. Seven years before that was 1980, bare market from ’80 to ’82 was 46 percent. Seven years before that was 1973, the ’73, ’74 bare market was a drop of 42 percent.
BRIAN: Seven years before that was ’66, ’67 bare market. That was a drop of over 40 percent. And it keeps going. So, every seven or eight years, the markets get creamed. And we want to point out that the markets dropped, or bottomed last time, at March of 2009 and have gone straight up since then. So, we are now in year nine of a seven, eight year market cycle. So, we are telling you that we are due. It’s not a scare tactic, it’s history.
BRIAN: We are telling you that we are due a market pullback. Now, typically, a bare market is 20 percent or more. A “correction,” quote unquote, is defined as 10 percent or more. We have not had a 20 percent or greater correction, and we are in a ninth year of expansion in the stock market, and it’s the second-longest expansion ever. So, we hope… at Decker Retirement Planning, we hope that you have a downside protection plan. The stock market is a two-sided market. It goes up and it goes down.
BRIAN: I don’t know why, but void of common sense is a buy and hold strategy. It’s totally fine in your 20s, 30s and 40s, but when you’re over 50 and you have amassed a fortune and you’re trying to protect that in retirement, why would you just sit there and allow it to get hammered every seven or eight years? You take a 30, 40 percent hit and then you take three or four years to get back to even. And on top of that, you’re drawing income. Now, we’re a math-based firm. I want to define what a destructive plan it is to draw income from a fluctuating account.
BRIAN: That means that you’re compromising the games. When the markets go up, you’re accentuating losses. When the markets go down and you are… mathematically, factually, you’re committing financial suicide by doing that. So, we want to point out that when it comes to these stock market hits, you don’t have to take them. Vanguard, Fidelity, some of the bankers and brokers, tried out this ridiculous statistic, that you should buy and hold for two reasons. One, no one can time the market. Well, that’s true.
BRIAN: Number two, if you would have been… if you would have missed the four best days of the market in any given year, your return goes from x to y, and y’s a lot lower than x. What they failed to tell you is the other side of the coin, that if you missed the four best… four worst days of the year, your return goes from x to y, and y is much higher than x. There have been invented, for decades now, what are called trend-following models. This is very, very important.
BRIAN: Trend-following models are models that catch the market internals and the trends of the market. I think most of you have gone to a beach where the tide comes in in 12 hours, there’s a shift, and then the tide goes out. There’s the noise of the tides where every 30, 40 seconds there’s waves that roll in and roll out. When it comes to the tide coming in and shifting and going out.
BRIAN: That’s what trend-following models pick up, and they use market internals, for example, market internals like the advance-decline line. So, in our current market advance, questions about how strong market internals are, the number of new highs going up each day, the number of… the number, the advancing issues, strengthening against the declining issues, is the percentages of stocks trading above their 200 day moving average going up.
BRIAN: If so, that’s a strong… those are strong internals supporting a market advance. I will tell you that that is not the case currently with this stock market. Market internals are not strong. So, when you have trend-following models, for example, of the three stock models that we have at Decker Retirement Planning, two of the three are in cash right now, today. Two of the three are in cash. One is invested long. And so, there are three separate managers with proprietary models.
BRIAN: We are able to shrink stock market risk by having two-sided models that are designed to make money in up or down markets. So, of our six managers, five of the six managers made money in 2008. Now, we’ve done something I think that’s brilliant. When it comes to managers, I told you that historically there’s never been a time where the stock valued with a 25 price earnings ratio in trailing earnings, that the stock market in the next 10 years has made money.
BRIAN: That’s because, in the next 10 years, if you think this stock market is going to be going up, you’re betting on something that’s never happened historically, not one time, not ever. And if you rely on the markets to make money, and you will lose money when the markets go down, historically, and the high probability, you’re in big trouble over the next 10 years. Our models, three of our six models, are stock market-based and trend-following, so they are designed to make money in up or down markets.
BRIAN: Two of the three managers made good money in 2008. One was up 17 and a half, the other was up 23 percent. The only one that lost money was down 11 percent in 2008. Now, here’s what I think is genius. With the six managers that we have, three are equity-based, one has a two-sided strategy with gold and silver. Guess what goes up predictably when the markets get crushed? Gold, silver, treasury, and oil.
BRIAN: Those are go-to safe havens that predictably go up when the markets get creamed. So, guess what our other three managers are? Two-sided strategies on gold and silver, average annual returns on gold, net of all fees, is 29 percent, 49 percent for silver. Energy… two-sided strategy on energy that in 2008 he made 37 percent. And… no, that was treasuries, made 37 percent. Oil made 56 percent in 2008.
BRIAN: These are hedges that make money when the markets go down. And by the way, they don’t do bad, they do very well, just in the normal years of the market. So, our clients at Decker Retirement Planning have high probability of making a lot of money over the next 10 years. When you, Decker Retirement… Decker Talk Radio listeners, if you don’t have a money management system that’s two-sided and diversified into sectors that make money when the markets go down you have significant stock market risk.
BRIAN: Significant stock market risk, and you’re betting on something that’s never happened in history, and that is for the markets to continue to go higher when it’s priced at 25 times trailing earnings.
BRIAN: Ok, I want to spend the last eight minutes on inflation risk. So, stock market risk, in my opinion, is that it destroys more people’s retirement than any other thing on the list, but inflation is probably second. So, inflation, we have five different levels of inflation protection for our clients at Decker Retirement Planning. Number one, we put in a COLA, cost of living adjustment, so that every year our clients get more money to pay, each year, for their higher food and energy costs.
BRIAN: So, number one by itself is not going to fix inflation risk, but it’s one of the five. The second is we ask to see if there’s any inheritances coming in the future from parents that are transferring assets. If so, we account for that. That’s an injection of capital that comes in in the future. We account for that on their plans. Third is we point out that their residence, if they have a residence or if they have other rental real estate.
BRIAN: Real estate acts as a powerful inflation hedge because it’s a hard asset that goes up in value when we have inflation. In the 70’s and early 80’s, when inflation was so strong, real estate act as a fantastic hedge where home equity prices were going up dramatically along with higher interest rates. So, that we… we point that out. That’s number three. Number four is what we call a downsize.
BRIAN: A downsize is where, in your late 70s, early 80s, your back hurts, your joint hurts, and you’re not interested in gardening or stairs anymore, so you sell the home for x, buy a condo for y, usually y is less than x, and there’s another injection of capital into your portfolio. And we make sure that that’s accounted for, too. The fifth and final part of the inflation hedge is the risk bucket itself.
BRIAN: We assign a six percent rate of return on the risk bucket when historically it’s averaged 16 and a half percent net of fees, much higher than what we put down, so we can build up a very big cushion for clients if they need to draw more assets from their portfolio than what we show. So, this is how we minimize inflation risk because we know that… gosh, when I was a kid, cars cost 15 hundred dollars, homes were in the 50s and 60 thousand dollars, gas was 60 cents.
BRIAN: Actually, I remember gas at 25 cents, and healthcare costs were a fraction of what they are today. So, we want to make sure that the… we want to make sure that you have the inflation protection that you need. And our clients, we feel like we’ve got that covered. So, our clients at Decker Retirement Planning have no interest rate risk because we have no bond funds, no credit risk because we have no municipal bonds, we have significantly lowered inflation risk which we just talked about.
BRIAN: And because we have two-sided models on the risk side, we have dramatically lowered stock market risk. So, we are acting as fiduciaries to our clients by doing all these things. In contrast, what is your advisor doing? What is your advisor doing? If they tell you that they want all of your money at risk in the asset allocation pie chart, and they tell you that… to buy and hold and ride it out. I was trained in the banker-broker model. I will tell you why they have all your money at risk.
BRIAN: It’s not in your best interest to do that. It is in theirs. I’ve heard of many managers that walk around each morning and lean into their broker’s office and say, “Hey, we’re paid to keep our client money at risk.” They are not incented to have you in CDs or treasuries or corporates or agencies. They are paid to keep you at risk. And then when it comes to fees, they’re… [LAUGH] they’re getting an override on all your portfolio that’s at risk.
BRIAN: So, that’s why they tell you to buy and hold, don’t time the market, be tax efficient. That’s all code for “leave me alone. I’m just going to draw my fees and you just leave it all alone. Leave it with me and leave it alone.” So, we don’t… we’re fiduciaries to our clients and we don’t like that. All right, so, those are the risks. I guess there’s one more… gosh, we’ve only got a couple minutes, right, Mike?
MIKE: Yeah, we’ve got literally two minutes left.
BRIAN: Okay. Well, there’s spousal risk and long-term care risk, and I’ll just cover that next week. Long-term care risk is the risk that one spouse bankrupts another because of healthcare costs, and spousal risk is the risk that one spouse passes away. What we do at Decker Retirement Planning is part of our planning is to… just pretending we kill off a spouse one at a time to see what the financial risk is.
BRIAN: And we go through and point out what changes in their portfolio and what doesn’t. So, for example, when we kill off the spouse, we want to point out… Actually, Mike, I don’t have time to go into this. We only have one minute for you to end this show. We’ll cover it next week. Mike, you take it away.
MIKE: Sounds good. So, for those that are tuning in right now, this is Decker Talk Radio’s Protect Your Retirement, a program by Decker Retirement Planning on KVI 570 nine A.M. Sunday mornings or KNRS 105.9 Greater Salt Lake Area [at?] Sunday evenings at six.
MIKE: You can also tune in, if you want to catch this show early, we do post it before everyone else on iTunes and Google Play via podcast. Just go on there, search for “Protect Your Retirement” by Decker Retirement Planning or Decker Talk Radio, and you’ll be able to listen to it at your convenience. Now, a couple quick things as well. There’s a number of different articles you can catch on this show. They’re written by Brian and other people from Decker Retirement Planning. Just go to deckerretirementplanning dot com for this, or you can also catch pre-recordings of this show on there as well, at your convenience. Thank you all so much for listening. We enjoy talking to you.
MIKE: If you have questions, feel free to also submit them. We can include them in the show at questions at deckertalk.com. That about sums it up.
MIKE: Until next week, take care, stay warm. Fall is here. And we’ll talk to you soon.
