Today on Protect Your Retirement, we will be talking about the newly elected President-elect Donald J. Trump and what the finances could look like with Trump going forward. We aren’t political on this show but staying informed about what could change in the financial world is important. Listen in and find out what could happen in the near future!
MIKE: Hi, this is Mike Decker and Brian Decker. Good morning from Decker Talk Radio’s Protect Your Retirement and Brian from Decker Retirement Planning and we’ve got a wonderful show lined up today. Whether you like it or not, we have a new president-elect and we are not political on this show. We are going to be going over though what the finances are going to look like, or most likely will look like, with a president Trump going forward. So Brian, you’ve got a lot of notes, a lot of things lined up here. Let’s dive right into it.
BRIAN: All right. This is how policy of presidents change your investments. Let’s start with the banks. The core assumption that the Fed will raise interest rates soon will follow and further gradual heights over coming years will be called into question under a Trump presidency. Financial intuitions are struggling in the news. The Fed Futures right now are pricing in less than a 50 percent chance of rates for a December move, and the European Central Bank is likely to interpret the uncertainty with stimulus and lower rates for longer.
BRIAN: So what this means, Decker Talk Radio listeners, is that if Trump is less willing to raise rates, then the banks have a less steep yield curve, which means that the difference between where they lend and what they pay out is going to be smaller and that’s like their profit margin.
BRIAN: So on the news of a Trump presidency, this is so interesting to me, Goldman Sachs, Wells Fargo, Citicorp, Bank of America, Chase, JP Morgan, Hong Kong Shanghai Bank, US Bank, all of the banks were down heavy, two, three, five percent on the announcement of the Trump presidency, and then when the markets opened the next day, they were all up. They were all up. It’s so interesting that the initial move was down.
BRIAN: Now let’s talk about the auto sector. Automobiles are going to be heavily influences by a Trump presidency because he is going to be inserting himself in policy on the trade with Mexico. The industry has bet billions of dollars on globalized production and higher fuel efficiency, but Trump has been talking about moves to effectively re-shore jobs to the United States and has called climate change a hoax. So the president-elect opposes the Trans Pacific Partnership and called for fundamental changes to the NAFTA Pact with Mexico and Canada.
BRIAN: This effects, of course, Toyota, Ford, General Motors, and the other automobile sector stocks. Again, it’s so interesting that on the announcement of a Trump presidency, the initial reaction were half a percent to four percent sell offs in the automobile stocks and then they turned on a dime and had big moves on the first trading day, which was Wednesday, November 9th.
BRIAN: Healthcare is going to be a huge change in direction for the sector. The weakest sector this year may become winners for the rest of this year and maybe all of next year as Obamacare reforms are set to be repealed and replaced with major legislation Clinton proposed is unlikely to be imposed on the drug makers. While Trump has not set out a comprehensive alternative to the Affordable Care Act, which may see 22 million Americans lose their coverage, he said that he’ll encourage competition between markets in different states.
BRIAN: Immediately on the announcement of the win of a Trump presidency, the insurers and the healthcare stocks, Pfizer, Glaxo, Novartis, Mylan, Bristol-Myers, Eli Lilly, Johnson and Johnson, all the different United Healthcare, Aetna, Anthem, Regis, all the different medical and healthcare providers and insurers were up huge. Mylan was up 5.8 percent, Novartis 3.4, Synopsis 3 percent.
BRIAN: Huge moves in the drugs with the announcement of a Trump presidency. The next big one is defense. With a Trump presidency, Trump has called for eliminating the sequester on defense spending and initiated a military buildup, boosting troop levels and the number of ships and aircrafts. He seeks to fully offset the costs through common sense reforms that eliminate government waste and budget gimmicks and from additional payments from countries where the United States has military bases, including Germany, Saudi Arabia, and Japan.
BRIAN: On the announcement of a Trump presidency, three and four percent moves right out of the bat to Lockheed Martin, Raytheon, General Dynamics, Boeing, Northrop Grumman, Honeywell, United Technologies, Textron. All these different defense contractors had big moves and this may be the start. The reason we’re talking about the change in policy is because it effects your portfolio and we want to be helpful at Decker Retirement Planning on where you should watch to see some of the biggest changes in your portfolio.
BRIAN: Now let’s talk about tax policy. Tax policy changed. Donald Trump’s call for repatriation holiday of 10 percent for the more than two trillion dollars in corporate cash parked overseas is now closer to reality. He has also promised that the biggest tax revolution since Ronald Regan, pledging that no American business will pay more than 15 percent of their profits in tax, compared with the current maximum of 35 percent. The top 10 US companies with cash overseas are Microsoft, GE, Apple, Pfizer, IBM, Merck, Google, Alphabet, Cisco, Johnson and Johnson, Exxon Mobile.
BRIAN: Those are the top 10 that with a lower tax rate at 15 percent, a lot of that money should come back to the United States. There’s a saying in our business that money goes where it’s treated best and so there will be a natural flow of funds from overseas back to a low tax country like the United States, moving the corporate tax rate from 35 percent, which was the highest in the world, down to 15 percent.
MIKE: Now Brian, I want to talk about, or ask you a couple questions about this and I recognize I’m probably asking the dumb question, but I want to ask it regardless. What does this mean for our economy? If the funds come in, what do you think businesses might do with it? Are they going to have more hiring with more jobs? Are they going to invest in other businesses to build themselves up, which has an infusion of cash in our economy? What does this actually mean for our economy and our recovery? Or not our recovery, but just our growth.
BRIAN: It’s both. It’s two trillion dollars that can be invested and used for hiring and expansion. So it’s a good thing to have the repatriation of two trillion dollars.
MIKE: Okay so that being said, does that mean that our artificially inflated market, is that going to essentially catch up without a drop? Is this going to help satisfy one of the four bubbles that we have here, or is that just completely separate all together?
BRIAN: It’s a good thing. It helps diffuse the bubbles if we have cash coming in. That’s new blood into the veins of corporate America having such a huge inflow of cash coming back from other countries.
BRIAN: Okay, continuing on, immigration is a huge part of the Trump platform. One of the biggest beneficiaries might be, and I’m going to crack up when I say this, Mexican cement companies. [LAUGHS] By now, one of the biggest beneficiaries might be Mexican cement company Cemex, ticker CX. [LAUGHS] Trump has campaigned to build a wall on the Mexican border and immediately begin the process of deporting illegal immigrants with criminal records.
BRIAN: Private prisons and detention center stocks are also getting a big boost premarket. So there’s a whole bunch of stocks there that are part of that group.
MIKE: This is a quick aside, but do you think Trump is looking at the Great Wall of China for this great wall of Mexico?
BRIAN: I don’t know. Should be an entertaining four years. Okay, extending legal marijuana from coast to coast. California, Nevada, Massachusetts have all voted to legalize recreational marijuana. As of early Wednesday, races were still too close to call in Maine, which had recreational marijuana measure on the ballot.
BRIAN: Colorado and Washington already legalized recreational marijuana in 2012, paving the way for Oregon, Alaska, Washington, DC to follow suit. There are public companies, believe it or not, that trade in producing and manufacturing and selling legalized marijuana. Okay, next one, Californians have agreed to significantly raise the tax on cigarettes and vaping devices, but similar measures fell short in Colorado, North Dakota, and Missouri.
BRIAN: California Proposition 56 will increase the tax on a pack of cigarettes from, take a wild guess what tax on one pack of cigarettes are.
MIKE: Today?
BRIAN: Today, right now, in California.
MIKE: Let me guess… 35 percent.
BRIAN: Pretty close. Two dollars. Two dollars a pack.
MIKE: That’s a lot.
BRIAN: That’s actually 40 something percent. Two dollars a pack. The cigarettes will be raised by 87 cents a pack to a total of $2.87 a pack, bringing it more in line with other states and sets a tax on e-cigarettes, too.
BRIAN: So the tax revenue is kind of a win-win, Decker Talk Radio listeners, because if people are going to smoke cigarettes, then they’re helping fund the state with all kinds of tax revenue. But econ 101 says that if you raise the price of something more and more, you will get less of it. It’s a scarcity supply and demand equation in econ and so I’m for raising the taxes on cigarettes because it’s so unhealthy.
BRIAN: Okay, Californians have agreed to significantly raise the tax… whoops. We already talked about California. By the way, the other thing on California is that there’s a big uprising to succeed… to secede the union.
MIKE: I think the term is Cal-exit.
BRIAN: Cal-exit, that’s right.
MIKE: Do you think that’s actually possible? To secede from the union?
BRIAN: No. No, because it has to be a supermajority in congress to allow that happen. That’ll never happen, not in Texas, not in California. Okay, last few things: three bay area cities also voted to levy a tax on sodas and other sugary drinks in an effort to curb obesity and diabetes.
BRIAN: The measure passed by a wide margin in San Francisco, Oakland, and Albany. A separate vote in Boulder, Colorado is on track to pass as well. In 2014, Berkeley became the first city in the country to levy a tax on soda pop and Philadelphia became the second in June of this year. So this will affect the sales of Starbucks, Coca Cola, Pepsi, Proctor and Gamble. These companies, when you raise the price of it, econ 101 says that you will get less of it. So we’ll see.
MIKE: Did you ever watch the show Parks and Rec?
BRIAN: No.
MIKE: This just sounds like a Leslie Knope legislation. It’s a comedy show on TV that’s not airing anymore but they did this and it was just the funniest thing. Anyways, I digress.
BRIAN: Yep. Okay, two other asides: the Mexican stock market was hammered when the futures opened today. It’s so interesting. So try to move your portfolio out of emerging markets, particularly Mexico. Also, there’s something that’s interesting. It’s like a canary in the coal mine for the health or lack of health of the economy, there’s something called doctor copper.
BRIAN: And we here at Decker Talk Radio want to be helpful to giving you signs to look at for economic health or weakness. Doctor copper is when the price of copper is trending higher, that’s an indication that the demand for copper is going up and copper is an industrial used metal, typically used for manufacturing. If manufacturing is strong and copper prices are trending higher, that’s a good thing typically for America. Copper prices are rolling. Also, so is the price of zinc, iron, coal, rubber.
BRIAN: And by the way, speaking of coal, do you remember that coal was supposed to be shut down by the Obama administration?
MIKE: It survived.
BRIAN: Coal stocks may be a screaming buy right now, just saying.
BRIAN: By the way, before we go into restaurants as an indication, another canary in the coal mine, there were a lot of people who said that they were going to leave the country if Trump was elected president. There’s something very interesting called an ex-patriation tax. Did you know about this?
MIKE: I’ve never actually heard of this. Can you explain what ex-patriation act is or task?
BRIAN: Tax.
MIKE: Tax.
BRIAN: If you are frustrated with the current leader and you want to move out of the country and you want to go to Australia or Canada, your total estate is added up and taxed as if you just died. Your total estate is taxed. And if you’re going to change citizenship, then the United States will tax you on all of your assets that are leaving.
MIKE: Have you seen that list of famous celebrities?
BRIAN: Yes.
MIKE: That said they would leave going around on Facebook.
BRIAN: Yes, yep.
MIKE: We’ll see what actually happens.
BRIAN: Yep. Okay, next is an interesting canary in the coalmine is restaurants. Restaurants are funded with what econ 101 says discretionary spending. You don’t have to go out to eat. You can eat at home. If you feel like you’ve got extra, then you go out to eat. If you don’t feel like you have extra, then you don’t go out to eat. It’s very interesting that in the last several months, a lot of restaurants have been closing down. Cosi filed September 28th for chapter 11 bankruptcy and they’re laying off several hundred employees.
BRIAN: Garden Fresh Restaurants filed October 30. It operates Soup Plantation, Sweet Tomato chains. It will close 30 locations as part of its reorganization. Rita Restaurants, they filed for chapter 11 bankruptcy October 4th. That operates Don Pablo’s Mexico Kitchens and Hops Grill and Brewery. Nine locations will be closed. Overall, this year, 2016 has not been a good year for restaurants. Why? Why do you think it is?
MIKE: Well I think people are nervous about the election. They’re nervous about the economy. They’re nervous about a lot of things and so they’re… I don’t want to say a lot of people are end of the world situation because it’s not the end of the world, but people are just nervous. There’s a lot of unrest.
BRIAN: Right. Now, can’t say for sure, but one thing has crimped… it’s not gas prices, because gas prices have stayed the same. What has nailed people’s free cash flow and discretionary cash with the bigger hit than anything else, it is the 22 to 27 to 28 percent hikes in health care. This is Obamacare.
MIKE: Isn’t it going up again 1st of the year?
BRIAN: Well, yeah. The hikes around the country are averaging 25, 27 percent. That is causing a lot of pinch in peoples’ wallet and they’re not going out to restaurants as much. Several other important factors in the restaurant industry: overexpansion, Wall Street Journal talks about that. They talk about how quickly the restaurants have expanded, 7.3 percent to 638,000 while the population over the same period from 2006 to 2014, population grew 6.9 percent. Restaurants expanded 7.3 and so there’s going to be some fall off from overexpansion.
MIKE: You know something that’s quite nice though, about all this? There’s a bit of a silver lining here for at least our clients. At Decker Retirement Planning here in Kirkland, Washington, our clients have a plan with a built in cost of living adjustment that they know how much they’re going to be able to spend each month. So that peace of mind with what’s going to obviously happen, inflation happen, cost of living goes up and the older you get, these things are going to happen, our clients with their distribution plan really aren’t struggling with this. And that is wonderful.
MIKE: So for those listeners that are hearing this radio show, if you want to have some peace of mind, look us up: www.deckerretirementplanning.com, see what we’re doing different than your banker or broker and how you can have this peace of mind so when you see that healthcare’s going up and you still want to go out to eat that you can have that peace of mind and actually mathematically and logically map out how much you can spend for as long as you live.
BRIAN: By the way I find it interesting. I love our website and the content we wrote, because I wrote it, but I love… we nail bankers and brokers. On our website, we talk very directly about the illogical approach and strategy of bankers and brokers. So Decker Talk Radio listeners, I hope you go to our website and check it out.
BRIAN: Okay to finish the comments about why restaurants might be struggling, one is the spike in costs of healthcare. Number two is the overexpansion. Number three is telecommuters are going up. There’s more and more people that are doing their work out of their homes. And guess what? Telecommuters don’t quote unquote do lunch. They go to their kitchen. They travel from their study or their room, their living room, to the kitchen and they eat and then they go back to their living room or wherever.
MIKE: That’s quite nice, isn’t that? [LAUGHS]
BRIAN: All right, and then just the demographics, a lot of countries with low birth rates and a growing population of retirees, there’s fewer and fewer customers for restaurants, so anyhow, the background there, I find it interesting of the restaurant struggling, it’s seen as an indication of economic strength. Okay I want to switch, Decker Talk Radio listeners, want to switch over to another topic.
BRIAN: When you’re in your 20s, 30s, and 40s, it’s all about accumulation. It’s growing your money, getting as much as you can in your 401k, pedal to the medal, take your risk, put it in the indexes, the S&P 500, the Russell, the MidCap, the Emerging Market indexes, and just let her rip. Let her rip. You can take the hits, ride it out, but when you retire, that mentality cannot follow you in retirement. When you retire, you’ve got to transition from the banker, broker accumulation model to a distribution model.
BRIAN: We would argue that now the focus is on preserving what you’ve taken a lifetime to earn and cash flowing what you have. So let’s talk about cash flow probably for the next 15, 20 minutes. Cash flowing what you have accumulated is critically important. I’m just going to throw out some ideas on how some people do it and we at Decker Retirement Planning in Kirkland, we are mathematical in our approach. So let’s talk about real estate as a cash flow investment. Let’s use real estate.
BRIAN: Today you buy a piece of property, fix it up, put it on the market as a rental, you pay taxes on it, you have maintenance on it, you have advertising and if you’re involved as a land owner, then you don’t have management costs. If you are involved as a land owner, you… if you aren’t involved as a landlord, then you hire a manager and you have manager costs. Net of all cost, the typical profit you have cash flowing in the first year of brand new rental real estate is very small. It’s about one or two percent. Now rents go up over time and rental real estate is very interesting.
BRIAN: When residential real estate got hammered in 2008 and a lot of people lost their homes, the demand for rental real estate went up and rents went higher in 2008. Let me say that again. Rental real estate went up in value, up in rental… in what you could charge for rent in 2008 when residential and commercial real estate got hammered. So it’s very interesting that rental real estate has a very interesting independent cycle, independent of other types of property.
BRIAN: But as far as a cash flow vehicle, let’s say you tie up $500,000 and you’re only making one percent on that, that’s probably not the best use to make $5,000 on $500,000 in a year, probably not the best use. And when you’re retired, you don’t have 15 or 20 years to wait for that real estate to season.
BRIAN: And what we mean by that is seasoned real estate, rental real estate that you’ve held for 10, 15 years, instead of having cash flow or profit margins of one or two percent, your profit margins are now five or six percent, sometimes seven or eight percent. Plus, you have the appreciation on that property. So the cash flow based on your investment is pretty darn good.
BRIAN: We include in our planning when clients come to us, if they have seasoned rental real estate, we include it. We ask questions, probing questions about do they want to be in management or not? If not, we make sure we do the calculations to measure apples to apples how rental real estate compares to other cash flow producing investments. All right, I think I hit rental real estate. Now let’s talk about bonds.
BRIAN: Mike, you mentioned top of the show about how bonds are a bubble. When the Federal Reserve and the central banks around the world are keeping interest rates artificially low, the bond markets are kept artificially high. Bond prices are high when interest yields, the yield you get on your bond, is very low. It’s kind of a contra relationship. So in February of this year, the 10-year treasury was yielding 1.2 percent.
BRIAN: Today, the 10-year treasury is over two percent for the first time in many years. The interest rates are artificially kept low on the overnight bank lending rate. Fed funds, the fed fund and the central banks control those two short term rates but what they don’t control is the open market bond prices. When bond prices go up, it’s an indication that one of two things: either the economy is expanding or that there’s concern about the risk of holding those country bonds.
BRIAN: Let me give you examples for both. Greece, when they started to unravel, denying that they’re going to do any type of following the plan for austerity, their bonds went from three or four percent on their 10 year up to 16, 17, 18, 20 percent. So did Brazil. When the risk of those bonds go up, the interest rate goes up. So that’s one example.
BRIAN: The second example is when the economies of countries are cycling from recession back to expansion mode, interest rates on bonds will be going up and bond prices will be going down. Is that a good thing? Yes. When you’re an expansionary economy, you want to have… you want to see one of the indications being more jobs, higher wages, higher real estate prices, etcetera. But if you’re owning a bond or bond fund, you are getting hammered in your bond prices.
BRIAN: So this is concerning for a couple of reasons. One, the banker broker model says that according to the rule of 100, that if you’re 50 years old, you should have 50 percent of your bonds, 50 percent of your investible money in bonds or bond funds. But the banker broker model has your safe money going into bonds or bond funds. They’re telling you that if you’re 50 years old, you should have 50 percent of your money in bonds or bond funds. Well when rates are this low, that means 50 percent of your money is earning almost nothing.
BRIAN: So that’s problematic number one. Number two is when rates do eventually go up like they’re starting to right now, the losses on your bond funds are huge from interest rate risk. We want to warn you Decker Talk Radio listeners, that if you have a model where your banker or broker or your financial advisor tells you to put your safe money in bonds or bond funds, you need to know that there are many good options out there. There’s many good options and at this point.
BRIAN: Okay, one more thing about bonds I want to talk about. There was one bubble that took the markets in half in 2001 and ’02 and that was the tech bubble bursting. It was one bubble that took the world markets almost to their knees in 2008 and that was the mortgage bond bubble bursting.
BRIAN: Today we have four bubbles. One is country debt, where for the first time we have all the G7 nations with debt to their countries that they’ve taken on more than 100 percent of their GDP, their gross domestic product. That’s bubble number one. Number two is the bond market bubble, which I’m going to extrapolate on just in a second. With interest rates this low, bond prices are artificially high. At some point, they will detach and I believe that’s starting to happen right now.
BRIAN: Number three is a stock market bubble. Stock markets right now are trading at 25 times earnings, at 25 times earnings. They’ve only been higher twice in the last 100 years. Once was 1929. Does that sound familiar? 1929 and 1999, those were both market tops. The fourth and final market bubble has to do with real estate. So with interest rates artificially low, real estate prices as measured by the affordability index, is keeping real estate prices artificially high.
BRIAN: The pin that bursts all of these bubbles are a couple of things. One is when rates go back higher, these bubbles will deflate, number one. Number two, any geopolitical or terrorism events will also be able to bring these bubbles down. I want to go back to the bond market bubble, though. I hope, Decker Talk Radio listeners, I hope, I hope, I hope that you know that any financial professional that tells you to put your safe money in bonds or bond funds is committing financial malpractice, should not be telling you that that’s where your safe money is because when interest rates go up like they have since February of this year, you will be losing money.
BRIAN: That money is not safe money due to interest rate risk and when you come in and we show you your options that you have for principal guaranteed accounts, I think that you’ll be stunned to see and a lot of people are angry that they didn’t see these options that are available that we use in our planning all the time, that are principal guaranteed and give you a great rate. Okay, I want to warn you about high yield bonds.
BRIAN: High yield bonds are called junk bonds. S&P and Moody’s rate the bonds that are investment grade, and this is around 35 percent. A third of the bond market are investment grade, meaning that they’re safer, triple b to triple a rating. Anything below a triple b rating is junk. These are the double b plus, double b, double b minus, all the way down to c rated and d, which stands for default, d rated bonds. The high yield bond market’s spread between treasuries and the high yield bond index is the narrowest it’s been in many, many decades.
BRIAN: Meaning that if you have a 10-year treasury that is not going to default, that the odds of default are zero, and the 10-year yield on that bond is two percent, and you have a 10-year bond with a 50 percent chance of default and that bond is yielding on a 10 year four percent, the spread between the high yield bond with the 50 percent default and a zero percent default is two percent, 200 basis points, two percent.
BRIAN: To take on 50 percent default risk and only be paid two percent is ridiculous, ridiculous in our minds. So we want to warn you that a lot of financial professionals will tell you, hey Decker Talk Radio listener, Mr. Retiree, we can get two percent on this fund but we can four percent on this fund. Well, the average person’s going to say well I’ll take the four percent. What they don’t tell you is the risk that you’re taking. You’re taking tremendous risk.
BRIAN: The default risk for high yield bonds is much higher than investment grade and it’s still much higher than the treasury rate. What happens when defaults start happening in a high yield bond? Let’s say that we’re all managing a high yield bond fund and defaults start happening. When you have a default and bond prices go down, actually I’m going to back up. What happens when just, say there’s no defaults. Bond prices start going down. Interest rates start going up like they have since February of this year.
BRIAN: Let’s say you’re in retirement and your safe money’s losing money and you think I don’t like this and you try to get out of a high yield bond fund. Well when you get out of a bond fund, you sell it. And when you sell it, the bond fund manager has to redeem your money. So he or she has to sell some of the bonds in the portfolio to redeem your funds. When interest rates go up and losses start occurring, you are going to be selling. The bond manager has to start selling high yield bonds.
BRIAN: So all things being equal, and let’s say that there’s no defaults, when bond prices start dropping because of interest rates and then you add on top of that withdrawals because people don’t want the losses, it’s like yelling fire in a theater and people rush for the exits and not everyone can get out. So we want to warn you, Decker Talk Radio listeners, that there is significant risk in high yield bonds, in the high yield bond mutual funds, and we hope that you know that that is risk money.
BRIAN: And by the way, we hope that you do a review of your bond portfolios to make sure that you know that you have or don’t have high yield bonds. Already this year, three major defaults this year where you went to sleep last night thinking that you had x percent of your portfolio in a bond fund and then you woke up the next day and you can’t get out and it’s 100 percent loss. That’s what happens when you yell fire in a theater and everyone wants to redeem at once and you can’t. You can’t get out.
BRIAN: So we want to warn you that default risk in a high yield bond when interest rates are going up is very, very high. I spent way too much time on that. I apologize.
MIKE: That’s fine. It’s important. Glad you went over it.
BRIAN: Okay, on cash flow, let’s talk about dividends, too. A lot of retirees use dividend income from stocks to cash flow what they have coming for retirement. So when we talk about dividends, Decker Talk Radio listeners, Mike, let’s pick on you. What’s better? If you have a two percent dividend, and let’s call that the risk free rate.
BRIAN: Is three percent better?
MIKE: I’ll play along because we do this in our visits with clients at Decker Retirement Planning. But I’ll say three percent’s better.
BRIAN: Okay, so five percent is better than three percent, right?
MIKE: Absolutely.
BRIAN: And what if, gosh I play golf with a guy, he’s getting seven. I need to get seven percent on my dividends.
MIKE: That doesn’t sound too good to be true. I’ll do it.
BRIAN: Okay.
MIKE: Sarcastically speaking.
BRIAN: Okay. And you know what? I’ve screened through the Wall Street Journal, I’ve seen some 10 percent dividends. I’m going to do that. Isn’t 10 percent better than seven percent?
MIKE: They must be growing money on trees.
BRIAN: Yeah. And once in a while, I come across some that are yielding 12, 13, 14, percent. Surely, logically, 12, 13, 14 is better than 10?
MIKE: Now by this point, they’re catching on, when you’re going through this with our clients here at Decker Retirement Planning, when you’re asking them 12 percent dividends?
BRIAN: I’ve seen some very smart people proudly show me their portfolio and circle their dividend yields, clueless to the additional information that we need to bring up right now. Okay so along with dividend yields, let’s talk about percentage… the default expectation.
BRIAN: So Mike, now, would you like a two percent dividend yield with a zero percent expectation of default? Or would you like a four percent dividend yield with a 20 percent default expectation? Or would you like a six percent dividend rate with a 35 percent default risk? Or would you like an eight percent dividend with a 50 percent default rate? Or better, how about a 10 percent dividend with a two thirds, 66 percent default probability?
BRIAN: Or better yet, how about a 12 percent dividend yield when there’s an 80 percent chance they’re going to cut the dividend any day now?
MIKE: That’s the whole story, with these things, and I wonder how many bankers and brokers actually talk to them about not only dividends, but the risk each dividend’s actually having.
BRIAN: Right. We had a huge client that brought to us a few years ago his dividend portfolio, and by the way, Decker Talk Radio listeners, if I mention this guy’s name, you would know it. He was very well known.
BRIAN: Client of ours, he passed away, but he proudly showed his dividend portfolio to me and I said Bob, this looks great, but let’s go through how well supported these dividends are. And we broke out a P&L and we went through these different companies and let’s say that a lot of these dividends were yielding a dollar a year in dividend payments but a dollar per share in dividend payments.
BRIAN: That’s fine, but a lot of the companies were earning 80 cents per share on cash flow. That means that they were borrowing to pay the dividend. How many years do you think they’re going to do that? In other words, that dividend is what we call an at risk dividend. There were some in his portfolio, Bob’s portfolio where he had a dollar per share in dividend payments and the company was earning a dollar, but in the last five years, had earned 60, 70, 80 percent, is just recently earning a dollar and paying it all out through dividend payments.
BRIAN: That is an at risk dividend payment in our opinion, too. When a company pays out a dollar per share in dividends and earns and nets $1.20, $1.30, $1.40, now you’ve got a cushion on your dividend portfolio and it’s very important to make sure that you have that cushion if you have a dividend type of portfolio. Problems with dividend portfolios is we want to make sure that you’re not drawing income from fluctuating accounts.
BRIAN: When we talk about total return, we talk about the appreciation of the underlying stock plus the dividend. So if the underlying stock in a year grows five percent and the dividend’s five percent, your total return is 10 percent. A lot of retirees in the last couple years went heavy into the energy sector for dividend type investments and yes they were getting five, six, seven percent in dividends, but their underlying investment with the price of oil per barrel going from $120 down to 25 before it bounced back up to where it is right now at 47, a lot of people got hammered on their underlying stock.
BRIAN: And so yes, they’re getting five percent, but the underlying investment took a 40 percent drop. We want to make sure at Decker Talk Radio that you know that you need to draw income from principal guaranteed accounts. Why? Because principal guaranteed accounts have no stock market risk. Every seven or eight years when the markets crash like they typically do, stock market risk for your income in retirement is gone. It’s zero.
BRIAN: In a principal guaranteed account, we zero out stock market risk. When interest rates go up and down because we ladder or we stagger the maturities of the principal guaranteed accounts, we have zeroed out interest rate risk and economic risk. Our clients sail through 2008, the people who did the planning, because they didn’t have any stock market risk, interest rate risk, or economic risk because the planning and the type of portfolios we do. If you want that peace of mind, you should give us a call. We can show you how we do this.
BRIAN: All right so now we’re going to talk about another way to cash flow what you have. I was taught growing up, you never spend principal. Never, ever spend principal. That works when interest rates are higher, but let’s say that you have a great rate on a CD. By the way, a 10-year treasury’s at two percent. Ten year CDs right now are two and a quarter. So let’s say that you get a great rate on a CD, two and a quarter, and you pour a million dollars in there and you’re going to live on the interest. How much money do you have to spend for the next year?
BRIAN: A million at two and a quarter is you have a grand total of $25,000 a year or $2,000 a month to spend any way you want. That doesn’t go very far. Because when interest rates are this low, if you try to live on that rule of not touching your principal, I hope you have over $10 million, because it’s very difficult, it’s very difficult to live on your interest when you have interest rates this low.
BRIAN: So what we do at Decker Talk Radio, at Decker Retirement Planning in Kirkland, Washington, is we have bond ladders, we have bucket number one that’s responsible for income for the first five years. What is bucket number one? Bucket number on is usually a money market account that we can get around one percent and it sends you monthly checks for the first five years, 60 months of your retirement. At the end of five years, bucket one is gone and a lot of clients that look at this the first time are aghast that we’ve spent principal in the first five years.
BRIAN: But then we quickly show them that if someone starts with 1.4 million in total investments and they take out, let’s say 230,000 in the first five years, you would think that the total value of the portfolio would go down if you spend 230,000. So Mike you know these numbers by heart. After you start with 1.4 million in the way we do it with buckets one, two, three and the risk bucket.
BRIAN: Bucket one is a five-year account. Bucket two grows for five years and pays income for years six through 10. Bucket three grows for 10 and pays income for years 11 through 20. And the risk bucket is a 20 plus year account. It’s not principal guaranteed. But the first three buckets, buckets one, two, and three are. In this system, the first five years, $230,000 in this example of a client starting with 1.4 million, comes out of the account. Surely Mike if you pull 230,000 out of an account earning one percent, that the value of the total portfolio drops after five years. Does it?
MIKE: Nope.
BRIAN: Wait, let me repeat that. We pulled $230,000 out of a $1.4 million account in five years. It’s the lowest earning account. We’re pulling a lot of principal in the first five years. At the end of five years, the total portfolio goes down, right?
MIKE: It does not, no.
BRIAN: Okay. And the reason it doesn’t is because during the first five years that we’re pulling money from the lowest earning account, it gives five years for the three higher accounts to grow and compound more than offsetting the 230,000 that our clients pull for the first five years of their investment.
BRIAN: At the end of 10 years, at the end of five years, bucket one is gone. Bucket two shifts over and provides income for years six through ten. I know these numbers like the back of my head. At the end of 10 years, there is four… here I said that and I jinxed myself, $450,000 that have come out of the portfolio in 10 years and Mike, we’ve started with 1.4 million, took 450,000 out in 10 years. Has the total value dropped?
MIKE: Not yet, nope.
BRIAN: It hasn’t. That’s unbelievable. And we need to show Decker Talk Radios this. After 10 years of drawing income from the two lowest earning accounts, it gives 10 years, this is key, for the two higher earning accounts to grow and compound more than offsetting the 450,000 that our clients drew out of the first 10 years of their account.
MIKE: The beautiful part about this is it’s just math. That’s all it is. This isn’t some magic trick or a miracle. It’s simply math.
BRIAN: Einstein said that if there’s seven wonders of the world, the eight is…
MIKE: Compounding interest.
BRIAN: Compound interest, that’s right. So Decker Talk Radio listeners, this is something you have to see. You have to see how we cash flow your investments, how we keep your income producing investments safe with principal guaranteed, how our clients can see where their money’s coming from. We include your social security, your pension money, your rental real estate. We total it up, minus taxes, it shows annual and monthly income with an annual COLA, cost of living adjustment, for the rest of your life.
BRIAN: Our clients, the number one fear in this country, is running out of money before you die. Our clients don’t have that fear because they see with the assets that they have and the math that we apply, we see how much money we can draw from their income so that they draw enough so that they don’t run out of money before they die. This is priceless peace of mind. I hope you come in and I hope you check it out and see because we’re very transparent. Come in. We will show you how these distribution plans work.
BRIAN: Okay we only have one more minute, Mike, but I want to just squeeze one last thing in here. This week, Avis Rental Car took a 50 percent hit, 50 percent hit, and it’s because of the huge bubble in car loan debt. Take a guess how much money car loans have ballooned over.
BRIAN: By the way, student loans are over a trillion. Guess what car loans are?
MIKE: Three trillion?
BRIAN: Nope, one trillion. Same as car.
MIKE: That’s still a lot.
BRIAN: It’s still a lot. But the profitability of car loans is making it very difficult for car rental companies to be able to make the money that they used to and so Avis took a 50, a five zero, a 50 percent hit on their stock this last week. All right…
MIKE: That’s it for this week, so tune in next week for more financial news. We’ll keep you appraised as well with the financial markets and how they might be looking with the new Trump campaign as they come to us, but at the end of this day just know that for those that are coming in and go to our website, www.deckerretirementplanning.com, we are pumping out article after article and radio show after radio show to inform you on how to protect your retirement.
MIKE: You can also subscribe to our podcast at iTunes.com or Google Play and subscribe to our weekly podcast there. But in the end, we wish you the best. This is Mike Decker and Brian Decker. Have a great Sunday.
