MALE: You’re listening to Retirement Radio. The contents of this show are the opinion of Mike and his guests, do not use this content for investment decisions, legal or tax advice. Consult with a licensed financial professional or conduct your own due diligence when making investment decisions. This show is pre-recorded before its actual air date.
MALE: You’re listening to Retirement Radio. And now your host, Mike.
MIKE: Hey-lo, hello, welcome. Welcome everyone, we got a great show lined up today. Thank you. All right, thank you, we got a great show lined up today, so excited.
MIKE: Today we’re not only talking about different phases of retirement and how that affects you, how that could affect you emotionally, but also financially you just gotta plan differently, you can’t just have one straight plan, there’s different phases. We’ll talk more about that with our guests coming up. We’re also talking about some antiquated strategies that a lot of you Retirement Radio listeners are probably using and we’re gonna help you find those issues and fix it, okay? All today on Retirement Radio.
MIKE: Now before we get started we do need to say a special thank you to our sponsors, Decker Retirement Planning, thank you so much. With offices in Seattle, Washington, Kirkland, Washington, just opening up rent in Washington as well for those south of the lake, but also in Salt Lake City, Utah, and in a month San Francisco, California. They’re just, they’re growing fast because they really live up to their motto, “A safer approach to retirement.” Check ‘em out, they’ve got so much information on their website, DeckerRetirementPlanning.com.
MIKE: Or you can listen to their podcast, Decker Talk Radio. But enough with that, they’re great, but we’re gonna dive into some details today. Now I want to wrap up a little bit from what I talked about last week, if you remember. And if you didn’t catch the show by the way you can always catch it on iTunes or Google Play, we archive it all. Or go to RetirementRadio.org for all the previous shows. But we talked about bitcoin and last I left the show I had said I invested some just to kind of get a feel for what it was, that process was.
MIKE: And the money cleared, the money came out so it’s legitimate, I’m telling you if you do want to invest in bitcoin, I don’t recommend it for actual retirement investing. But if you want to have fun with fun money that you can afford to lose if it completely went away, why not? Right? Whether it’s going to Vegas, playing on bitcoin or whatever you do with your money, that’s fun money, you do what you want with it. As long as it’s legal. Always keep it legal. All right. [LAUGH]
MIKE: But aside from that I’ve been working with this incredible group as of late called A Safer Retirement Education™, it’s a new educational system that’s going to be doing events all over the nation educating people in a workshop format that you can go in and put your retirement plan together all by yourself right there working with a purebred fiduciary, it’s going to be amazing. Now they’re not doing the classes yet, they’re still in their organization phase.
MIKE: But they brought me in to have a conversation about that. And I was more than happy to talk to them because as you all know I’ve got a few opinions on retirement planning. And well it was wonderful, but this one topic came up and I just was like, “I don’t know. I don’t know about it, okay?” They said, “A lot of people,” which is true, “Are buying income annuities.” Ugh. I couldn’t tell you how sad I was.
MIKE: But they wanted my opinion on it, and I said, “Well you need to talk about it because every insurance agent, every salesman out there is going to want to sell you an income annuity.” It’s the best non-committal investment a banker or broker or insurance salesman could sell you. They make a fat commission up front and it’s set it, forget it, they don’t need to talk to you ever again. But aside from all of that, it just, it doesn’t make sense so I was saying, “You need to put it in there and be very transparent on how these actually work.”
MIKE: “And not the way that they’re sold.” Okay? Perception is reality, and often times these salesmen are controlling your perception and so when reality actually sets in and not the perceived reality, it’s a very frustrating experience, at least I’ve seen over and over and over when sitting in advisor’s offices. So with that being said I thought it’d be appropriate to start today’s show off focusing on the good, the bad, and the ugly of income annuities in our segment of…
MALE: A bit of clarity.
MIKE: Income annuities are complex insurance products that use benefits and add-ons that can customize your investment strategy in such a way that you can feel like you’re putting together a somewhat custom plan that gives you payments for the rest of your life, while leveraging your assets to be able to continue to grow. With riders, allocation options, and different payment structures you are able to map out something that could be perfect for your retirement needs.
MIKE: We’ve talked about variable news before, this is a different topic for a different time, you can go on to iTunes or Google Play to catch that previous show. Today we’re focusing on what’s called a SPIA, or a Single Premium Immediate Annuity, or fixed income annuities. Okay, are you still with me? If not don’t feel bad, I’m going to play a quick clip from The Big Short that kind of sums up how I feel about how people talk about these products.
RYAN: It’s pretty confusing, right? Does it make you feel bored or stupid? Well, it’s supposed to. Wall Street loves to use confusing terms to make you think only they can do what they do. Or even better, for you just to leave ‘em alone.
MIKE: Now to avoid any confusion, here is the simplest explanation of an income annuity that I have ever been able to come up with. It is a self-made pension where you give your money to an insurance company and let them handle the finances.
MIKE: Now I’m trying to be very, very objective and kind with this definition, okay? You get an income stream for the rest of your life and that sounds nice, right? Now, oh and I’m going to be a little less objective here, but I want to ask yourself if this is a big product for insurance companies, how is it that they have all these, or they can afford such nice structures, such buildings, and such expensive places? How can they pay some of the highest commissions in the industry to their salesmen?
MIKE: These products are very lucrative for them. Which should be a sign in itself that you’re not getting the best deal. ‘Cause they are. And let’s just let it be at that. But we’re going to dive in the details right now with this, let’s start with the good. There has to be some good redeeming quality for these products to be successfully sold, right? And that makes sense. It’s not just smoke and mirrors, there is something that can be redeemable here.
MIKE: And here’s the list that I came up with while trying to be as objective as possible. The biggest and this is my opinion, the biggest selling point is peace of mind. Okay? You’re just going to receive a stream of income, knowing it’s going to be in there every month, every quarter, however you set it up for the rest of your life. Now that assumes that you chose the lifetime payment option, but if you live for 200 years, you’re still getting that money, okay?
MIKE: Now for some people they just can’t be bothered by rate of return investment strategy, all the jargon that Wall Street throws at them and how it all works. I get that. They just want to know that they are receiving a payment for the rest of their life, and that’s it. These folks are normally individuals though who have never really handled their household finances and do get a bit overwhelmed with financial decisions, okay? So I get that. There is some benefit for these. Now the second advantage of income annuities are…
MIKE: Yeah, there’s not. That’s really it. Just peace of mind, because mathematically, factually, objectively, historically these products don’t make sense. Now let’s take the analysis one point at a time. First, you have no liquidity. Once you initiate that payment structure and you start receiving your paycheck every month, you are stuck. If there’s an emergency, doesn’t matter. You can’t pull out those funds. If you’re receiving payments and something comes up, that’s it.
MIKE: Life happens, but you won’t be prepared for it because you’re putting all of your funds in those or in these products. Now if you’re receiving income and it pays for all of your dividends and you’re saving money for it, that just seems kind of like a not so useful situation, it just seems very inefficient from a financial planning standpoint. But I digress. To put some perspective in place, if you would have received payments today of 20,000 a year from some sort of product in 10 years, it could be worth 15k or even less, maybe even 10k of the value of money.
MIKE: That is a financial squeeze that you do not want to have, okay? A hundred dollars in 1989 would be worth around 200 dollars today. Had you invested those funds properly or had you not invested those funds properly, you would be cutting yourself significantly short due to inflation. Can you imagine the lack of buying power just trying to buy groceries and get by? Everything would be twice as expensive, could you and your budget right now afford life if everything was twice as expensive? That’s the kind of financial squeeze the income annuities can put you in.
MIKE: Now you can buy a rider or an inflation tool that will have your payments increase over time with a built-in cost of living adjustment or a COLA, which is nice in theory. But it actually averages out to be sixes for the actual profitability for yourself because well, keep in mind the insurance company did the calculations when they put this together, and they expect you to die at a certain time and if you die early it’s even more money for them, so and they’re really just maximizing their profits either way.
MIKE: And with any such rider you’re paying fees which holds back any sort of performance as in holds back the maximum amount you can receive for payment. Now speaking of fees, if you do pay that rider fee it does give you the option to pass on leftover assets to a beneficiary of your choice. Which can be nice. Now there are some limitations there and obviously it varies product to product, but keep in mind it’s not a lifetime payout or not always a lifetime payout.
MIKE: It’s usually a set five or 10 years or some set amount because well, the insurance company put this together and they’re going to give themselves the upper hand. Insurance companies are not charities, they are for profit businesses and they will work to profit off of us. And that’s just, that’s their structure, you can’t be mad at them for doing that, that’s like being mad for someone to do their job. I mean, goodness, that’s just how it is. But you just need to know what you’re getting into if you’re looking into one of these.
MIKE: If you don’t pay these rider fees and you die, you don’t pass anything on to your beneficiaries. This is why income annuities would fare under one of the worst financial products for estate planning. It can be an absolute disaster. So here is the big question. Where is the break-even? There can’t really be a product and again, I’m not saying this in a promissory sense, but there can’t really be a product out there that legitimately just screws people over. There has to be some sort of break-even.
MIKE: So under what situation would it make sense to buy one of these products? Well, I ran the best SPIA, Single Premium Income Annuity, remember that? That I could find with today’s rates. Assuming that you are a man, and again I’m not being sexist here, it’s just for insurance products you have to declare if you’re a man or a woman, and I just ran it as a man ‘cause I’m a man, okay? And invested 100,000 in a SPIA at the age of 60.
MIKE: You’ll receive payments for the rest of your life at around 5,643 dollars. Again, rates vary and these are, this is a hypothetical situation but this is the hypothetical illustration that I got. You will have to live 18 years to break even on your initial investment or just the principal, assuming there’s a zero percent interest. Now I’m just going to pose the question, would you ever work with a financial advisor for 18 years when they were giving you a zero percent return?
MIKE: That would be crazy. That would be nuts, you wouldn’t do it. You’d be insane to do that, right? But keep in mind, if you died at that age there’s no assets being passed, it is done, zero, zilch. The insurance company got all the gains with all the money that you gave them to play with and they didn’t have to do a thing. Why would you allow an insurance company to get away with that? Why would you let basically give them money and pay them to give you your own money back? It doesn’t make sense.
MIKE: Now if you lived to the average life expectancy of someone who would be 60 today, that would be another 24 years for a 60-year-old man, you’d take home an incredible three percent from your investments. Now I get that 10-year CDs are around 2.4 or five percent but keep in mind that if you die before you turn 84 years old, those assets would pass to your beneficiaries, the CD assets would pass. With an income annuity, they do not at all.
MIKE: And who in the world is gonna put their entire assets in a CD? No. You diversify, you figure out other investment strategies, there’s a whole plethora of things you would do to have that kind of conversation, I’m just being a bit hyperbolic here, when I’m saying the 10-year CD 2.4 or five percent or all or a majority of your assets that you’re putting into this income annuity getting three percent, which is ludicrous. But let’s continue. And please note that since 1958 to today the S&P just to kind of give a comparison, has averaged around 10.4 percent with dividends reinvested.
MIKE: Just keep that in mind when you have to think about that three percent that you’re getting. Now that is not adjusted for inflation but still that is a huge gap. Now the longer you live with this income stream it would seem like the interest or the return would exponentially grow. In reality it’s not as pretty as you’d think. If you lived 75 years in retirement, so now you’re 135-years-old, your average rate of return for this annuity would be 5.9 percent after you would have taken out any sort of income.
MIKE: That’s pathetic. Now in my opinion it would be impossible to live long enough to make this investment decision worth it. Just my opinion and all the numbers that me and my staff here at Retirement Radio have run. We just don’t believe it makes sense mathematically speaking. Again, I’m recognizing peace of mind is what matters most for some people and if that’s what’s most important for you, good, great. You can do that. But for anyone else that wants to leverage their assets still getting the transparency you deserve and making the best financial decisions, this might not be one of them.
MIKE: Now before I extend a number and offer here for those that have one or are thinking about getting one and want to see other options, I do want to bring up the biggest problems that I do see with these products and how the salesmen trick people into buying them. There’s like that phrase for [variable annuities?] that if they’re… let’s see, variable annuities are sold not bought because if people knew what they were buying they wouldn’t actually buy one. I kind of feel it’s like the same way, if someone had an insurance agent or whoever was selling them this income annuity and they had an actuary sit next to them.
MIKE: I don’t think they would buy it. Just saying. Now with these income annuities, they typically use what’s called a ghost account. Now every salesman’s going to have a different term for that but you get what I’m saying here. It’s a ghost account that shows up on the statement, it’s a dollar amount that is high and is actually way higher than the cash amount, and they can even give bonuses to boost that amount and that’s what you’re going to be fixed on. This ghost account is meant to grow at a significant rate and it shows returns from seven to 10 percent each year.
MIKE: Which is fantastic. Okay? And well, the problem with… I’ll just dive right into it, the problem with the ghost account is the amount that you’re looking at here, what you think and you’re gauging the whole performance off of isn’t your cash value, it’s just a made up number that they have that keeps growing high that’s going to be based off of some calculation in the near future to figure out how much you’re going to be paid. But the calculation they also made as well, so it’s like you’re in this pretend world of these pretend investments that will give you a pretend amount that they have complete control over and then will pay you their dividends.
MIKE: Now I’m saying this out loud, it kind of sounds like a matrix situation but we won’t go there. If you died before you turned on the income stream, your beneficiaries would receive the cash amount but from what I’ve seen from the top income annuities that are doing riders and are structured this way, I mean that’s like a two or three percent growth. It’s pretty pathetic. That high number that everyone looks at or most people will look at on their statements seems high and it’s there to be high to keep you wanting to keep the product. They want retention.
MIKE: Now take that imaginary number, this is when you want to actually take your income out, you take that imaginary number, divide it by the number that they give you that determines the… by the actuaries on how much you’ll receive for life. Please note that that number that you are dividing it is also made up by the insurance companies. No matter how you slice it, they are reserving the advantage for themselves and are set to win big. Now sure once in a while someone lives to be a hundred and some years old and they might not make as much money, but they’re still making money off of that person.
MIKE: So congratulations, let’s just say that you got a million dollars and you invest it or there’s a million dollars this account grew and grew and grew and now it’s a million dollars and you’re so happy. Keep in mind it’s a ghost account. Now the insurance company divides it by 20 and now you get 50k per year for the rest of your life. Okay. Well, you’re still going to have to live 20-plus years just to get that fake principal money out. And it barely even passes what you originally invested in there. It just doesn’t add up.
MIKE: In finance on the statements, if you see a monetary number that’s how much you should expect the cash to be, look at the statements. If you’re listening to this right now and you have any sort of annuity, call the company and say, “How much cash is actually here?” Forget about the withdrawal penalties and the illiquid parts, this, that, or the other, just find out how much cash is actually growing in the account because that’s really what you should be looking at and not these fake ghost accounts. As they can be very misleading, especially on the statements.
MIKE: So if you have an income annuity or any annuity, I’m going to extend this offer to you at no cost to you, to help show you the, give you the transparency you deserve and give you options on what you can do with that product for your retirement plan. Must be 55 years or older and have at least 300,000 of investible assets to qualify, but call right now, 800-261-9446 or dial #250 on your smartphone and say the key word, “Retirement help.”
MIKE: So you can get a hold of my back office, they’ll gather your information, and we will help take care of you. All right? That simple, just nice and straightforward but you should call now. 800-261-9446 or dial the pound on your smartphone, #250 on your smartphone to say the keyword, “Retirement help,” so you can get my people and we can help you. It doesn’t make sense that you spent your entire life working and saving to have your money just sit around doing nothing, locked up in some product that isn’t looking out for your best interest on so many levels.
MIKE: It just doesn’t make sense. Now before we wrap up this segment, I do just want to throw out there working with financial planners who are trained as distribution planners who are purebred fiduciaries could give you way better returns, advice, and guidance and give you more of your money in a safer way than what these income annuities are with the insurance companies laughing all the way to the bank. It would be done in such a way that you just have the transparency that you’re looking for, have the answers there and just have it be mathematically make sense.
MIKE: It’s really a no-brainer, you just got to find the right one and so I’m going to also extend this with the offer, we’re going to attach it to there that if you’re not working with a purebred fiduciary call me now. It doesn’t make sense. Art Levitt, the past SEC chairman, he said when he was working for the SEC that if you have 50,000 more of investible assets, fire your broker and hire an investment advisor. Which is code for fiduciary. You need someone that’s looking out and as Tony Robbins says, “1.6 percent of financial professionals are actual purebred fiduciaries,” which is nuts. It’s just insane.
MIKE: So if you have any sort of annuity and you’re stuck in one, we want to hear about it and we want to help you show your options, give you the transparency of what you can actually do, how much you’re actually earning, and help plan around that. But also if your guy is not a purebred fiduciary, that’s 65 licensed working for an independent company under a registered investment advisory firm, there’s no Series 7 license, no 66, none of that other crap. Just 65 licensed with that business structure. If that’s not it, you could be being taken advantage of.
MIKE: Doesn’t matter how nice the person is, and I’m sure they’re nice people, but you’re working with a salesman. And that might not be the best thing especially for your retirement. So we’re going to extend this one last offer, 800-261-9446 or dial #250 on your smartphone and say the keyword, “Retirement help now.” And get the transparency you deserve and make sure that your retirement plan is on track. You want that to happen, you should only retire once, and if we’re at the market top like a lot of people are talking about right now and how I personally believe too, and it tanks.
MIKE: And you’re still in the pie chart or something happens, you could be forced back to work and we do not want that to happen. We are here for you, that’s the whole purpose of this show. Now we’re going to take a quick break everyone, stay tuned, we’ve got John Switzer [PH], Clayton Bradshaw [PH], excellent interviews talking about the different stages of retirement and how to help protect your retirement on so many levels. We’ve also got Brian Decker who’s gonna give us our market minute here, so stay tuned for this and more.
MIKE: Hey y’all, it’s Mike, your host from Retirement Radio and I’ve got some news for you. Decker Retirement Planning has put together some very special events that are happening in Salt Lake City, in Seattle, Washington, in Kirkland, Washington, and in Renton, Washington to help educate you on a safer approach to retirement. What you don’t know could hurt you and with the market top we’re in and all the bubbles that we’re experiencing right now, you should be attending this. If you are 55 years or older and have at least 300,000 of investible assets, this is meant for you and for your retirement so you can have a safer approach to retirement.
MIKE: Just pick up the phone right now and dial 844-404-DECKER. That’s 844-404-3325 or on your smartphone you can just dial #250 and say the keyword, “Decker Retirement,” to get all the information you need. Call now for a safer approach to retirement.
MIKE: All right everyone, so we’re back and I am so excited, there’s been so much going on in the market and we’ve brought in a special guest, Brian Decker, to tell us all about in our next segment…
MALE: Your market minute.
BRIAN: Hey thanks Mike, I have a lot of information on the stock market, tariffs, taxes, demographics, so I think you’ll find this very interesting. JPMorgan, let’s talk about the stock market, we’ll start with that. JPMorgan executive, Dan Pinto warned that equity markets could fall as much as 40 percent in the next two to three years. And his comments come as investors worry over the effects of the central banks raising interest rates and rising inflation, it could cause a deep recession or a deep correction in the markets.
BRIAN: By the way the two big tailwinds Mike in the market in the last, gosh, in the last many, many years since 1980 has been falling interest rates. Since 1980, 38 years of declining interest rates have been a tailwind to help the markets go higher, there’s two reasons that stock markets go up. One is rising earnings per share. Earnings per share this year will go up, but since 2000-and… probably May of 2017 for the previous five years interest rates on the S&P haven’t gone up much.
BRIAN: They’ve been artificially raised by stock buybacks. So I think that’s interesting. But the two tailwinds that are now headwinds is lower interest rates, they’re now starting to go up again. And the second tailwind that now is a headwind is quantitative easing. Federal Reserve Bank printing money and a lot of that finding its way into the stock markets producing major push in higher asset values. Back to Dan Pinto of JPMorgan Chase, he said that markets are nervous and if President Trump goes beyond what he’s already announced on tariffs, investors could react badly.
BRIAN: Jamie Dimon who’s the CEO of JPMorgan, he echoed the concerns about tariffs. The other thing is Guggenheim, he said, “Based on a dashboard of proprietary recession probability models,” which shows 24 to… in the six months ahead they assign probabilities. They say, believe that the next recession will be in late 2019, mid-2020 and the risk assets tend to perform well two years in front of a recession.
BRIAN: But investors should become increasingly defensive in the final year of that expansion, because typically that decline starts in the last year before there’s a recession. Markets average a 27 percent decline and treasury bonds average a 20-plus percent increase in the flight to safety. By the way, you can take it to the bank that there’s certain asset groups that do well when the markets get hammered. Oil, treasury bonds, gold and silver. But back to this Guggenheim report. There’s seven signs of a late market cycle. Number one, labor markets become unsustainably tight.
BRIAN: Number two, the Fed is raising rates in the restrictive territory. Number three, the treasury curve flattens, the difference between the 10-year and the two-year becomes very flat. Number four, leading economic indicators are starting to decline. Number five, growth in hours worked slow. Number six, consumer spending declines. And [COUGH] [CLEARS THROAT] number seven, high yield bond spreads widen. Right now the risk for high yield bonds, it’s been treated as almost a treasury bond.
BRIAN: [Thirst?] for yield around the world right now is so high that the spread or the difference between high yield bonds and treasury bonds for the United States is only like 150 basis points, not much. Okay, want to talk about the Federal Reserve now, this is the idea that the Federal Reserve can pull its economic levers just so, so they gradually raise interest rates and slowly unwind its quantitative easing programs and withdraw its unprecedented never been before tried stimulus efforts without triggering a recession.
BRIAN: Unfortunately, history suggests that that’s highly unlikely. According to the official record, the Fed has pulled this off just once. Then Fed chairman Alan Greenspan, he doubled rates in ’94 without causing a recession. Now that was in the middle of the booming tech market. Every other tightening cycle was followed predictably by a recession. [CLEARS THROAT] There’s a ratio that listeners can pull up called the tech-to-utilities ratio, it’s a measure of risk appetite. And it’s following the same pattern it did before the dot com crash.
BRIAN: So presently the tech-to-utility ratio is up above six and we only got to 6.5 before the tech bubble burst and things came crashing down to 2.0. So it’s interesting to see the overlap there. There’s a two and a half trillion in outstanding… I want to talk about debt now. This is important. There’s a two and a half trillion dollars in outstanding US debt rated triple-B according to Morgan Stanley, that’s up from 1.3 trillion five years ago, and 686 billion a decade ago.
BRIAN: Let me say that again. 10 years ago a triple-B dept, which is one notch above junk bonds, went in 10 years from 686 billion to 2.5 trillion. That’s the most ever for companies rated triple-B, which is the lowest rung of the investment grade ladder, right before it slips into junk bond status. American corporations have never carried so much debt relative to GDP before and the overall quality of this debt has never been lower. The size of the triple-B rated corporate debt market is now twice the size of the entire high yield bond market.
BRIAN: That is most American businesses that have issued debt are either one, already junk in credit status or they’re within one downgrade of becoming so. Trust me when I tell you that the next default cycle we have in this country will be the most devastating financial crisis in our history, far worse than the 2008, 2009. For now we don’t see many signs of stress in the credit markets, this is just a head’s up that those numbers are becoming very elevated. Treasury department is expected to issue over a trillion of new debt in each of the next four years.
BRIAN: This is additive to the 21 trillion dollar debt load that’s currently outstanding and must be refunded when bonds mature. Even more troubling is the growth rate of the forecasted debt issuance is almost twice the size that CBO, Congressional Budget Office is most optimistic economic growth rates. So the projection of the debt market at some point, we have a saying in the business that it doesn’t matter until it matters. Well at some point the debt that the United States has is going to matter.
BRIAN: Also there’s interesting things happening with demographics, the data’s very clear on demographics. Things are better for the few, but the people that are being benefited by the economy are within the top five percent. 95 percent… of the five percent of the people in this country have more than 95 percent of the assets. Okay, tariffs. Want to talk about tariffs and taxes and we’ll close it up.
BRIAN: Tariffs. Nearly 20 percent of China’s total exports went to the United States last year. 20 percent. Or roughly 420 billion. 31 percent of their exports, China’s, went to other Asian countries, three percent to Germany, two and a half to UK, 11 percent to other European countries, and the balance of their exports approximately 33 percent went to other countries. The US exported 154 billion in goods to China in 2017, this represents eight percent of total US exports.
BRIAN: The United States sits in a very good bargaining position when it comes to these tariffs. Certain industries would definitely be impacted more than others, for example, total US auto exports to China were 20 percent. Civilian aircraft engine equipments and parts to China were 13 percent of the total exports. Other industries especially agriculture were even bigger, 55 percent of the soybean total global exports went to China.
BRIAN: 75 percent of sorghum, barley, and oats went to China, hides and skin 50 percent, logs and lumber 45 percent, fish and shellfish 22 percent, crude oil 20 percent, cotton and raw materials 17 percent. But China has other plays so currency manipulation could be used as a tool. China could devalue their currency to offset higher prices due to US imposed tariffs. China could also choose to jump 101.2 trillion worth of US treasury holdings, that would put upward pressure on us.
BRIAN: So in conclusion, China doesn’t sit in a strong position to win a train war, but it can inflict some pain in the US economy in the stock markets. Both sides have moves to make and the stakes are high worldwide. Now I want to finish up with taxes. The lower half of Americans filing taxes in 2017, 141.2 million tax filers had total AGI, Adjusted Gross Income of 1.14 trillion, or 11.3 percent of all the income. On this they paid 41.1 billion in taxes.
BRIAN: So their average tax rate was only three and a half percent. And they paid 2.8 percent of all taxes. Let me say that again. The lower 50 percent paid 2.8 percent of total taxes. Note that they’re the lower half of taxpayers, meaning they did file a return, there’s a large group below them that didn’t even have to file because they didn’t have any taxable income. So well over half the population either paid no taxes or they paid less than a very low rate. The average AGI, Adjusted Gross Income for the bottom half of taxpayers was only 16,200.
BRIAN: These are not wealthy people, literally housing and food and other basics are critical issues for them. At the same time this income inequality has a frustrating consequence. The other half of taxpayers bear almost the entire tax burden. Note that the top 10 percent pays 70 percent of the income taxes. The top 50 percent pay 97 percent. The bottom 50 percent earns 11.3 percent of the Adjusted Gross Income and pays 2.8 percent of the income taxes.
BRIAN: The top 50 percent have 88.7 percent of the AGI and they pay 97.2 percent of the taxes. That’s why we call our system progressive, by design it gives those at the bottom a lower rate. In fact it favors more than just the bottom half, everyone except the top five percent pays a lower share of the total income taxes than their share of the total income. That’s not necessarily true of every taxpayer since these are averages, but it’s certainly true for most.
BRIAN: The top one percent which we’re told often gets wildly favorable tax treatment doesn’t look so lucky by this measure it only received 20.65 percent of the income, but it paid 40 percent of the taxes. Now what about this year’s, the new Trump tax plan. The top one percent goes from paying 38 percent of the total income taxes to a little over 43 percent. For 2018 households in the top 20 percent will have an income of 150,000 or more and 52 percent of the total income.
BRIAN: [COUGH] About the same as 2017 but they’ll pay 87 percent of income taxes up from 84 percent. By contrast, the lower 60 percent of households who have income up to about 86,000 and receive 27 percent of income as a group this tier will pay no net federal income taxes in 2018. 86,000 or less. Last year they paid two percent. After the income tax, the most important revenue raisers are for social security and Medicare. They provide about 34 percent of the total tax take this year according to the joint committee on taxation.
BRIAN: Corporate taxes will account for seven percent of revenue down from nine percent in 2017. The rest of the total comes from excised taxes, estate, gift taxes and other sources such as customs or duties. Roughly one million households in the top one percent will pay for 43 percent income tax up from 38 percent in 2017. These filers earn above 730,000. Now losing your deductions in order to pay for the tax cuts on corporations and the lower income tiers of the country.
BRIAN: The Republican Congress had to scramble to find additional sources of revenue in order for the new tax plan not to increase the deficit more than it did. And they found some of that revenue by taking away deductions. There are literally scores of smaller deductions that you were previously able to itemize that will not be available starting in 2018. Let’s look at some of the bigger ones. So number one everybody knows that state and local income taxes will no longer be completely deductible. If you’re allowed to only deduct up to 10,000 dollars.
BRIAN: That’s painful for people living in high tax states, but it’s also fair because the other states shouldn’t have to subsidize what those states decide. And while Texas and other low tax states don’t have an income tax, local governments are financed by property taxes that are typically higher than those in a lot of states. There are just six states that don’t have any income tax. Starting in 2018 homeowners can take a mortgage interest deduction on a loan of up to 750,000. That’s down from a current limit of one million.
BRIAN: When the median home in California is 480,000 a lot of homeowners are going to have mortgages in excess of 750,000. Number three I’m not certain what Congress was thinking but they took away the deduction for personal disaster losses. So you get that if the president declares your area to be a disaster area, but you don’t if it’s just an earthquake or a flood. It needs to be a huge disaster for you to have a deduction for that loss.
BRIAN: The next one is if you move more than 50 miles for a new job you can deduct reasonable moving costs starting this year you can’t, that deduction is gone. Divorces, they tend to cost a lot of money on top of emotional toll. Under current law alimony’s deductible, by the former spouse making the payments. And it’s included as income to the recipient. In the new bill these payments are no longer deductible by the payer. Nor are the payments included in the recipient’s gross income.
BRIAN: Instead the person getting the alimony has to pay taxes at the rate paid by the person paying the alimony. And since it’s usually the man who makes the money, the woman will get taxed at the man’s rate no matter what her actual income is. Ouch, the provision is effective for divorce and separation agreements signed after December 31, 2018. Next deduction lost is a Bloomberg article highlights the fact that business deductions for meals may be going away. Yes, corporations get a reduced tax rate, but essentially the new law says that entertainment expenses are not deductible.
BRIAN: Business lunches and entertainments are not deductible. Number seven, Congress has spent a great deal of time patting itself on the back over a 20 percent tax break on pass-through tax corporations. The thought was that they were helping small businesses to keep even the big players who got most of the corporate tax cuts. Well, not so much it turns out that a lot of those with pass-through corporations don’t qualify, and if you’re a modern business with lots of contract labor instead of actual W-2 employees, you don’t qualify either. Why do doctors not get a tax break but architects do?
BRIAN: You would think a restaurant owner would qualify, not necessarily. If you advertise the best pie or steak in your area, you may lose your tax exemption. Seriously. Who writes these kinds of rules? Companies have been able to subsidize commuting and parking expenses and deduct them. Not anymore. That 20 dollar a month subsidy you got for commuting to work on a bicycle goes away. You can no longer deduct your cost of preparing taxes under the new tax plan. If you do your own taxes, you can’t deduct the cost of the software either.
BRIAN: No more deductions for the high commissions you pay your agent or manager or even your union dues. Hollywood actors, professional athletes are no longer gonna be happy about that first part. If you’re an actor you’re no longer able to deduct your audition travel expenses or acting lessons either. And while the new tax laws nearly double the standard deduction for married couples and singles, from 12,000 to 24,000 you do lose your personal exemptions. Many families with multiple children will feel the loss of that exemption sharply.
BRIAN: I can tell you from personal experience, having had more than two kids it is becoming very expensive, but then again, lower income families get an enhanced child tax credit. You can no longer buy sporting tickets and give them to clients and claim them as a business expense. Some people were able to itemize their investment management and consulting fees, tax preparation fees, unreimbursed employee expenses and certain hobby expenses. Those are all gone with the new tax laws.
BRIAN: To be fair, there is a number of really good portions of the bill, but a lot of people have lost a lot of exemptions. Mike, back to you.
MIKE: Brian, thank you so much. That was just absolutely incredible. Thank you so much. Now we’re gonna go quickly to our last guest here, Clayton Bradshaw, we’ve actually moved him, he’s gonna be with us next week on Retirement Radio. But we’re gonna make way for a purebred fiduciary, one that I’ve known for some time and have great respect for, John Switzer.
MIKE: John, thanks so much for coming on the show.
JOHN: Thanks for having me.
MIKE: John, people are retiring earlier than before and living way longer than before as well, so how does that change the way you’re doing your retirement planning?
JOHN: That’s a great question. Because when you retire early and then live longer what you have to do is you have to be able to spread your retirement out over more years. And the only way to understand and to be able to see conceptually whether you’re able to do that is through distribution planning.
JOHN: And what we do is, we want to take all your different sources of income, stack those up, and also bring in the assets that you have, your investible assets.
JOHN: And see what type of income all of that will generate.
JOHN: Because until you do this distribution planning, you’re really only guessing. And there’s no way for someone to say, “Okay, I’m gonna retire early, and then I know I’m gonna live longer, and I know that I’m gonna have enough to spread across all of those additional years.”
JOHN: Typically the way we approach it with our clients is we want to distribute all the way out to age 100. Not because we believe all of our clients are gonna live out to age 100, but what we want to do is we want to make sure that our clients never run out of money before they pass on.
JOHN: We want to make sure that their money always outlives them. We also take this one step further. Because retirement is really broken up into three phases. And I like to refer to them as the go-go years, the slow-go years, and the no-go years. Now, the go-go years I define as the years that right after you’ve retired. Lots of energy still and you and your spouse may be taking trips, doing these big projects. And that will last for a good sometimes depending on when people retire, 10 to 15 years.
JOHN: But for everyone it’s different. But what stays pretty consistent is those slow-go years. The slow-go years usually start and last for about three or four years. That’s where you’re transitioning from the go-go years into really going into a no-go stage of life. Where the big trips for the week usually consist of going to the doctor or also going out to the grocery store.
MIKE: Makes sense. Yeah.
JOHN: And it’s in these later stages of life where it doesn’t make a whole lot of sense to try and save up a lot of reserves.
JOHN: Because during those years you’re not going to be going to the Bahamas and doing lots of swimming and different types of activities like that. And what we want to do is in the years where you will be traveling, in those go-go years we look to try and actually push more money up during those healthy travel years and those healthy project years.
MIKE: Now John, you’re talking a lot about essentially this transition from your working life to your retirement life, they’ve been working their entire life, that has to be a really tough transition, isn’t it?
JOHN: It is, it’s a very tough routine to break.
JOHN: Because what you’re doing is you’re trying to switch your mindset from a saving mentality into a spending mentality. And for a lot of people that is very, very difficult. Especially when for so many years they’ve spent their lives saving for some day, it becomes very hard for people to realize in the moment that they are at some day.
JOHN: And that it’s time to start spending some of what they’ve been saving a lifetime for.
JOHN: And what I find helpful for people is once they retire, to try and create a bookend on that stage of life.
JOHN: And open a new chapter moving into retirement. And the best way that I’ve seen people do this is by taking say a big trip as sort of a celebratory trip after they’ve retired. And like I was saying before, it’s a way to kind of close one chapter of life and open up a new chapter in life. And it becomes much easier when you have this significant event to be able to say, “Okay, that was my prior life, now I’m moving on to the next stage.”
JOHN: And during this next stage of life, it’s important to go out and do things. Making memories with family members, with your family, and allowing…
JOHN: …your family to bond and have different experiences that are going to last a lifetime.
MIKE: Now John, what is one of the common questions you’d get when you’re talking about spending their own money. You’re talking a lot about budgeting, finances, different stages of your life. But are there some common questions or concerns that you’re getting from a lot of your clients up there in Washington?
JOHN: This is a good question. I’m glad you asked it. One of the big comments I always get is, “Boy, I’m having a hard time spending what you’re giving me.” And what I tell people is two different things. Number one is, if you don’t spend it, somebody else will. And number two is, if you know how much money you have to spend, is it irresponsible to spend it? Those are the two big things that I push back when I hear people saying, “I’m having a hard time spending.”
JOHN: Because it is, it’s very difficult to make that switch. But as I’ve said before, it’s a necessary process to go through in order to go from the saving mentality into a spending mentality.
MIKE: Now John, I want to talk to you about the financial side of these different phases that we’ve been discussing. How do you combat what probably is the biggest risk or one of the biggest concerns, is inflation. How do you combat that with your planning?
JOHN: One of the biggest tools that we have to combat inflation is the COLA or cost of living adjustment, which we build into the plan, the distribution plans that we create.
JOHN: And this cost of living adjustment allows us to keep up with inflation. And actually act as a hedge on inflation.
JOHN: And every COLA or cost of living adjustment that we do is unique to the individual. Meaning, we can have one client come in and they’re going to have a certain COLA or cost of living adjustment, whereas the next client that may come in, it might be lower or it might be higher.
JOHN: Part of what we use to evaluate… part of what we use to evaluate this is say for example, “What do you have in large tangible assets?”
JOHN: Because the amount of large tangible assets that a client will have becomes a determinant of what size COLA or cost of living adjustment they need.
JOHN: For example, if we have a client who has a whole lot of real estate that has a ton of equity, their cost of living adjustment, the amount that they need to hedge on inflation actually can be much less in the plan. Whereas a client who may not have as much equity in their home, we need to create more of a safety net by creating a larger cost of living adjustment to act as a larger hedge on inflation inside of their plan.
JOHN: And for each client that we work with, each client has a cost of living adjustment that will be unique to them.
MIKE: Now John, we gotta wrap up the show, this is such great information but before I let you go here, are there any last tips, things to look out for? Anything that you want to tell our listeners with Retirement Radio right now before we head out?
JOHN: Well a couple of the big things to look out for is number one, if you have the money that you need right now to retire, go ahead and pull the trigger and retire. Because the only reason why you should continue to work is if you absolutely love what you’re doing.
JOHN: Because the thing is, you’re never going to get any of these years back. And especially when you start to think and play into the three phases in retirement. You actually might have say, a 20-year period that you believe that you’re going to live through. However, in that 20-year period, the go-go years, which are the healthy years that you have to travel and do all those things you want to do, might be just a third of that. So really rather than having 20 years, you may only have eight or nine years to do those things that you really want to do.
JOHN: And again, the thing that we do for our clients which is vital is that we help them create a distribution plan that allows them to see how much they can spend for the rest of their lives. And that is really priceless. And within that what we also do is we’re also making sure that during the first phase of their retirement, those go-go years, that they have enough to make sure that they have an ability to fund those great projects, to take those great trips with their families.
JOHN: So that they can make all those memories when they want to, and how they want to.
MIKE: Let’s give it up for John Switzer everyone. John Switzer.
MIKE: [OVERLAP] we got to wrap up the show right now, thank you all so much for tuning in. Before we go we’re gonna extend one offer here, John was talking about some very important retirement planning techniques, the three seasons of retirement as well as conceptually making sure that you have the investments and the transparency that you deserve, so what we’re gonna do is John and his team have offered for the next 10 minutes, we’re gonna extend an offer right now to come in and visit with him and his team at Decker Retirement Planning.
MIKE: To go over your retirement plan, to go over your phases, to make sure that your plan makes sense. Call right now, 800-261-9446 or dial #250 on your smartphone right now and say the keyword, “Retirement help,” to get to my people and then we will connect you and get you scheduled on John or one of his other associates, they’re purebred fiduciaries. That number is 800-261-9446 or dial #250 on your smartphone today.
MIKE: And say the keyword, “Retirement help,” to get that setup. Now, must be 55 years or older and have at least 300,000 of investible assets to qualify, but this is at no cost to you. That’s 800-261-9446 or on your smartphone #250 with the keyword, “Retirement help.” You just say that when you’re asked and they’ll get you right over to my people. Thank you all so much for listening, we’ve had such a great show.
MIKE: Now stay tuned, next week we’re talking about trade wars and more. Stay tuned until then, have a great [week everyone?]
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.