MIKE: This week we’re talking about tax minimization strategies, social security, and debt, when to address it, and how to take care of it as you enter retirement. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
BRIAN: Okay, the stock market is setting records, and I want to talk about what’s behind the numbers. We have internal and external numbers for the stock market. The external numbers are where the stock market is making new highs. The internal numbers are why a couple of our money managers went to cash about a week or so ago.
BRIAN: And that is the internals is called the market breadth, B-R-E-A-D-T-H, the market breadth. That is when you have the market going to new highs, but the number of advancers versus decliners is shrinking, or you have the number of new highs-you have the stock market going to new highs, but the percentages of stocks trading above their 200-day, their 100-day, or their 50-day moving average is going down, the breadth is weakening. The market is weakening.
BRIAN: So, you’re going to battle with your soldiers, and you’re winning the victories, but you’re going to battle each time with fewer and fewer soldiers, making the sustainability and the internal strength of the market weaker. So, oh, gosh, probably a week and a half or so ago two of our six managers went to cash because the market internals or the market breadth was weak. So, we just want to give you a heads up. The trend is definitely up.
BRIAN: The expectations are very high. So, let’s look at some of these signs. US investors are abandoning actively managed funds for passive index ETFs. This typically happens when it looks like, hey, I can do this. This is easy. And the typical public will take over and fire an active manager and just buy index ETFs near a market top.
MIKE: Now, Brian, can I ask you a question about that? Is this typical before a big market crash, that people think that they know what they’re doing?
BRIAN: Yes. It’s a definite sign of a market top. So, let me read that again, US investors are abandoning actively managed funds for passive index ETFs, exchange traded funds. Number two, let’s talk about how expensive or cheap the stock market is. Price earnings ratios are at a sixteen-year high. So, this is forward looking price earnings ratio is at a sixteen-year high of 17.5, and the current price earnings ratio of 25 has only been higher twice, 1929 and 1999.
BRIAN: So, markets typically have seven or eight year cycles. We’re in year nine of this one. In the history of our stock market the market’s only gone longer one time, and that was in the 90s. It went ten years without a 20 percent or greater correction. So, the other thing is sentiment is very bullish. Investors are optimistic. Now, I want, Decker Talk Radio listeners, I want you to think about what the definition of a market top is.
BRIAN: A definition of a market top is when the sky is blue, the temperature is 75 degrees, and everything is perfect, and it can’t get any better. So, that’s the definition of a market top, plug in instead of blue skies, plug in price, earnings, volume, trend, cash levels, all that to put in a market top. So, when I talk about sentiment, market sentiment, people are more optimistic about the stock market than at any time since 2004.
BRIAN: Wall Street Journal reported last week that investment newsletters are the most bullish since 2004. The share of newsletter writers who are optimistic on the stock market climbed to 62.7 percent this week, the highest level since 2004 according to Investor’s Intelligence, which surveys more than 100 newsletter writers each week for its sentiment index. The gauge has become something of a contrarian indicator. It tend to lead to peak euphoria ahead of a market top, and pessimism typically peaks at market bottoms.
BRIAN: A reading above 55 percent suggests that a trading top is forming, while topping 60 percent means quote, it’s time to start taking defensive measures, unquote according to investors Intelligence the measure’s been above 55 percent for eleven straight weeks, and above 60 percent for four of them. Remember, the mark was 62.7 percent this week. Another interesting tidbit, BMI research points out that the technical in the US stock markets look scary, that’s their word, not mine.
BRIAN: The combination of bullish sentiment and weak market internals creates the worst possible risk return profile. Consumer confidence is high, these are all good things, outperformance of US markets versus Europe is very large. The volatility, the vix, has been low for a long time. Expectations are very high for large increases in corporate earnings. What if they don’t deliver?
BRIAN: We have started year nine in what typically is a seven, eight-year market cycle, and the global economic policy uncertainty index just hit a record. So, the global economic policy uncertainty index looks at how the negotiated trade agreements haven’t been negotiated yet. We don’t know if we’re going to have open trade agreements, or more protectionist type of trade agreements at this point.
BRIAN: Protectionist trade agreements typically have hurt earnings for US companies. All right, now at Decker Retirement Planning in Kirkland, I want to talk about more of what we covered last week, which is tax reform. By the way, I loved Ronald Reagan’s quote. He says, quote, government’s view of the economy could be summed up in a few short phrases, if it moves, tax it. If it keeps moving, regulate it. And if it stops moving subsidize it.
BRIAN: The Trump team put out the following to describe their tax reform efforts, three things, number one, simplicity, and fairness, make the tax code more simple and more fair. Number two, jobs and growth, make it easier to create jobs, raise wages, and expand opportunities for all Americans. And number three, this cracks me up, a service first IRS. Create an IRS that is simpler, fairer, and that puts taxpayers first.
BRIAN: Mike, when you think of the IRS, do you think of the IRS putting Mike Decker first?
MIKE: No, never.
BRIAN: Yeah. Do you think of it as a rabid attack dog that latches onto your leg and doesn’t let go?
MIKE: Oh my gosh, the less I have to deal with the IRS the better in my opinion.
BRIAN: Yup. So, here’s some highlights for individual and family taxpayers, this is on the Trump tax reform that’s going out, there’s a three bracket tax rate schedule, with the top rates reduced to only 33 percent, elimination of itemized deductions except mortgage, interest, and charitable giving, larger standard deductions, and child dependent care tax credits, streamlining of education tax benefits, elimination of the AMT, the alternative minimum tax, the improvement in the earned income tax credit, and the repeal of the estate tax, and the gift tax.
BRIAN: Now, I’m very excited about all of these, the elimination of the AMT that bites me every year, the repeal of the estate tax, and gift tax is huge, streamlining of education tax benefits, larger standard deductions for child independent care tax credits, the elimination of deductions except mortgage, interest, and charitable giving, and the three-bracket tax rate schedule with the top rate reduced to only 33 percent.
BRIAN: So, that 33 percent top rate, which begins at 202,000 dollars for single taxpayers, and 255,450 for married couples filing jointly. If this plan is enacted very few people will pay 33 percent, firstly because not all that many people make that much income, but also because those who do are frequently self-employed professionals or business owners. Now, Decker Talk Radio listeners, especially you that are self-employed professionals, I’m going to give you some amazing tax advice right here.
BRIAN: Maybe your LLC becomes a C Corp. When I say maybe I’m hinting that it’s probably pretty smart. Your income now becomes W-2 wages, and you make sure to hold your wage below 200,000 if you’re married, filing jointly, and then all your income above 200,000 is dividend income to you, to your bank account at a tax rate of sixteen and a half percent. So, after paying 39.6 percent in recent years that will feel like tax heaven.
BRIAN: Other changes to corporate income taxes include reduced top rate from 35 percent to 20 percent. That’s almost 50 percent cut in the corporate tax rate. Number two, the elimination of the corporate AMT. Number three, immediate full deduction for capital investment expenditures. So, when you buy capital and equipment you can write it off in the year that you purchased it.
BRIAN: The next one, number four, indefinite carry forward of net operating losses, that’s huge. Number five, interest on future loans becomes non-deductible. That will be an incentive not to take on debt. The elimination of most deductions except research and development. So, the incenting in the corporate tax code for R and D is also a huge positive.
BRIAN: The next one is exemption of foreign subsidy dividends from US tax, and the last one is US companies can repatriate currently deferred foreign cash holdings at a tax rate of 8.75 percent. There’s a reason that Ireland is the home of the massive cash holdings of Apple. It’s because their tax rate is below 10 percent. So, now that it’s 8.75, the Trump team has made it easy for companies to repatriate that cash, and put it to work here in the United States.
BRIAN: Decker Talk Radio listeners, I’m excited about the individual and corporate simplicity, and streamlining of our massive tax code, that this will simplify things quite a bit. There’s a lot of people who might think that-and this is called the Laffer Curve-if you raise taxes above a certain point, you will get less, not more revenue. This is counter-intuitive.
BRIAN: If the government wants to increase revenue they should just keep increasing taxes. Well, look at Detroit. That’s proof that that didn’t work there. When you raise taxes above a certain level-let’s take you, Mike individually-let’s say that, you’re working very hard, you’re making 250, 300,000 dollars. Let’s say you make a lot of money, Mike, let’s say you make 300,000 dollars. Actually, let me graduate the tax into this.
BRIAN: So, any money you make above 250,000 you’re taxed at 35 percent-I’m just making this up. Any money that you make above 300,000 is taxed at 45 percent. Any money that you make above 400,000 is taxed at 50 percent. Any money you make above 600,000 is taxed at 75 percent. Any money you make above 700,000 is taxed at 90 percent.
BRIAN: Now Mike, at some point, and I’m just making this up, let’s say that you were on track to make 1,000,000 dollars this year, individually, would you go to work if 90 cents on the dollar of what you earn goes to taxes?
MIKE: It would be very frustrating.
BRIAN: No, the correct answer is no you wouldn’t.
MIKE: Well, yeah. So, let’s assume that I’m working for the money, then no, I absolutely wouldn’t.
BRIAN: Okay, and let’s also-and by the way, this is called the Laffer curve, L-A-F-F-E-R. It’s an economic model that has been shown time and time again that at some point-and we already know what some point is-people are not willing to get up and go to work if over X amount of that money goes to the government. That number, according to the Laffer curve is about 33 to 35 percent. When you get over that tax revenues go down because people are not willing to give more than a third to the government. Isn’t that interesting?
MIKE: That makes a lot more sense, too.
BRIAN: By the way, we should have an offer here Mike, and I’m going to launch into tax saving strategies, we’re talking about taxes anyhow. Tax savings strategies for our clients at Decker Retirement Planning at Carillon Point in Kirkland, and soon…
MIKE: March 1st for Seattle.
BRIAN: March 1st for Seattle. 2 Union Square, 42nd floor, southeast corner office, I’m very excited. It’s an amazing view of all of Lake Washington, Mt. Rainier, all the way over to the west, it’s just gorgeous, fantastic.
BRIAN: Or to use Trump’s word, this cracks me up, we will win bigly in Seattle.
MIKE: He really said that?
BRIAN: Yeah, he says bigly a lot.
MIKE: Is that a real word?
BRIAN: I don’t think so. I think he invented that, bigly. I’ve never heard anyone say bigly.
MIKE: There was another president who said normalcy.
BRIAN: Well, normalcy is a word.
MIKE: It wasn’t when he said it. So, maybe 2018 Webster Dictionary’s going to have bigly in there.
BRIAN: Bigly will be in there, yeah. All right, so the offer, Mike, should be, have people come in, call in, and let’s talk about-I gave some very important information about people who own their own business, small business-let’s talk about the new tax code that’s being discussed by the Trump team, and how to have your W-2 income capped at 200,000, and to dividend back to you all income above that at sixteen and a half percent.
BRIAN: That’s a no-brainer. If you’re retired then we will go through, and talk about how to comprehensively minimize your taxes.
MIKE: Great. So, for the next ten callers that call in we will give you the option to come into our Kirkland office, or we can schedule a time for you to visit us in Seattle at 2 Union Square. Must be 55 years or older, and have at least 300,000 of investible assets. Call 1-800-261-9446. That number one more time is 1-800-261-9446, and when you call in they will gather your information, and one of our staff will be reaching out to you to schedule a great time for you to visit us here in either Kirkland or Seattle.
MIKE: So, we look forward to that time. We look forward to those calls, and we’re only extending that offer for the next ten callers that call in. All right, well let’s keep going here. And so, let’s talk, are we going to keep going with taxes, Brian?
BRIAN: Yeah, let’s continue to talk taxes. So, at Decker Retirement Planning in Kirkland we have a four-part tax minimization strategy with people who are retired. Number one, we look at your lines eight and nine on your 1040, and that’s when you have interest and dividend income show on lines eight and nine.
BRIAN: Typically, we see 10 or 15,000 dollars there, and that’s where you’re paying around 4 to 6,000 dollars in taxes on money that you’ve never even touched. So, what we want to do is optimize that, and either have you take that as income, or move those reinvested mutual funds, which has created the dividend and interest income on lines eight and nine, sell those and repurchase those into retirement accounts, so that you have that benefit of reinvestment on those mutual funds, but not the taxes that go with that.
BRIAN: Ideally for us, we want to not have you taxed on the growth of the accounts during the year, only taxed on the income that you receive and spend, and even there, we try to minimize that as much as possible, but lines eight and nine, we try to optimize that ideally by moving those reinvested mutual funds shares over to retirement accounts so that you’re not taxed on that. Number two, this is the Roth conversion strategy, and by the way, on this second point, Decker Talk Radio listeners, this is where most people will have the highest-most of our clients will have a six-figure tax benefit in their lifetime, and this is where you have your biggest tax saving strategy.
BRIAN: A Roth IRA is a golden account in three ways. Number one, it grows tax free. Number two, it distributes income back to you tax free. And number three, it transfers to your beneficiary’s tax free. So, this is a golden account that is only golden if it’s placed in the accounts that growing the fastest, number one, and number two, it’s in the accounts that are not going to be tapped for income for the longest period of time.
BRIAN: So, in our bucket system, we don’t put it in buckets one, two, and three, because you’re drawing that money too soon, and the returns are not high enough. It is only the risk account that our clients convert the IRA to the Roth. We don’t do it all at once. We do it over five to seven years, but we know mathematically to the dollar how much should be converted, and we try to do that over five to seven years. So, silly question, Decker Talk Radio listeners, would you be happy with us if we took your IRA at 250,000 dollars, and we grew it in 20 years to 1.2 million dollars? Would you be happy with us?
BRIAN: All of you would say, yes, of course we’d be happy. And then we would point out that now, in your mid-80s, we put you in the top tax bracket paying required minimum distributions on 1.2 million dollars when you could have paid tax on 250,000. And so, any tax wise person would not be happy with us at all. So, we are smart, and we do the planning, and we do that in accounts that are growing the fastest.
BRIAN: Now, by the way, our risk accounts are two-sided stock models. These computer models have been around for 30 years. They are trend following models. There’s computer algorithms that when the S&P goes up they kind of track with the S&P, but when the S&P goes down they go to a defensive strategy that’s designed to have them make money-not lose-make money when the markets go down. These computer algorithms allow the managers that we have in place right now to have made money in 2000, ’01, and ’02, when people lost 50 percent of their money.
BRIAN: And then when the markets doubled from ’03 to ’07 these models doubled also. And when the markets got creamed in ’08 these managers collectively made, not lost money. And then, when the markets are up 150 percent from ’09 to present these models have made money during that-have kind of tracked with the S&P during that period too. So, this is where we have to use models that can justify a 20 percent tax on a IRA to Roth conversion.
BRIAN: If you’re averaging 100,000 in the S&P in sixteen years grows at only four and a half percent dividends reinvested. 100,000 in our models are growing from 100,000 to over 900,000 in sixteen years at a rate of sixteen and a half net of fee average annual returns. Now we can justify an IRA to Roth conversion, because we have the models that are in place to grow that money tax free, and to minimize the losses.
BRIAN: You know, one of the things that can happen is-with your banker or broker-let’s say that you do an IRA to Roth conversion, and then in that year you lose money. So, not only have you paid 20 percent tax, but you’ve also taken a stock market hit. Well, at the end of the year you can recharacterize-that’s the word-you can recharacterize, and get a do-over from the IRS. So, that’s very important tax information to know about as far as a Roth conversion.
BRIAN: But, back to the growth rates on these stock market models. If your average returns are around three or four percent, and you’re paying 20 percent tax, your break even on that money is around six years, but if you’ve got models that are growing like we do, we can easily justify doing the Roth conversion, paying 20 percent tax with average annual returns of sixteen and a half. Mike, this is probably a good point to have people come in, and see our six managers, to visually see the six managers that we use, their rates of return, how they work, and have that discussion, because too many people out there are getting hammered by the banker and broker model that when the markets roll over, and they eventually will, you will take-in your retirement-you’ll take another 30 plus percent hit.
BRIAN: It will take you four years to get your money back, and your banker and broker will tell you to stay invested even though it makes no sense, but by the way it makes sense to them, because that’s how they get paid. They get paid to keep you in risk accounts and not have you transfer out. That hurts their salary. It just really bothers me that that’s their incentive and motive. So, Mike, we should have people come in and see the six managers that we’ve got.
MIKE: We’ll show you the performance. We’ll explain what they’re doing, and be as transparent as transparency is, with who we’re using, and why we’re using them.
BRIAN: All right, so now, let’s talk about social security.
BRIAN: We’re going to change it up and talk about social security for a couple minutes. When it comes to social security, this is money that was deducted from your check. This is not a government benefit. Actually, they call it a government benefit, but this is your money. This is our money. It was deducted and held out to be given back to us during our retirement years as social security income. You know, by the way, if you die before you draw your social security it’s not paid back to you, and when you die any unused social security is not given back to you.
BRIAN: However, because of the… gosh, what do you call it, the just-how government screws everything up, social security is, there’s worry about the on-going… the ability to continue social security for people in the future. I’m very cynical, skeptical. I think that social security will survive this in one of several ways.
BRIAN: You’ll notice that the full retirement age of social security continues to get older, and the retirement age for social security will continue to get older, and that will allow social security to continue to pay out in the future, number one. Number two, there’s something called means testing that has been floated out there. It hasn’t become law yet. Means testing is where the government decides that anyone who makes over X amount, let’s say 600,000 dollars. Government decides for you that those people don’t need social security, so they don’t pay them.
BRIAN: And it will start at a high number, and then it will go down. It will go down. That’s called means testing. So, social security can survive by not paying you, by having an older retirement age, and by means testing. And they’ll think of other things that will continue the ongoing survivability of social security. But, social security is a benefit where the government collects it, and gives it back to us.
BRIAN: And, at age 62 you can start your draw of social security. Your social security benefit grows five percent a year from 62 to 66, and eight percent a year from 66 to 70. And, again, I’m showing my cynic side by telling you that the incentive is to wait, wait, wait, wait, wait, and then die so that the government keeps all your money. So, with social security, your monthly benefit almost doubles from 62 to 70.
BRIAN: So, ideally, mathematically, you benefit by waiting until age 70. However, there are some caveats to that. Let’s say, Mike, that you drew social security, and I draw at 70. I appear to be the smart one, but you’re better off than me for around fourteen years. Brian has to live beyond age 76 to 78 before my waiting to age 70 actually benefits over the person who drew at 62. Does that make sense?
MIKE: Yeah, it makes sense.
BRIAN: Okay, and so, that’s the crossover. And when it comes to social security benefits, we recommend in the optimization report, individually to wait ‘til age 70 for an individual, because mathematically that’s where you maximize your social security benefit with only two exceptions. Obviously the first exception will be health. So, if you have-if you’re diagnosed with something horrible at age 65 you’re not going to wait ‘til age 70.
BRIAN: So, health would be number one, health and longevity. If you don’t think you have longevity in your family, then draw your social security sooner, don’t wait. Now, the second part is equally important. The second part is if you’re retired at age 62, and for eight years you wait on your social security, and all of your income in retire comes from your principle, then for eight years you’re hammering your principle in those early years of retirement all in the name of maximizing your social security, and you’re destroying your retirement by doing that.
BRIAN: So, we look at, in our planning that we do, we look at optimizing your social security, but checking it against the draws on your principle to make sure that you’re not taking too much principle too soon in your plan. Okay, now we talked about the individual. Let’s bring in husbands and wives, couples. Couples with spouses have options that allow you to maximize your social security.
BRIAN: There are hundreds of ways to draw social security, and when you come in we do what’s called a social security optimization report. Out of the hundreds of ways, on page three, it will show the worst way to draw your social security, and the best way, and typically on page three the difference between the two is over a couple hundred thousand dollars in benefit. So, this is something that’s very important, and when it comes to spouses there are ways for you to optimize using different strategies that come out in these optimization reports by using spousal benefits.
BRIAN: And, file and suspend is available for anyone that’s age 66 as of April of last year. As of April 30-I think it’s April 31 of last year, if you’re 66 or older you can use what’s called file and suspend. File and suspend is where you bring your spouse on at her full retirement age to receive spousal benefits, which at your age, 66, is about half of your income, and then you suspend your benefits so that at age 70 your individual benefit maxes out, her individual benefit maxes out, and on top of that, for four years you’ve drawn spousal benefits.
BRIAN: And that is, by far, the best social security optimization strategy by far. However, they nixed it. Social security nixed it last year, and put an age limit on it. And so, now instead of file and suspend you have what’s called file and restrict. So, file and restrict is another strategy that’s in use for anyone today, but it requires that one spouse is drawing on their social security before the other spouse can receive spousal benefits.
BRIAN: So, you don’t get file and suspend. You get to receive spousal benefits if the other spouse is drawing. In fact, it might be good if anyone has questions on this have them call in, and we can run a social security optimization report so that they can know factually, mathematically, objectively to the dollar the strategy that maximizes their social security income.
MIKE: Sure, yeah, so for this one, callers, have a pen and paper ready, or something to take a note down, I’m going to extend the offer, and then I’m going to give you a bit of quick homework so we can run that social security optimization report for you.
MIKE: So, for the next ten callers that are 55 years or older that have at least 300,000 of investible assets, we’ll run this at no cost to you. It simply shows you the options that you have in front of you in a very analytical, mathematical way. So, for those next ten callers that call in, it’s 1-800-261-9446. That number one more time is 1-800-261-9446, and this is important, what we will need from you to run this report, not necessarily when you call in.
MIKE: You can call in right now and reserve your spot, but what we will need by Monday to run the optimization report is your birthday, which should be easy. You should know that, but also, what will you receive at your full retirement age? And if you don’t know you can go to SSA.gov, the social security website, login, and then will tell you how much you will receive at full retirement age, or FRA. That number with your birthday, and a quick phone call, and we will have the information we need to run the report, and then we will touch base with you, send it to you, and go over the findings from the optimization report. So, again, at no cost to you, it just makes sense to benefit whatever plan you have, and continue to double check it to make sure it’s in good order.
BRIAN: All right, so now, let’s talk about debt. There’s a lot of talk out there about how once you’re retired you should just pay off all your debt. Well, there’s two thoughts on paying off debt. Let’s give you a scenario where a couple, both age 65 want to retire. They’ve got a million dollars in saved assets, in their 401ks combines, and in their savings and investment. We never include the value of the home in our retirement planning, because your home is sacred.
BRIAN: It should be where you live, and gosh, it just really bothers me that some planners automatically tap into your home equity with a reverse mortgage, and they tap that, and I just think that’s a tragedy. We don’t do that here at Decker Retirement Planning in Kirkland. But let’s talk about the paying off debt. So, this couple, they’re age 65, they have a million dollars in saved assets, but they have a 400,000-dollar mortgage, and they have another 50,000 in credit card debt, and they need to retire, they need income of about 6,500 dollars net of tax.
BRIAN: Okay, so that’s the scenario. Well, if you retire, and pay off your debt, now you no longer have 1,000,000 dollars to generate income. You have 550,000 to generate income after you’ve paid off your mortgage, and after you’ve paid off your credit card debt leaving you with not enough money to generate, along with social security the 6,500 net of tax that you need.
BRIAN: So, we want-we’re mathematical in our approach at Decker Retirement Planning in Carillon Point in Kirkland. And so, we want to make sure that you know that here is a version one, if you pay off your debt. Here is a version two, if you pay off no debt. And, here’s version three if you just pay off your consumer debt, which is your credit cards. Credit card debt is typically, gosh right around twelve percent, sometimes much higher.
BRIAN: If your portfolio income is averaging say six percent, and your mortgage debt, let’s say you’ve got a mortgage, and it’s three and a half percent. Net of your mortgage interest deduction, that three and a half is about, call it three. It’s actually 2.8. So, say it’s 2.8 percent. So, if your money in your investments is earning six percent, why would you take money from six percent investment and pay off 2.8 percent debt?
BRIAN: That doesn’t make any sense, but it does make sense to take money from 6 percent to pay off twelve percent debt. That does make sense. So, what we show clients is a mathematical approach to your retirement on paying off debt. We create versions of your income plan where you can visually see the effect of paying off debt. Now, who’s the-Dave Ramsey is a spokesman for paying off debt. We believe most of what he says, and I practice it myself.
BRIAN: I don’t have personally any debt, but there’s a cost to paying off of your debt, and we want to make sure that your eyes are wide open to taking assets that you have and paying them off. All right, the next thing I want to talk about, Decker Talk Radio listeners, is many of you have an option when you’re retired at 65, you have an option of a lump sum, or you have an option of a lifetime income stream.
BRIAN: So, when we talk about a pension and how you should receive your pension, let’s start there. So, with your pension there’s something called survivability. Let’s say that you are married. You’ve got a spouse, and you can draw-and I’m going to make these numbers up-let’s say you can draw a pension of 2,000 dollars with zero survivability-meaning you can get 2,000 dollars, zero survivability, per month, or you can get 1,750 with 50 percent survivability to your spouse-meaning that if you die she gets half.
BRIAN: Or you can get-ah, these numbers-let’s say, that should be 1,800, and let’s say that you get 1,700 with 100 percent survivability. We at Decker Retirement Planning at Kirkland would recommend that you take the 100 percent survivability because mathematically over two spouses lifetimes, you’ll end up drawing more, number one, total from that pension income stream than one life, and second, that it creates income replacement and peace of mind for the spouse.
BRIAN: So, there’s a double benefit of taking the lesser amount on your pension when you have that choice to make. We can help you on this at Decker Retirement Planning. Come in and see us and we can talk you through this, but that’s called the survivability choices, and we want to make sure that-it’s not intuitive at all-it’s not intuitive. Take the lesser amount and you’ll draw more. Isn’t that interesting? Take the lesser amount and you will draw more total income.
BRIAN: All right, now, the other option that you have when you’re facing retirement, let’s say that your company offers you 250,000 in income for life, or 200,000 lump sum, which should you choose? Well, a lot of smart people will say, gosh, I’m smart, I’m going to take the larger amount. I’m going to take 250,000 for life, and so, at 65 years old the actuaries will say, well, I think Brian’s going to live another 20 years. 20 into 250, that’s, Brian you get 12,500 each year for the rest of your life.
BRIAN: And then, someone will say, 12,500 into 250, why Brian that’s a five percent return. That’s a great return. We want to make sure that you know that that’s not a good deal for most of you, because now you’re paying an insurance company to get your own money back at the rate of five percent a year. That’s not a rate of return, that’s a distribution rate. At the rate of five percent, and they hope you die soon so that they keep what they don’t pay you.
BRIAN: That’s called an income annuity, a life annuity, or an income rider. We don’t like that, we don’t use that, and we warn people against doing that. So, let’s talk about, there’s three major benefits to you taking the lump sum distribution, and the first one is simple, it’s rate of return. Let’s say at 65 you both, Mike, let’s say that you took the 250,000 for life, and I took 200,000 lump sum today. We both live to age 100 and we die. Um, I die in a hang gliding accident. You die blowing out your birthday candles.
BRIAN: So, I go out in style.
MIKE: But I go out with a bang.
BRIAN: Yeah. All right, so Mike, you get 12,500 each year for the next 35 years, and we total it up. I get 200,000 today, and it takes 16 years before your 12,500 payments add up to the 200,000 that I get today. If I get any rate of return on it at all above 2 percent, you’ll never beat me.
BRIAN: So, the first reason to take a lump sum is simple, it’s rate of return. The second reason to take a lump sum, Mike, you’re being a nice guy, I’ll throw you under the bus again.
MIKE: Is that literally in this analogy?
BRIAN: Almost. So, let’s say that you and your wife, and me and my wife go out, and we’re hang gliding-or no, we’re sky diving, and tragedy strikes, all four of our parachutes don’t open, and we all die.
BRIAN: You took your 250,000 for life, that stops. So, those payments stop when you and your spouse die. There’s no assets of unused pension money that goes to your estate, but for me, and my wife, Diane, that 200,000 lump sum goes into our estate, and it stays there, and it transfers to our children as an inheritance.
BRIAN: So, the second reason to have a lump sum is an estate reason, and that is it goes in your estate, whereas those lifetime payments stop when you and your spouse die. There’s no transfer of assets into your estate. So, that’s number two. Number three, the third reason to take a lump sum over a lifetime of payments has to do with corporate risk. The poster child of corporate risk is United Airlines and Pan Am.
BRIAN: Pan Am and United Airlines both went bankrupt, and pilots that had their pensions coming in saw those pensions cut down by 70 percent, and they felt lucky to get the 30 percent that they did, but there was a major reduction in their pension payouts. So, um, you have company risk when you take an income lifetime payout. All right, those are the three reasons.
BRIAN: So, Mike, at this point-or, Decker Talk Radio listeners at this point, I wanna take the remainder of the program, and there’s only-I think there’s only seven or eight minutes left.
MIKE: We’ve got eight minutes here, but I wanna extend a quick offer, for those that are getting near retirement, and have that option, have the ability to either take a lump sum, or a pension, we’re gonna extend an offer and run the numbers for you so you can see the difference in a plan. We’ve talked about distribution plans before in other podcasts, which you can find on Decker Talk Radio on DeckerRetirementPlanning.com or on iTunes or Google play via podcasts, but we’re gonna invite you in and run two plans and show you the numbers and how this actually plays out for you on an individual basis.
MIKE: So, all right Brian, we’ve got just a few more minutes here to wrap up. Any last news or notables that you wanna mention?
BRIAN: Yeah, I want to talk about how as a firm at Decker Retirement Planning how we’re different. I’m going to spend just a few minutes on this. Number one, we’re fiduciaries. I hope, Decker Talk Radio listeners, that you don’t deal with a salesman at a bank or a brokerage firm. There’s three ways to know if your banker or broker is a fiduciary. They’ll tell you that they’re fiduciaries, but there’s three ways to know.
BRIAN: Number one, they have to work for an independent company. A large or brokerage firm is not independent, and they tell their salespeople what they can and cannot sell to you. We’re independent. We don’t have anyone telling us what we can and can’t work with you on in financial tools and instruments out there. Number two-so, number one, they’ve got to be independent. Number two, they need to have a series 65 license.
BRIAN: A series 65 license is someone that is licensed for a fee only type investments on the security side. That means that everything is above board, there’s no secret charges. Series seven can charge hidden commissions that a lot of the time they won’t tell you about like mutual funds, C shares, C as in Charlie-C share mutual funds where they tell you there’s no front or back end fee, but they get paid one percent 12B1 fee, and it’s just criminal, and we see this all the time when assets transfer in, non-traded REITs with twelve percent commissions that they never told you about.
BRIAN: Invariable annuities just laden with fees. The last is, we wanna make sure you know, they’ve gotta have an RIA corporate structure, Registered Investment Advisory firm is someone who is a fiduciary. If someone is series 65, independent, with an RIA corporate structure, those are the three requirements. Not one of three, they need all three to tell you that they’re a fiduciary.
BRIAN: Your banker, and broker, and your insurance guy are not fiduciaries. We are fiduciaries, number one. Number two, the second thing that makes us different is our clients can see how much they can spend for the rest of their lives. This is huge. Since 2008 the number one fear in the United States is running out of money before you die, that’s the number one fear. Our clients don’t have that fear, because they can see on a spreadsheet, the left side shows-imagine this-shows your income, your income from your assets, your pension, your rental real estate, your social security.
BRIAN: We total it up, minus taxes, gives you your annual and your monthly income with a COLA, Cost Of Living Adjustment, so you’re getting a little more money every year, and we run that to age 100, so that our clients can see how much money they can spend for the rest of their lives. I will tell you, Decker Talk Radio listeners, if you haven’t done these calculations you’re guessing. You’re guessing on how much you can spend for the rest of your life, and that’s a major, Grand Canyon guess. Hope you’re right.
BRIAN: The last thing that I have time to talk about is tax-oh, we already did that, comprehensive tax minimization, and we covered that today. So, once we have your income plan set we comprehensively minimize your taxes. And we go to the next one, which is number four, risk reduction, and that is making sure that we’re drawing your income from principle guaranteed accounts, not from a pie chart that is fluctuating.
BRIAN: A pie chart has you diversified among stocks and bond funds, and as the markets go up you’re drawing income, so you’re compromising the gains, and when the markets go down you’re accentuating the losses, so that you are committing financial suicide by drawing income out of a fluctuating account. Contrast that with the amazing peace of mind that our clients have that when they’re drawing income from principle guaranteed accounts, the markets can crash like 2008 and it does not affect our clients, does not affect our clients.
