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BRIAN: Welcome to Safer Retirement Radio, where you get the transparency you deserve. With over 35 years of experience in financing investing, we help you stay up to date on market news and retirement strategies. I’m Brian James Decker, owner, and founder of Decker Retirement Planning and host of Safer Retirement Radio. With me is my co-host and one of the advisors here at Decker Retirement Planning, Clayton Bradshaw.
CLAYTON: All right, ladies and gentlemen, welcome back. We’re excited to be here after another week. So, we talked last time, if you listened in, we talked about the risks. Today, we wanna compare and contrast a couple of strategies.
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CLAYTON: There’s the common strategy that we call the pie chart, and then there’s the strategy that we hope all retirees use, which is the distribution strategy, the income strategy, and we’re gonna talk about kind of the pros and cons of each today as we go through those strategies. So, Brian, I know you’ve seen this a lot. Early in your career, you started on one side of the industry, realized the pitfalls of that, and so, you’ve moved over to what we affectionately call the right side of the industry. You’re seeing the light, right? And that’s been the case for you for over 20 years at this point.
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CLAYTON: And you’ve been able to see retirees be successful using the distribution strategy. So, can you talk a little bit about why that income, that pie chart strategy that the other guys are using, doesn’t work in retirement? We can talk about where it works, ’cause it is an effective strategy in certain time periods of your life, and under certain circumstances. Let’s talk about when it works, when it doesn’t work, and then we’ll talk about the distribution strategy and when that works.
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BRIAN: Okay, so, the enlightening moment for me happened in 1987, I started in ’86, was told that the asset allocation pie chart buy and hold strategy, which is using modern portfolio theory, was the way to go. And then, I gave me 18 months to accumulate a book of business, and then 1987 hit. Black Monday, October 19th, the markets were down 20 percent in a day, 30 percent peak to trough. The clients that were working, that had a paycheck, unfazed. They wanted to know how they could get more money into a down market.
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BRIAN: It was interesting, the stark contrast. The clients that were retired were very much afraid because they were drawing income out of the portfolio that’s now down 20, 30 percent. I was told by my manager to go through all my retired clients and ask them to not draw income from their portfolio, and let it recover. I made those calls, I’ll never forget those calls. They were incredulous at the information I gave them saying, oh, should I tell my bills that I owe that I’m waiting for my portfolio to recover?
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BRIAN: So, that they’ll wait for my portfolio to recover? They were furious. ‘Cause it didn’t make any sense what I was asking them to do.
CLAYTON: Right, yes.
BRIAN: So, think of the contrast there. The working clients were excited about getting money in because their income wasn’t coming from their portfolio. And their 401(k)s every two weeks are averaging into a down market. They were excited to buy into the down market ’cause their retirement dates were 10 plus years away.
CLAYTON: [COUGH] Sure.
BRIAN: In contrast, retired clients had taken the hit and they were drawing income out of a fluctuating account.
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BRIAN: Which is a lose-lose mathematical situation. Once you’re retired, and you’re pulling money from an account that’s going up in value, you’re compromising gains as markets go up, and you’re accentuating losses as markets go down. And you are committing financial suicide by doing that. So, the stark contrast, I’ll never forget, between how that pie chart worked for one side and terrified the other side. So, should we talk about, more in-depth, why we split the two?
RR S4 E21 THE GENIUS OF DISTRIBUTION PLANNING [00:04:22]
CLAYTON: Right, so, yes, let’s dive into that. I wanna touch on, you mentioned people that are putting money every two weeks from their paychecks into their 401(k)s, the term for that is dollar-cost averaging. And if you’re contributing, so, for all of our listeners that aren’t retired, and are still a ways out from retirement, I hope you’re doing this, because you’re getting the benefit of lowering the average price of your shares within your 401(k). So, even though you probably aren’t aware that you’re doing it, it’s just happening, so keep doing that, keep contributing to your 401(k), so you’re better prepared for retirement.
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CLAYTON: Because as these dips, like we’ve seen a couple of times this year, have happened, you’re taking advantage of those dips through your contributions to your 401(k). So, yeah, let’s jump into the next point.
BRIAN: Okay. So, where the pie chart works, and let’s talk about its creation. So, you’re given a risk questionnaire to create the pie chart. Based on how you fill out that risk questionnaire, it’ll produce a diversified portfolio, of mutual funds for stocks, bonds, cash, real estate, gold, silver, a diversified portfolio based on the level of risk that you’re willing to take.
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BRIAN: That should be updated as you get closer and closer to retirement, and it works beautifully because your checks come from your company, while every two weeks your dollar-cost averaging into your 401(k). You’re writing out any market advances, you’re writing out any market declines, you’re gaining on market advances, and in your 20s, 30s, 40s, and maybe stretching it a little, early 50s, we recommend the pie chart for our clients.
CLAYTON: Right, it makes sense, and it’s just something that kind of happens in the background while you’re working.
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BRIAN: Right, but if you’re within five years of retirement, we don’t recommend it, we recommend you switch over to a distribution plan. And the reason is, because the worst time to take a 30, 40, 50 percent hit, the worst time, superlative intended, is right before you retire.
CLAYTON: Right.
BRIAN: Right before you pull the trigger and you retire, you take a 30, 40, 50 percent hit, now your world is changed, you probably can’t retire. This happened in 2008, many people thought they were gonna retire…
CLAYTON: Right.
BRIAN: …had to work longer.
CLAYTON: Yeah.
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BRIAN: Did the markets…
CLAYTON: Well…
BRIAN: …come back? Yes, but did they have to work longer? Yes.
CLAYTON: But I also think that there’s a bit of anxiety and fear that stays with someone when an event like that happens when it drastically impacts what their plans are. I mean, so, the same thing happened in 2000, lot of people had their money in tech, NASDAQ goes down, what, 75 percent over from 2000, ’01, and ’02? And, so, for anyone that retired in ’99, flying high on tech stocks, ’cause the ’90s were amazing for tech, they’re working another 10 years because they never wanna let that happen.
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CLAYTON: I was talking to one of our other planners here last year, and years ago he worked for another company, and he said he had a guy call, and he would call once a year, and this was just a story that floated around the office, it wasn’t one of his clients. But, he would call once a year, and, I can’t remember how long it took, but it was around 15 years that he had something in the neighborhood of 100 grand invested in the NASDAQ, in 2000 it took that hit. And then, almost 15 years later, called and finally, when he was back at that 100 thousand, he cashed himself out.
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CLAYTON: 13 years, it was 13 to 15 years, in that range. And that’s the kind of thing, so this is why we talk about this. If you’re approaching retirement, and you are planning on making that leap, to switch from working to not working anymore, and you lose 50 percent in your account. I imagine that you probably won’t have retirement on your mind for quite a while.
BRIAN: Right, so, it’s interesting you give that statistic, I was gonna use the S&P, 100 thousand in the S&P January one of 2000, didn’t see 100 again until October of 2014, that’s how long it took.
CLAYTON: Yeah.
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BRIAN: So, when you’re pulling money out of a fluctuating account, totally fine if you’re getting your income from your paycheck. Once you retire, you’ve gotta switch your strategy from an accumulation strategy, which is what we referred to for the pie chart, to a distribution strategy. If you don’t, you are gambling on how long you can stay retired.
CLAYTON: Right.
BRIAN: As well as so many other negatives. Can we…
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CLAYTON: Well, real quick, so I, and I’m sure you’ve seen this too, Brian, where couples will come in and the market’s flying high, and they’re loving life, and you ask them about their risk preferences and they’re like, oh, yeah, we love all kinds of risks, like, bring the risk on, risk is great. We’ll make a ton of money when there’s a ton of risk. And then, the market takes a 10 percent dive or a 20 percent dive, like it did a couple of times this year. And then you get a call, and they say, hey, we actually don’t have as much risk tolerance as we think. And so, the market has come back in these instances, but how long is it gonna take the next time the market takes the drop?
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CLAYTON: And so, for a lot of people, I don’t think most people can stomach the drops in the market, because we’re emotional. And so, even though you might think, hey, things are great, let’s just ride this out. That’s not the case ’cause the moment it drops, and you’ve seen this, I’m sure a ton over your career, that somebody says, you know what, I’m out I can’t stomach that anymore, it’s not my time of life anymore.
BRIAN: Right. So, that is, another way to say it is, well, we talked about computer trend followings last time. And fear and greed gets in the way of people making good decisions.
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BRIAN: When you have a math-based, rules-based strategy for your risk money, you’re miles ahead.
CLAYTON: Right.
BRIAN: Okay, I can’t wait to hammer the pie chart.
CLAYTON: Let’s do it. So, we talked about when it works, let’s talk about when it doesn’t work.
BRIAN: Yeah, when it doesn’t work starts around your mid-50s or within five years of retirement. Now, most of your pie chart, I hope that clients are indexing, and using Vanguard while they’re accumulating assets.
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BRIAN: But, most aren’t, they’re paying fees, on average, of about one percent. So, speaking of fees, the first thing we do is we’re able to lower our fees. I’d say the average fees our clients pay are 50 basis points or less. I think that’s an average. So, we, usually, cut our clients fees by half when they come on board with us, on average.
CLAYTON: Sure.
BRIAN: The second thing we cut is their risk. So, most of our clients have way too much risk and we cut their risk exposure down from 60, 70 plus percent to about, gulp, 25 percent.
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BRIAN: Why 25 percent? Around 25 percent. The reason is because that risk bucket, if you leave it untouched for about 20 years, that 25 percent grows and while you’re spending the 75 percent, that 25 percent in 20 years replaces what you spent, and you reload. So, you start with X, 25 percent of X is left alone for 20 years, and with the models that we use, which we covered last time, two-sided strategy.
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BRIAN: We’re able to replace that money in 20 years, while you spend from principal guaranteed accounts. So, when the markets crash every seven or eight years, the number one reason that people go back to work or are blown out of their retirement are these market crashes. And they historically have happened every seven or eight years. They haven’t happened since ’08, now we have these quickies, like, fourth quarter of 2018, the markets were down 20 percent and came right back.
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BRIAN: We have February and March of 2020, this year, where the markets were down 30 percent in five weeks, and came right back. There will be a time when the Fed can’t bail out the markets.
CLAYTON: Yeah.
BRIAN: And we’re getting close to that point because the Fed balance sheet is at a point where you just can’t print money. You just can’t continue to do that.
CLAYTON: Right. And, I mean, with all of these different instances, I see that a lot of our clients have peace of mind, because in front of them, on a single sheet of paper, they have that income plan.
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CLAYTON: Where it shows them, all right, here’s how much income you’re gonna get until age 100, here’s your tax, here’s your, I mean, everything. Sorry, my mind’s kind of going crazy ’cause there’s social security, there’s how much is in each of your different accounts, it all shows it on one page. It shows where your risk is, and how much is at risk, and it spells all this out on one page. So, for anybody that’s wondering, well, what would my risk drop to if I were approaching retirement, or now that I’m in retirement I feel like I’ve got a little more risk than I want to. Let’s look at it, let’s put into a distribution plan.
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CLAYTON: We’ve mentioned this before, we’re math-based, we’re research-focused at our firm. We can put it on a piece of paper, we can show you what it looks like, all on one sheet. So, you’ve got the snapshot right there in front of you. So, you can see, all right, yes, I’ve got enough money, or maybe I need to adjust things a little bit longer. So, it helps you adapt and work towards those goals that you wanna have in retirement. Because, ultimately, I think whenever I talk to people, what do they wanna do in retirement? What’s gonna be the best thing for them? They’ll give me different responses, and I’m sure you’ve seen this too, Brian, where you get different responses. Well, what does my ideal retirement look like?
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CLAYTON: And for some people, it’s volunteering, others it’s being a grandparent, and others it’s traveling and having fun and just playing all the time. So, it’s a little bit different for everybody, but, ultimately, it’s, I just wanna feel comfortable and have peace of mind in retirement to do those things that I wanna do, without feeling that anxiety of when’s the next paycheck gonna come in and is it going to be enough?
BRIAN: Yep, good points, all good points. I wanna go back to the safety that our clients have.
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BRIAN: In a distribution plan, there’s two things that I think are superlatives, one, I think is, with a pie chart, who do you know that can look at a pie chart and see how much income they can draw for the rest of their lives?
CLAYTON: It can’t be done. I mean, ’cause what you’d try to do, let’s say you say, okay, I’ve got a million dollars on my pie chart, and I’m gonna take three percent of that or, no, is it four percent of that. Well, let’s say it’s three percent. So, you’re taking 30 thousand out every year, what does that do for ya?
BRIAN: Right. That does not support, 30 thousand plus, what, your social security?
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CLAYTON: Right. And then the market takes a 50 percent dive and your portfolio drops and…
BRIAN: Right.
CLAYTON: … then your income drops proportionally.
BRIAN: By the way, have we covered the four percent rule?
CLAYTON: Yeah, we have, we can just do it in 30 seconds really quick. So, the four percent rule is just drawing a set percentage out of your account every year. Some people say it’s four, others have argued that it’s three or five. Whatever the percentage is, anytime you’re drawing a set percentage out of your account on an annual basis, you are setting yourself up for failure in retirement, if the market takes a drop, or when the market takes the next drop.
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CLAYTON: Because, if you’re drawing, so I’ll just do some very simple math here, so, back to that million dollars, if you’ve got a million dollars, you’re pulling out, we’ll say four percent, you’re pulling out 40 thousand dollars a year. If you’re all in the S&P 500, which a lot of people have found that that’s convenient. Vanguard says that just indexing beats a lot of money managers. So, all your money is in the S&P, S&P takes a 50 percent hit, so now your account’s at 500 thousand, and you’re still pulling out four percent of that. That’s 20 thousand dollars now, instead of the 40 thousand that you were pulling before.
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CLAYTON: So, when you look at it like that, that’s a pretty dramatic income decrease for people that are in retirement. So, to depend on that set percentage, yeah, you can do math to say, all right, well, in my pie chart this is gonna work. But, it doesn’t take into account all of these circumstances, variables, and eventualities, that can happen and will happen with the market when it takes it’s dive. And that’s where, when you’ve got distribution planning, it protects your income against those downfalls, those market crashes.
BRIAN: Good. William Bangin [PH] who created it said that it doesn’t work when interest rates are this low, also.
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BRIAN: So, you’re not getting your income component coming in when interest rates are this low, and a buy-and-hold strategy in the markets, like you said, it’s just a matter of time. It’s not if, but when the markets tank, 40, 50 percent, and you’re drawing money from that. It takes you out of retirement.
CLAYTON: Right, well, and I talked to people too that say well, this is how mom and dad always did it, and this is how grandpa and grandma did it with their accounts. But, mom and dad were probably living on a pension that they earned working for the automotive company or the tech company, or I guess not tech company, but any of those major corporations that offered pensions.
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CLAYTON: That’s where they were getting theirs from, with a little bit of social security to bolster and then a little bit of assets on the side, they had that three-legged stool. Well, pensions, if you’re younger than 50, are almost non-existent at this point. And so, that’s not really an option for most people going forward in the future. Social security is a wild card at this point, we don’t know what the future holds.
BRIAN: Yep.
CLAYTON: So, it’s something that we can, we wanna make sure that the income that you have is as protected as possible because of these externalities that we try to account for.
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BRIAN: So, the two biggies, in my mind, when you’re retired, and you have your money coming from laddered principal guaranteed accounts. When the markets crash next time, our clients don’t lose any money in their emergency cash, because that’s at the bank, they don’t lose any money in buckets one, two, three, four, or five, those are all laddered principal guaranteed accounts. And the risk bucket, which is a two-sided strategy, which we talked about last time, has made money in the last 20 years, every time the market’s gone down 10 plus percent.
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BRIAN: So, they make money as markets go up and they protect and make money as markets go down. So, our clients don’t take that hit because the strategy has changed from an accumulation strategy to a distribution strategy. That is huge peace of mind, number one, is knowing that when the markets crash the next time, they are not gonna be taken out. Huge piece of mind, number two, addresses the number one fear of people over 60 years old, which is running out of money before they die.
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BRIAN: Like you said, nobody can look at a pie chart and see how much money they can draw for the rest of their lives. Nobody can do that. Our clients can see their income stream, social security, pension, rental real estate, portfolio income, we add it all up, minus taxes, they see annual and monthly income with a COLA, cost of living adjustments, to age 100. Huge, huge to know how much money you can draw for the rest of your lives.
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BRIAN: That’s priceless peace of mind because when our clients come every, we do annual reviews, formal annual reviews, where we look at and update everything to make sure that they are right on track. But, mathematically, our clients can see how much money they can draw per month after tax, you can’t do that looking at the pie chart.
CLAYTON: Right, so for anyone that wants to learn more about distribution planning, we’ve got a ebook, it’s free. Go to our website, it’s DeckerRetirementPlanning.com.
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CLAYTON: Again, that’s DeckerRetirementPlanning.com. We’ve got some books and useful guides, but I encourage you to download our book The Decker Approach: A Common Sense Approach to Retirement. And you can learn more about distribution planning, if you wanna talk to us a little bit more about what a plan might look like for you, we can do a free call as well. But go to our website, DeckerRetirementPlanning.com to download that book, so you can learn more about distribution planning and how it can help you in retirement.
BRIAN: A couple more things.
CLAYTON: Yep.
BRIAN: Roth conversions, the number one tax strategy where clients say usually six figures, at least, of taxes owed, not taxes paid.
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BRIAN: The Roth conversion, we know mathematically how much money to convert from an IRA to a Roth. You can’t know that looking at a pie chart. So, we separate that out, that’s huge, also. So, tax strategy, tax minimization, income planning, portfolio optimization, each part of the portfolio in the buckets that we use in distribution planning are optimized. Clients know the income, we already covered that.
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BRIAN: Risk reduction is huge, all of those things, check, check, check, we have in an income plan that you cannot have in a pie chart asset allocation plan. It works beautifully in your 20s, 30s, 40s, and early 50s, but it will hurt you, and will probably take you out of retirement if you use that in retirement.
CLAYTON: Right. So, again, if you want to learn more about us, learn more about distribution planning, again the website, DeckerRetirementPlanning.com.
RR S4 E21 THE GENIUS OF DISTRIBUTION PLANNING [00:23:27]
CLAYTON: We do virtual meetings for anyone that’s feeling uncomfortable leaving their house right now, or can’t for whatever reason. I know in a couple of different offices we’ve got people that are still pretty… We’ve got some offices in California and Washington that are still pretty locked down, unfortunately. Here in Utah, we’re open to in-person meetings. They’re a little bit easier to do here. But again, DeckerRetirementPlanning.com, we look forward to hearing you, if you have any questions feel free to reach out. But, you can get all of our contact information through that page. So, we look forward to having you be with us next week. Next week, we’re gonna talk a little bit more about potential problems that retirees can face in retirement.
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CLAYTON: So, we’ll go through a list of considerations when you are looking at retirement, what you should be on the lookout for. A lot of these are just things that people just don’t think about, as far as what happens if the spouse passes away unexpectedly, things like that. So, we’ll go through that, we look forward to having you join us next week.
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