MIKE: Good morning, everyone. This is Mike Decker and Brian Decker on another addition of Decker Talk Radio’s Protect Your Retirement. We’re excited to do part two of a two part series in potential problems in retirement, but before we get started, I know Brian’s got some wonderful things. Brian Decker from Decker Retirement Planning out of Kirkland and Seattle. And Brian, you’ve got some news you wanted to talk about before we get started today, right?
BRIAN: Yeah, last time, last week Decker Talk Radio listeners, you heard us get into the biggest problems that are faced in retirement, in our opinion: how much income do you want in retirement, inflation protection, stock market crash protection. We’re going to go through and just topically review a couple of those. There’s 22 different problems that we’re going to go through, but I wanted to start the program with some interesting information. I love what I do; wake up at 4:30 in the morning, no alarm clock.
MIKE: [LAUGH] Do you know how insane that sounds?
BRIAN: Yeah, I just can’t wait to get to today’s news every day.
MIKE: So do you wake the roosters up? Do you let the roosters know when to crow? [LAUGH]
BRIAN: Anyhow, I saw this article and wanted to pass it on. There’re several different phrase and sayings in our business. One is, “the trend is your friend,” meaning that it doesn’t matter if the stock markets are wildly overvalued; the market trend right now has been and is still up.
BRIAN: The next thing is that markets can stay overvalued for years. But this talks about how expensive the markets are right now. Stock markets right now are essentially more expensive than they’ve ever been before, with the exception of 1929 and 1999. And guess who’s buying at these levels? It’s our United States Central Bank. Central banks began buying stocks because they ran out of bonds, mortgage back bonds, to buy. Said in another way, once they bought so many bonds that interest rates fell to zero, they couldn’t buy anymore and in order to continue their free money policies, they had to continue to expand their balance sheets.
BRIAN: So the central banks did the logical thing, I’m being sarcastic, and they started buying stocks, which is even more dangerous. You see, they funded their buying in indexes to minimize the cost. So as a result, the majority of these tremendous inflows have been channeled into the 10 largest stocks that trade in the United States. One is Apple; two is Alphabet, which is Google; three is Microsoft; four is Amazon; five is Facebook; then Berkshire Hathaway, Exxon, Johnson Johnson, J.P. Morgan, and Alibaba.
BRIAN: The 10 largest cap stocks are receiving central bank purchases. So these shares are up 21 percent over the last year compared with 11 percent for the S&P 500 as a whole. So the central banks aren’t merely buying at the top, they’re concentrating their investments and following an investment strategy that really doesn’t make sense. Perhaps the most jarring example of this is the trend for the Swiss National Bank. Swiss central banks own more shares of Facebook than Mark Zuckerberg, the company’s founder.
BRIAN: When the world’s wealthiest, most conservative, and most risk averse investors open a Swiss bank account to hold the world’s best currency, the Swiss franc, they’re really buying U.S. stocks because it’s backed with, now, the 10 largest United States companies. In 2016 alone, the Swiss central…
MIKE: Wait; Alibaba is a United States company?
BRIAN: No, it’s India. It’s a search engine company out of India, but it’s on the New York Stock Exchange and on the Nasdaq it’s the top 10 largest capitalized companies.
MIKE: Okay. That makes sense, okay.
BRIAN: So in 2016 alone, the Swiss Central Bank ownership of global equities grew by 41 percent. The Swiss Central Bank now owns almost 500 billion worth of equities in markets around the world. That makes it one of the 10 largest investors in the entire world.
BRIAN: A tiny country of just over eight million people. So when we talk about how the central banks are using a Keynesian approach of flooding the markets with money and buying back bonds, which now they’re producing an artificial bull market with the purchases of many hundreds of billions of dollars going into the stock market. All right, so there isn’t a problem until it’s a problem as far as the stock market trend.
BRIAN: Want to talk about, continue to talk about, Decker Talk Radio listeners, more about the problems that we see in retirement. At our company in Seattle and in Kirkland, at Carillon Point, we go through and we purposely try to punch holes in the plan. Once the plan is set up, we go through and ask questions: How much income do you want at retirement?
BRIAN: We want to make sure you have a budget, you’ve checked to make sure the income that’s being drawn is sufficient so that you have extra for travel and for entertainment, things like that. We want to make sure you’ve protected against inflation. We want to make sure you’re protected against stock market crashes. What if a spouse dies? How much should you have at risk?
BRIAN: Legacy holdings, required minimum distributions, and then last thing we talked about is Roth conversions. How much money you should convert from an IRA to a Roth. If you’re interested in that program, we did it just last week, you can go to our website and pull that up. Right Mike?
MIKE: Yeah, absolutely. Www.deckerretirementplanning.com. Or you can even go to Google Play or iTunes and just search for the podcast at Decker Talk Radio or search for specifically, “protect your retirement.” But feel free to go on there and listen to that show or a number of other episodes here.
MIKE: I want to give a quick shout-out for our listeners as well. Brian and I are going to be discussing a lot of important topics here, but we also will be extending a few calls to come in and visit with us and our planners in person. So stay tuned as we roll out some great information as well as for those that have questions, we’re getting a lot of questions from our listeners, just email email@example.com; they go straight to me and we’ll make sure to incorporate them in future episodes here. So this is for you and we’ll be discussing some great retirement strategies in great detail.
BRIAN: Good, and we’ll put your questions on the air. All right, the next thing we want to talk about is dynasty trusts. Why is that a problem in retirement? The problem in retirement is the wonderful, good-natured, loving grandparents want to give, not just their children, but their grandchildren assets. When you name your grandchildren in assets, or transfer assets to your grandchildren, there’s something called generation skipping tax. It’s 49 percent.
BRIAN: Or you can use your exclusion that is allowed to you to avoid state and federal income taxes. You can’t have it both ways; you’ve got to use one or the other. So a very popular way around this problem is to what’s called a dynasty trust. A dynasty trust is s trust that lasts several generations and it’s a per stirpes account, meaning it stays bloodline only.
BRIAN: So that when you have the assets in a dynasty trust, if a spouse were to divorce, they cannot claim those assets: they stay with the bloodline son or daughter. What is a dynasty trust used for? Most of the time, a dynasty trust is used for education. So when the descendant (grandchild, great-grandchild) goes to school (college, university), they can access a percent of the trust for tuition, books, things like that, and it helps them.
BRIAN: So that allows you to be a generational rockstar to your children, grandchildren, great-grandchildren by, instead of… Let’s say you have three children, you create a dynasty trust and your beneficiaries are your three children, but a portion of your assets go into the dynasty trust, upon your death, and is funded with instructions on what percentage each of your children are allowed access to the trust.
BRIAN: So that’s how to avoid a problem, which is how best and most efficiently to get assets to your grandchildren and great-grandchildren, etc. It’s called a dynasty trust. The next one we’re going to talk about is on heirs. How to receive the money, how do you want them to receive the money? Today, at death, or a combination?
BRIAN: When you pass away, if you just provide an inheritance, there’s a good-better-best formula that we use at Decker Retirement Planning in Seattle and Kirkland. It’s good to give your children an inheritance; it’s better to create memories during your, while you’re still alive so that you can have those memories; and it’s best to have an inheritance, create the memories, and make sure you have the income that you need and want for the rest of your life so that you’re not sacrificing any of your income for your lifestyle.
BRIAN: But on top of that, you’re able to create memories by having family reunions and spending down your estate. This sounds so different from the years that you’ve taken to build up your estate. Once you go into distribution mode in retirement, your paychecks are your social security, your pension, your investment income, your rental real estate.
BRIAN: Those income streams totaled up, minus taxes, have got to make sure that it’s enough to make sure that you can receive enough income to pay your bills and have extra for entertainment and travel for the rest of your life. And to put a COLA on it.
MIKE: [While?] these are fun things like, do you remember that cruise we went on where we went through seven virgin islands and we went to a different dive shop every single day.
BRIAN: Every day. That was a great [OVERLAP].
MIKE: We got great food afterwards, and then it, I mean, that’s a memory the whole family will remember for the rest of their life, right?
BRIAN: Right, right.
MIKE: You can’t buy that if you’re just giving some people money because they’ll use it for other things.
BRIAN: So Mike, a lot of people won’t understand why we’re saying something that seems so irresponsible as spending down your estate. Here’s the problem, this is another problem in retirement.
MIKE: You’re not saying spend down the estate like the lottery effect, just blow through all your money. I mean, it’s calculated how much you should spend and how you should do it, right?
BRIAN: It’s actually a tax strategy. So let’s say that in the state of Washington, your state estate tax per person, you have an exclusion that shelters 2.2 million dollars. So if you’re married, you’re sheltering 4.4 million. If you have a five million dollar estate, or anything above 2.2 million, which, in these real estate prices, it’s easy to get to. Real estate is amazing in King County right now, what’s going on.
BRIAN: So it’s very easy to have an estate over 2.2 million. So track with me on this, Decker Talk Radio listeners, this is very important. If you have two and a half million dollars, let’s say 3 million dollars, you can shelter all of it by making sure the language is in your will to use your exclusions so that upon your death, you create a decedent’s trust that uses that exclusion and shelters 2.2 so that when your spouse dies, now both of you are dead, you’ve used your exclusion and then the spouse last to die exclusion, you’ve sheltered 4.4 million of a three million dollar estate. Zero estate tax is owed.
BRIAN: But what happens if you don’t have the exclusion? If you don’t have the exclusion, then when you die, all three million dollars transfers over to the surviving spouse and when he or she dies, the last to die, they exclude 2.2 million of a three million dollar estate. So there’s eight hundred thousand left and at 18 percent that’s 144 thousand in state estate taxes that are due that could have been easily fixed by just simply having a few extra sentences in your will in the creation of a decedent’s trust.
MIKE: It’s a bit of a glass half full, half empty. You have to pay your taxes so you can be forced to pay your taxes in a tax efficient way, create memories, have a good time or pay too many taxes? Is that what I’m hearing?
BRIAN: Yeah, we want to minimize the taxes that any of our clients pay. But the way we got to this is, when we talk about spending down an estate. Let’s say, let’s do another take where a spouse dies; there’s no exclusion in the estate, so now there’s a three million dollar estate. 2.2 is the exclusion so now they have exposure of 800,000 dollars.
BRIAN: What if, for the next 15 year of that surviving spouses life, now I’m going to be ridiculous here to make a point.
BRIAN: Sarcastic ridiculous. Let’s say that there were 50,000 dollar family reunions each year for the next 15 years. That gets rid of that extra money, it was spent in a wonderful way to have family reunions, flying everyone out and it spends down the estate so that when they die, that full 2.2 million is able to transfer to the children with no taxes due.
BRIAN: It depends. When it comes to estate taxes, most people fall into one of two categories, and neither is right, neither is wrong, but, and there’s smart people on both sides. When it comes to estate taxes, half our clients will say, “You know, whatever Jonny and Julie get from us, above and beyond any estate taxes, is more than we ever got. We’re not going to pay for any strategies that get them more money.” I would say half our clients might fall into that category.
BRIAN: The other half fall into the category of where their mindset is, they would rollover in their grave if they knew that just the act of dying creates a tax after paying a lifetime of taxes. So that bothers people enough that it’s not about giving their children more money, it’s about minimizing the taxes.
MIKE: And for those that are just tuning in right now, this is Brian Decker from Decker Retirement Planning and Mike Decker from Decker Talk Radio. We’re going over the potential problems in retirement and right now we just had covered state estate tax and it’s a bit of a tongue twister, isn’t it?
MIKE: You kind of have to slow down to say that one.
BRIAN: Covered dynasty trusts, we covered how to transfer assets properly. Some people want to transfer assets just at death; we recommend a combination, just like we talked about.
BRIAN: Okay, here’s another problem in retirement. And that is the concern and worry of wonderful, goodhearted parents making sure their children, and stressing about getting money to their children when they die. This shouldn’t be a stress. In the planning we do at Decker Retirement Planning in Kirkland and Seattle, we have a distribution plan that allows our clients to see in a spreadsheet format where all your sources of income are coming from; social security, pension, rental real estate, income from your assets.
BRIAN: We total it up, minus taxes, it shows… Our clients can see how much they can draw each year with a three percent COLA to age 100. This is priceless information because if you don’t do these calculations, you can’t know how much you can draw for the rest of your life. Distribution planning is a Grand Canyon difference from the banker broker model, which uses asset allocation pie chart diversification and the four percent rule.
BRIAN: The asset allocation pie chart is a problem because it keeps all your money at risk, strike one. It has you buy and hold as markets go up and down, strike two. Which means that after you’ve taken a lifetime to accumulate all these assets, can you really afford to lose 30 percent of it and then take four years to earn that back, all because your broker is paid based on how much money he keeps at risk.
BRIAN: There’s a conflict there that is a major problem and defies common sense on why he would have you, or she would have you use a buy-and-hold strategy. The other has to do with your quote unquote safe money. Why in the world would you put safe money in bond funds and call them safe when interest rates are so low? So this is strike two I guess. Strike two is telling you that you’ve got safe money in bond funds and using the rule of 100 to show you how much money you should have in bond funds.
BRIAN: The rule of 100 says, “Mike, if you’re 65 years old, you should have 65 percent of your money in bonds or bond funds.” That means 65 percent of your money in a low interest environment is earning almost nothing. But the bigger problem is what happens when interest rates go up. When interest rates go up, you lose principal. So in 1994, the tenure treasury went from six to eight percent. The average person, according to Morning Star, lost over 20 percent that year in their bond funds.
BRIAN: In 1999, the tenure treasury went from four to six percent and the average bond from that year lost 17 percent. If we go from where we are right now, at 2.3 percent from the tenure treasury, and it goes back to just four percent, where it was not too long ago, that would be a hit to principal of between 15 and 20 percent on what banks and brokers are telling you is their safe money. When it’s not safe; mathematically that is just not true. That’s like a math teacher teaching that two plus two is seven. So we want to warn people in Decker Talk Radio that your bond funds are not safe when interest rates are this low.
BRIAN: Then, in the distribution planning we use, we make sure that you’re receiving your income from principal guaranteed accounts. Why is that important? It’s important because interests rates go up or down, stock markets go up and down, the economy goes up and down, and we want to make sure our clients at Decker Retirement Planning don’t have to go back to work after the markets get creamed, which they typically do every seven or eight years.
BRIAN: In 2008, the clients that did the planning with us didn’t have any life changing experience when the stock market lost 37 percent in calendar year 2008. They didn’t have to go back to work, move in with the kids; they didn’t even have to change their travel plans. They did the planning and they’re drawing income from principal guaranteed accounts that don’t fluctuate when the stock market goes up or down, that don’t, aren’t concerned and lose money when interest rates go up and down.
BRIAN: All right. A little aside there, but another concern that comes here is, will there be money left over for heirs? That shouldn’t be a concern because if you’re drawing the income that you should for the rest of your life, you don’t have to worry about it because the appreciation of your home, the fact that you’re probably both not going to live over age 100, and with how conservative we are when it comes to the rates of return that we use for planning, our clients, many of them, will be passing on large amounts of money to their beneficiaries.
BRIAN: So it’s just not a reason for concern when in distribution planning you can see how much you need to draw, or how much you can draw for the rest of your life. If you have, if you were using a pie chart, you’re guessing on how much you can draw. So I just want to emphasize that at Decker Retirement Planning, we do the math to make sure that you can see how much you can draw in income.
MIKE: Oh yeah. So I mean, it’s simple. And Brian, I just want to recap the two questions. And for those just tuning in right now, you’re listening to Decker Talk Radio’s Protect Your Retirement, a program dedicated to the facts of retirement.
MIKE: And I just want to say, we’re going over real quick over problems in retirement trying to answer two simple questions: Can I retire? And if so, how much can I draw?
MIKE: I mean, that should be a simple question that people think of, but I don’t think people understand that you need to have those calculations done because they trust a broker who has a conflict of interests. Do you memorized that statement that they put in their, in the bottom of their broker statements?
BRIAN: Pretty close. It’s a required disclosure, four years ago, that the DOL and the Securities and Exchange Commission require to be in all bank and brokerage statements. And that is a warning and a disclosure that the bankers and brokers interests may not always be the same as yours. And that’s an understatement.
MIKE: For those listening right now, I’m going to issue a challenge. To all of you, it’s a really important challenge to see who you’re really dealing with because can you imagine going to a doctor’s office and he can say, “Well, I can try and treat you, but I might not want to. I might want to do experiments on you,” or something else.
BRIAN: Or I’m a dentist.
MIKE: Or I’m a dentist, yeah, but we’re going to look at your foot. So look at your last statement, look at the bottom, read the fine print. If they are admitting that their interests might not be aligned with you, you’re probably not working with the right person and I’m going to have you write down this number right now and call us.
BRIAN: Wait, before you do that, let’s talk about the requirements to be a fiduciary.
MIKE: Oh, that’s a great point. And there are, can we, I know it’s baseball season started up so let’s do the three strikes.
BRIAN: Yeah, there’s three requirements that will determine if your banker, broker or advisor is a fiduciary or not. You should write this down. One is, they’ve got to work with an independent firm that doesn’t tell them what they can and cannot sell. Decker Retirement Planning is totally independent. Nobody tells us what we can and cannot use as far as financial instruments with our clients. No one tells us that.
BRIAN: The big banks, the big brokers, the big financial planning firms have that instructions on what they can and cannot sell. Making, the first point is independence is a requirement. The second is very simple. They’ve got to have a series 65 license. A series 7 license means that they’re commission oriented and they can hide fees and commissions. You want to be upfront with your financial planner and money manager so that their fee only, such that you can have above board, total transparency on the fees that are being paid. That’s number two.
BRIAN: And number three is, the structure of the firm has to be an RIA, a registered investment advisory company. If they’re not an RIA, then they’re not a fiduciary. And they, all three, you’ve got to check the box on all three for them to be a fiduciary. If they’re not, what we have to do at Decker Retirement Planning is many clients come in and we have to unwind a lot of major problems, like variable annuities where the bank or broker got eight percent upfront. It gets paid every year you own it. The insurance companies get paid every year you own it. And the mutual fund companies get paid every year you own it.
BRIAN: Mike, that’s three layers of fees that typically add up to five to seven percent before you make a dime. We don’t like them, we don’t use them and sadly they’re used commonly with the sales people that are not fiduciaries.
MIKE: Variable annuities are sold, not bought and that’s an old expression; we’ve said it before in the show. But, so you’ve got your three checks if you’re working with a fiduciary.
MIKE: You’ve also got, look at the bottom of the statement and read the fine print. You owe it to yourself from the lifetime you’ve spent accumulating and saving to not put it with the guy who only gets paid when you’re taking risks. That just doesn’t make any sense. So take a look at that, write this number down and give us a call any time during the week. If you find that you’re not working with a fiduciary, call this number and we will visit with you and help protect your retirement. That number one more time is 1-800-261-9446. Must be within five years of retirement and have at least 300,000 of investible assets. If that’s the case, this will be at no cost to you.
MIKE: The number one more time to write down, so you can do your homework later, is 1-800-261-9446. And I just want to have a quick little aside. I drive a Mini Cooper and I bought it new. I know that’s a stupid thing to do financially, but it was something I just wanted to at the time and I love it, right? And when I was shopping around for cars, I didn’t go to one place. If I wanted to look at a Toyota, I had to go to a Toyota dealership. If I went to Jeep, it was a Jeep dealership, and what was really interesting is, when I was Jeep, they only talked to me about how good Jeep was. They had nothing good to say, or nothing to say about any other company.
MIKE: When I bought the Mini Cooper, it was interesting; the guy never said anything bad about the other companies. He was a great salesman. He just said, “You know, people have different tastes in different cars and things like that.” However, he still was only motivated to sell me that vehicle. So I want people to understand that even though it might be a nice guy or a nice gal, they might not be pressing you to do a different investment. They have, if you’re working with Vanguard, they’re only going to talk to you about Vanguard funds; American Funds is the same story. Schwab, TD Ameritrade, Fidelity, they’re only going to give you limited options.
MIKE: Unless you’re working with a fiduciary that is truly independent, you are pigeonholing yourself into a situation of what your options are to manage your retirement. I mean, that’s a fairest thing to say, right Brian?
MIKE: These aren’t bad people, they’re just-
BRIAN: They’re just trained differently. They’re not trained to focus, like, they’re trained to focus on accumulation. They’re totally fine in your 20s, 30s, and 40s, but once you get 50 plus years old, or within five years of retirement, it requirements a different approach.
MIKE: I just had a quick story it reminds me of, ‘cause… Do you remember when we first got dirt bikes? And I unknowingly said, “Well I only want my dirt bike to have neutral, first gear, and reverse.” ‘Cause [LAUGH] Do you remember that? [LAUGH]
BRIAN: I don’t remember.
MIKE: I didn’t know that you don’t reverse in a dirt bike. These bankers or brokers don’t know how to do proper retirement planning, to run the calculations, to do what you should have and that’s why we offer free consultations for people.
BRIAN: They’re good people and we’re not attacking them personally; they’re just not trained to do what we do.
BRIAN: Okay, the next one is a bleeding heart. This is a probably in retirement. Bleeding hearts is the expression we use to describe people who have raised children that think your money is their money. So they call mom and dad when their Mercedes breaks down, or their BMW, and they need a new one. They call mom and dad when they need money for, to buy a new house. They need money for this or that. Your money is their money and they… We have several expressions.
BRIAN: The expression that we use is, “love them enough to let them struggle so that they can learn the critically important life skills of using a budget and going without.” And it creates skills of generosity, of appreciation, of being frugal, of budgeting, and the parents that have raised their children with a bleeding heart have created a monster, or more than one monster.
BRIAN: I remember one situation where there was a client, lives on Lake Washington-lived on Lake Washington. They came in and they had, they were about 70 years old, husband and wife, they had no more retirement assets. They had a beautiful home, paid for, on Lake Washington, but no IRAs, no Roths, no SEPs, no 401(k)s, no joint accounts, no non-qualified assets; all of their investment accounts were gone.
BRIAN: And they asked us what they should do. First of all, we asked how they got in that situation. They said, “Well, over the last 25 years in retirement, our kids have needed this and that and this and that have added up to all of our investment funds.” We told them that they needed to sell their home and downsize to create assets that can generate an income so that they can enjoy the rest of their retirement years. And they looked at us, I just still can’t believe this actually happened, they looked at us like we were crazy. And they didn’t come back.
BRIAN: I don’t know what they’re going to do. At the time, they couldn’t pay their yard maintainence people because they were house poor. They had a beautiful asset in the home, but they had no cash flow, they had no way to generate income outside of social security to generate, or to pay their bills. By the way Mike, do you know there’s a famous guy who made the news this week, who didn’t do his planning very well and who has cash flow issues and his name rhymes with Johnny Depp.
BRIAN: Guess who it is.
MIKE: You just said his name.
BRIAN: It’s Johnny Depp.
MIKE: [LAUGH] You couldn’t have gotten more creative, like Johnny Lepp? [LAUGH]
BRIAN: No. Johnny Depp. I wanted to make sure that you got it. But Johnny Depp has assets all over the world, real estate; he’s got all kinds of different assets. And his cash flow needs are… two million dollars…
BRIAN: A month. That’s what he needs to keep all the balls in the air. Two million dollars a month. And he doesn’t have it. So right now, he’s got a fire sale of a whole bunch of assets. So, when it comes to bleeding heart, we want to make sure that we talk this through to make sure that you’re not a bleeding heart and that you can throw us, your advisor, under the bus, tell your kids that you love them, that you’re rooting them on, but that your financial advisor tells you that you just don’t have the money to be sending over to buy a new Mercedes or BMW at this point.
BRIAN: All right, the next point is, when it comes to protecting assets, what happens when, and this is a problem in retirement. You’ve saved all your life and you’re so excited, you retire. Right after your retirement party at XYZ Company, you pull into the shopping, to get some groceries, you pull into the shopping center and you bump someone in the parking lot. And they, just to be nice, you look, you get out of the car, you see that there’s no damage and you just walk up to the person just because you’re a nice person, and you ask if they’re okay.
BRIAN: But you notice that they don’t roll down the window ‘cause they’re already on the phone to their attorney. And-
MIKE: True story.
BRIAN: Yup. And their attorney tells them that they want a net worth statement and not to answer the question if they’re okay. So the window finally comes down, you ask them politely if they’re okay, they said, “I’m not answering that.” But here’s where to send your net worth statement. And by the way, state law says you have to send that statement. And then they decide if they’re going to sue you or not.
BRIAN: Now remember, you just got retired and now you have a liability issue. To help in situations like that, above and beyond what your car insurance liability is, is an umbrella policy. An umbrella policy is an easy fix. It’s five or six hundred bucks, a year, for an extra million dollars in liability coverage. We just want to make sure that you know that that should be in place in any complete financial plan.
MIKE: All right, well, and I just want to chime in there too. You shouldn’t live your life in fear. You shouldn’t sit at home in your retirement, watching TV and doing absolutely nothing because you’re scared of the litigious society that we live in. I mean, you should be able to go out and you just, you’ve got this backup. And it’s really that simple.
MIKE: So… All right, let’s see. Brian, what do we have next on the list here? I know we’ve been covering a lot of great information. And if you’re just tuning in right now, this is Decker Talk Radio’s Protect Your Retirement, a show that focuses on the facts on retirement planning and relevant information as well. We do talk about taxes; we do talk about wills, power of attorney and other relevant aspects. We’ve even talked about health and nutrition on here, but we just dive into the facts, dive into the details.
BRIAN: What we’re talking about today is how to protect your retirement and potential problems that come up. So the next one, Mike, has to do with life insurance: do you need it? Now we are fiduciaries, meaning that we’re required by law to put our clients best interests before our companies best interests. Mike, in all the years that you and I have worked together, how much life insurance have we sold?
MIKE: I can’t remember us ever selling it.
BRIAN: It’s very rare.
MIKE: Yeah, if you’ve sold it, I just didn’t know about it because it does not happen.
BRIAN: Okay, it’s very rare is the point I wanted to make. The reason is because if, once you’re retired, in our opinion, if you have a life insurance policy, keep it. If you don’t, you don’t need it. And that’s unbelievable information, but we want to make sure that we test to see if there’s problems so we kill off, we talk through the death of a spouse. So the worst time to lose a spouse, are you going to add something here?
MIKE: Oh, I’ll add in a second here, but this is a good topic you’re on right now.
BRIAN: The worst time to lose a spouse is today. As far as income earning, let’s say that you’re in your 60s or 70s or 50s, whatever it is, the worst time to lose a spouse when it comes to income is today, right away. They’re no longer able to generate income and once you, if you’re married, you lose one of the two social security income streams. You can’t keep them both when one spouse dies, so you choose the greater of the two.
BRIAN: And what we do is we acknowledge that in the death of a spouse, it’s a horrible emotional experience. We want to make sure that it’s not a horrible financial experience. So we talk through with the spouse in our conference rooms, how financially are they affected? We remind them that they keep the house, that all the assets that have been earned are still there for investment. We remind them that they keep whatever income streams are transferred to them. If there’s rental real estate, that continues.
BRIAN: If there’s a pension, we check on survivability to see how much transfers to the surviving spouse. We add it all up, we look at the delta, the difference, and we ask, “With you two married, we have you receiving seven thousand dollars a month. But if John dies, when John dies, if he were to die today, your income is no longer seven thousand a month-it’s now five thousand a month. Can you live on that?” And we have wonderful conversations on the options that she, the surviving spouse, has.
BRIAN: Statistically, the woman is going to outlive the man and so, without any rehearsal, we ask her what she’s going to do. Many times she’ll say, “Well, I’m going to sell the house. I’ll sell the house, downsize to a condo, free up assets and replace that two thousand a month.” Woman are brilliant in their survival financial instincts ‘cause that’s a [COUGH] that’s exactly right.
BRIAN: We want to make sure that you also have, that you also have the ability to replace income if income was lost at the death of a spouse. So let’s say a spouse dies and a pension with 75 thousand dollars a year dies with them. There’s no survivability and that pension dies with them. That means that there must be income replacement.
BRIAN: Of course we’re going to use life insurance to replace that income. So we just have a conversation to make sure that when it comes to your financial plan, that we talk about all the problems we can muster. Life insurance helps plug income replacement. Mike, you were going to say something there.
MIKE: Well, we’re talking about life insurance and there’s something that we should talk about, about the letter.
BRIAN: Oh, that’s coming up in long-term care.
MIKE: Is that coming up here? Okay, with long-term care. So after we talk, we’ll address the letter here in just a moment.
MIKE: The reason why is because what we’re talking about is not blanket statements here. These are things that you got to come in and talk about it and figure out how unique your situation is and what needs to be done. You can’t just enter in these things into a computer and then spits out an answer and you’re good to go. And so just stay tuned for Decker Talk Radio’s Protect Your Retirement, as we just go over the facts of retirement planning.
Talk Radio listeners, the problem in retirement that we’re going to talk about now is long-term care. This is the risk of one spouse bankrupting another spouse due to high healthcare costs.
MIKE: I feel like I gave the spoiler away when I said the letter. [LAUGH]
BRIAN: Yeah. Well a lot of people don’t know what you’re talking about.
BRIAN: So let’s go through this. In our opinion at Decker Retirement Planning, you have seven different options when it comes to handling your long-term care risks. So I’m going to go through them very quickly right now. By the way Mike, again, we are licensed to sell long-term care. How many of those policies have you ever seen us use?
BRIAN: The reason is because even though we’re licensed to sell it, we only do it when it plugs a hole.
BRIAN: The enigma when it comes to long-term care is that the people who need it can’t afford it and the people who can afford it don’t need it. I just want to say that right.
MIKE: Well it’s interesting how the insurance companies put that together. Because if the people that can afford it that get it that don’t need it, well they’re doing pretty well for themselves.
BRIAN: Well let’s look at the statistic. The statistic that the long-term care industry talks about is that 70 percent of Americans will eventually, at some time in their life, go into a long-term care facility. The problem with that statistic is, they count even one day in hospice as going into a facility.
BRIAN: So in that statistic, if you strip out 30 days or less of hospice, now you’re talking about how the statistic actually flips. Now 70 percent of Americans don’t go into a facility; we just die. We have a stroke, a heart attack, get hit by a bus, whatever it is, but we don’t go into a facility. And of the remaining 30 percent, half of those are there nine months or less. At our firm, we are very mathematical in our approach. We want to take, we want to hope for the best, but let’s plan for the worst.
BRIAN: A worst-case scenario is a healthy body with Alzheimer’s. That’s a worst-case scenario for long-term care risk to a surviving spouse. So let’s talk through this nightmare. A lot of you, when I describe what I’m going to say here, you’ve lived it, you’ve seen it. There’s three parts to this journey. So the first day that your spouse forgets an anniversary, you don’t check them into a facility. But the first third of that journey is on you.
BRIAN: You’re serving them, loving them, supporting them, providing for them, helping them, driving them; you’re doing all the things you can yourself. Do you need any help at this point? No, it’s all on you. It’s exhausting: it’s emotionally exhausting, it’s physically exhausting, but the first third of the journey is on you.
BRIAN: The second third is not when you check your spouse into a long-term care facility at 10,000 dollars a month. You stay at home and ask for in-home care, which isn’t 10,000 a month; it starts out low and the more you need it, the more expensive it becomes. Finally, you get to the point where the final third of this journey your spouse wakes up at two in the morning, puts on a shirt and tie, wanders out in the freeway, around the neighborhood and gets lost and you want for his or her own safety, you’ve got to check them in to a full-time facility.
BRIAN: Now it is 10,000 a month and the costs keep coming every month. We want to ask the obvious question, and also at this point, it’s no longer years in this final third of the journey, it’s typically 18 to 24 months. So do you have 10,000 times 24? Do you have 250,000 dollars, 240-250,000, in your own estate to pay for this? Most of time our clients have it in two places.
BRIAN: One, they have it in the equity in their home. And two, they have excess in the investments that they have in their plan. So they have it two times over and most clients choose to self-finance, which is the first options. They choose to self-finance that risk. The second option is by far the most popular for those that choose coverage; it’s called traditional long-term care.
BRIAN: In the second option, traditional long-term care, you pay five or six hundred dollars a month and you have coverage, a benefit of three or four hundred thousand dollars. So that if you were to go into a facility, then they would pay up to three or four hundred thousand dollars of your bills. But if you die, not if, when you die, that coverage stops. So if you never use it, you paid for it, but you never use it and it’s just gone.
BRIAN: A problem that we want to make sure that Decker Retirement Planning listeners know about is Mike, what you call the letter. So, a lot of people that own traditional long-term care are convinced that the description of their premiums, being described as guaranteed-level premium, means that they’re guaranteed to be level.
BRIAN: It doesn’t mean that at all. We want to make sure that you know that it’s very common in your late 60s, early 70s, you’re going to get a letter and it tells you that your premiums have just gone up 60 percent. Why 60 percent? Because that’s the highest amount allowed in the state of Washington by the insurance commissioner. And that is freely granted because now you are entering the higher cost ages and exposure, that risk exposure timeframe.
BRIAN: What the insurance company hopes you do is, they hope that you cancel and now they’ve collected all of those past years and years of premiums, no risk at this point. Or, they hope that you cut your benefit to keep the premium the same and now they’re getting the same income and they’ve cut their risk in half. Either way the insurance company wins. So we want to make sure, Decker Talk Radio listeners, that you know that it’s coming.
BRIAN: If you have it, that that letter is coming, and we plan around it and budget it into your plan so that we can use what you’ve paid for. We don’t want it to be a surprise; we don’t want you to panic.
BRIAN: Okay, option number three on long-term care. One is to self-finance, two is traditional long-term care, three is when an insurance guy gets ahold of you and says, “Hey, if you get hit buy a bus, that long-term care you’ve paid all your life doesn’t pay you a dime. So that three or four hundred thousand dollar death, or long-term care benefit, is useless to you if you die. Tell you what we should do, what we should do is make sure you get that three or four hundred thousand either way, whether you die, when you die, or, and or, if you go into a long-term care facility.”
BRIAN: So they’ll sell you a whole life policy with a long-term care writer. In this third options, it sounds really good on paper. The problem is it’s extremely expensive. It’s typically around 1,000 dollars a month, per person, for life. So it’s available, we just want to point out it’s very expensive. Option number four is asset based long-term care. Now the quandary with long-term care is if you have the assets and can afford it, you don’t need it, and if you don’t have the assets and can’t afford it, those are typically the people who need it.
BRIAN: If we use long-term care, this is the one we typically go for. Asset based long-term care is where you create an account, you save 10,000 dollars a year for 10 years; you get 100,000 in there. And then when you die, you get paid a 2x death benefit, or 200,000 dollars. If you go into a facility, you get around 4x in benefits, so around 400,000 in long-term care benefit. And at any time, if you change your mind, you can pull all your money out; it’s liquid to you. So we like the flexibility of asset based long-term care.
BRIAN: However, for clients that have assets that are smaller, to save 10,000 dollars a year for 10 years, per spouse-it’s very, very difficult. It’s very expensive. I’m going to have to talk quicker to cover this.
MIKE: We’ve only got four more minutes left.
BRIAN: Okay. So that’s asset based long-term care. Option number five for long-term care expenses is called the Safe Harbor Trust.
BRIAN: Safe Harbor Trust used to be a very popular idea. It’s where you’d move assets to a sibling so that you got the assets out of your name so that when your spouse went into a facility, you could put him or her on Medicaid, not pay anything, and after they passed away, you could draw all those assets back. Well the IRS got ahold, got wise to this and they put in a clawback provision that if you’re diagnosed with Alzheimer’s or any disease that put you into a facility, within five years of funding your, or moving assets that they can claw those back and you pay for it.
BRIAN: Also, here’s the bigger problem, your sibling, because this is an arm’s length transfer, can wake up one day and say, “You know, Mike, those assets you gave me… I really like that 800,000 or 1.2 million that you gave me.” And that’s theirs. Now, that’s theirs; they get to keep those assets. All right, option number six is the most tragic and that’s divorce. Financially, to survive, some spouses, they can’t afford long-term care; they will just divorce to survive.
BRIAN: And option number seven is, are one of… How much time do we have left? Two minutes?
BRIAN: We have… Option number seven is an index universal life where the asset grows very quickly, the average around seven or eight percent principal guaranteed growth. You pull money out of it via a loan, and it’s tax-free income.
BRIAN: The IRR, the internal rate of return on this investment is around five, six percent tax-free, which is the tax equivalent of like an eight and a half percent CD, and you have liquidity access to 90 percent of the surrender value of the account and our clients can use it for long-term care. Mike, we’re running out of time.
MIKE: Yeah, that’s about all we got time for the show. So tune in next week, 9:00 a.m. at KVI 570 AM radio, or tune in anytime after that on Decker Talk Radio’s Protect Your Retirement, deckerretirementplanning.com where we do post the show. Or listen to us on Google Play or iTunes. And for this radio show, this cast or other podcasts or articles, go to www.deckerretirementplanning.com. Until next week, enjoy retirement.
Decker Retirement Planning Inc. is a registered investment advisor in the state of Washington. Our investment advisors may not transact business in states unless appropriately registered or excluded or exempted from such registration. We are registered as an investment advisor in WA, ID, UT, CA, NV and TX. We can provide investment advisory services in these states and other states where we are exempted from registration.