MIKE: Good morning and thank you for listening to Decker Talk Radio’s Protect Your Retirement, a radio program brought to you by Decker Retirement Planning. This week we give you market updates as well as aspects you need in a retirement plan to be successful in retirement. The comments on Decker talk radio are the opinion of Brian Decker and Mike Decker.
MIKE: Good day everyone. He’s another edition of Decker Talk Radio’s Protect Your Retirement with Mike Decker and Brian Decker from Decker Retirement Planning, offices in Kirkland, Washington; Seattle, Washington; and Salt Lake City, Utah. We got a great show lined up for you today. But first, Brian, the markets have been doing the ups and downs, a lot of down lately. What’s going on here?
BRIAN: Oh my gosh, the market has never before had a 10 percent drop in this few says. That was a four-standard deviation event, so it’s very rare to see a market go down 10 percent when it just made brand-new highs just days before.
BRIAN: So, it’s very interesting. We talked last week about why the markets went down. There were some market jitters about rising interest rates. And this is kind of interesting, because the tailwinds since 1980 have been lower interest rates. The previous administration had The Fed for the last eight years lowering interest rates artificial to stimulate an economic interest and it’s also helped the stock market.
BRIAN: Also, The Fed has been printing money through quantative easing and a lot of that has fed the stock market gain. Those two tailwinds are now headwinds. The Fed is expected to raise interest rates four times this year and there’s a repurchase of the quantative easing where not only are no longer are they printing money, but now they’re trying to pull money out of the system.
BRIAN: So, it’s interesting that with price earnings ratio expansion, we got to a level just third week of January of this year when we hit 25 times trailing earnings on the price earnings ratios. That’s only happened two times before. That was 1929 and 1999. Ten years after 1929, the markets had not made money. 1999 the same thing was true. So a lot of retirees in the United States are expecting the markets to do something this time that’s never been done before.
BRIAN: Now, true, we do have multiple expansion with corporate earnings that are looking very good. That is true. But we also have the tailwinds which are now headwinds for the stock market. Mike, today we’re going to spend the entire time talking about what to like for in putting your financial plan together. We’re going to go down a list of things, a checklist of things that you should have in your retirement plan.
MIKE: So, if that sounds like you, stay tuned. A lot of great information lined up.
MIKE: I would also like to announce that we will be having our San Francisco office probably opening up here in the next couple months. So that’s very exciting for us. We have an office in Seattle, Washington, Kirkland, Washington, Salt Lake City. And we’ll be opening up San Francisco within a couple of months.
BRIAN: All right, number one, want to talk through what should be in your retirement plan. And the first thing we have is liquidity. This seems common sense. A matter of fact, most all of these we’re going to talk about is common sense, but liquidity has bubbled up over the years to be the number one item that we talk about, because so many of our competitors will lock you up in annuities. And we want to warn you of that.
BRIAN: We define liquidity as money that can be in your savings, checking account next day, no penalty. If all your money is liquid, that means it’s not working for you. If all your money is locked up, that’s equally silly. So we found that the sweet spot for retirement clients is around 30 to 40 percent. So when we put our client plans together, we have three basic parts. We have cash, which is emergency cash which is totally liquid.
BRIAN: It’s sitting in savings, checking account or credit union money. It’s immediately liquid. Then we have safe money which is later principle guaranteed accounts. So when the markets crash every seven or eight years, our clients do not feel it. That is so very important. And then we have the risk money. The risk money is completely liquid. The emergency cash is completely liquid. The latter principle garmented accounts, we have a varying liquidity there, but when we do our liquidity scores to make sure that they’re okay, they usually come up about 35 to 45 percent liquidity.
BRIAN: So, if you had a million dollars of investable assets in your retirement plan, are you okay with having next day liquidity with 350 to 450 thousand dollars of those funds? Most of our clients say yes. But please do a liquidity score to make sure that you are not being locked up so that when life events happen like healthcare, like cars going down, roofs, water heaters, whatever, you need to have liquidity to make sure that you’ve got the ability to have those grab funds.
BRIAN: The next thing is potential income. Do you know that most people, Mike, this boggles my mind? Most people have no idea how much money they can draw from their retirement, because they’re looking at a pie chart. Would that bother you?
MIKE: Oh, yeah. That’s the opposite of stability and retirement should be stable, it should be consistent, it should be relaxing.
BRIAN: Right. So this is the number two item on our list, because most people in retirement use the discredited four percent rule to decide how much money they can draw from their retirement for the rest of their lives.
BRIAN: Now, let me talk about what the four percent rule is, and I want to proceed the definition with this description that I would say, this is my opinion. But in my opinion, the four percent rule has destroyed more people’s retirement in this country than any other piece of financial advice around. It’s the most toxic, poisonous, disastrous financial strategy out there. The 4 percent rule goes like this, stocks have averaged around 8 1/2 percent for the last 100 years.
BRIAN: Bonds have averaged around 4 1/2 percent for the last, I don’t know, 37 years. So let’s be really conservative and just draw four percent from your assets for the rest of your life. That works beautifully when the markets are going up. But markets in the last 100 years, you can google this, have an 18-year market cycle. So when markets hit a flat market cycle, like, for example, 1946 to 64 was a nice bull market. 1964 to 1982 was flat. It just chopped for 18 years. 82 to 2000, the biggest bull market we’ve ever had.
BRIAN: 2000 to around 2016 was very flat. So, when you’re in a flat market cycle, the four percent rule not only doesn’t it work, it actually destroys your retirement. So let’s walk you through the nightmare that Americans went through in the last flat market cycle. So imagine you, Decker Talk Radio Listeners, you each retire with four million dollars. And why do we say four million? It’s because bankers and brokers have told you for decades you need three or four million dollars to retire.
BRIAN: That’s not true, but let’s just grant you the high end. So you got four million dollars and you retire January 1 of 2000. So beginning of a flat market cycle. So in 2000, 01 and 02, the tech bubble bursts and you lose 50 percent of the equity portion of your assets. How did you do? Well, you worse than that, because you’re drawing four, four, and four. You’re down 62 percent on the equity portion of your funds going into 03.
BRIAN: But the good news is, from 2003 to 2007, markets double. But you don’t get all that, because every year you’re drawing 4 percent in 03, 4 percent in 2004, 4 percent in 2005, 4 percent in 2006, and 4 percent in 2007. And then, you take that hit in 2008, down 37 percent plus you draw 4 percent on top of that. Now you no longer can stay retired. Proof of what I’m telling you is true, the average gray-haired retiree, we saw them in droves coming back to retail, banks, fast food, Wal-Mart. We saw them.
BRIAN: They had to go to plan B, because their retirement was destroyed by the four percent rule. They had to sell their home, move in with the kids. They had to go to plan B. Now, the guy who invented the four percent rule, his name is William Bangon [PH]. He came out in 2009 and he publicly discredited the 4 percent rule saying that when interest rates are this low, it doesn’t work. He called it dangerous and he said that he doesn’t use it.
BRIAN: By the way, you can see these quotes on our website at DeckerRetirementPlanning.com. So in 2009, William Bangon publicly discredited the 4 percent rule. Now, 10 years later, when people retire they go to their banker and broker and guess what rule is trotted out as the way to define how much money you’re going to draw from your assets for the rest of your life? Yes, it’s the four percent rule.
BRIAN: The four percent rule, the publicly discredited strategy by its founder. So we want to warn you that there’s a right way and a wrong way to draw income from your portfolio. Let’s take another jab at the banker, broker model. When you have a pie chart, which by the way, keeps all your money at risk. And by the way, that’s fine. It’s called an accumulation strategy. It’s totally fine in your 20s, 30s, and 40s when you’ve got a pay check coming in and you can take risk.
BRIAN: But when you are 55 or older and you retire, and you take that last paycheck you’re ever going to take, you can’t play that game anymore. You can’t have all your money at risk. And so we point that out as common-sense observation and yet the banker broker model has that asset allocation pie chart, it keeps all your money at risk.
BRIAN: And when you do that-by the way, Mike, I’ll ask you a very difficult question, sarcasm intended there. Why do the bankers and brokers keep all people’s money at risk?
MIKE: It’s because that’s how they get paid.
BRIAN: That’s how they get paid. I used to have an office manager swing by my office every morning, open the door, say, “Brian, good morning. Hey, just remember, we are paid to keep our clients at risk.” We are paid to keep our clients at risk. That’s not in your best interest. That’s in the banker, broker financial advisor’s best interest.
MIKE: Can I do an analogy?
BRIAN: Yep.
MIKE: So, here in Utah, every summer, if you own a home, someone’s going to knock on your door and try and sell you pest control. Do you think they’re going to knock on your door and say, “Hey, you should use home defense? You can pick it up at Home Depot and it will take care of most of your issues. They’re never going to do that, because those guys are knocking on your door to try and sell you whatever their product is. The same idea is with any sort of banker or broker. They’re going to sell you the products that make them money. They’re not going to tell you what actually is best for you.
BRIAN: Right. Okay, so the intent is to maximize profits and fees which, by the way, we haven’t gotten to yet, but being a fiduciary, we can’t do that.
BRIAN: A fiduciary is someone who is not series seven licensed. That means that we cannot take a securities commission. We have to be fee-based only, above board. So we can’t do to you what bankers and brokers do to you on a regular basis and that is take full advantage of your risk situation, keeping you all at risk to maximize fees. So back to this point, when you draw income from a fluctuating account, you are committing financial suicide.
BRIAN: You are compromising the gains when the markets go up, because you’re drawing income and you’re accentuating the market loses when the markets go down, because you’re drawing income from that pie chart. This makes no common sense; no mathematical sense and it’s proven to hurt you when the markets go into a flat market cycle. We saw this in 2008 and in 2009. Now, contrast that to this next point when your potential income should be drawn from laddered, staggered, principle guaranteed accounts where your money is not at risk.
BRIAN: And where you’re drawing income so that when the markets go up and down, when the economy goes up and down and when interest rates go up and down, it does not affect your income. That is what we as fiduciaries recommend for our clients, number one. Number two, we don’t recommend a pie chart where all your money is at risk. We have a spreadsheet where if you can picture this, we’ve got your social security to age 100 for both you and your spouse. We’ve got your pension, if you have one. We’ve got rental income if you’ve got that.
BRIAN: We’ve got your income from your laddered portfolio that’s generating an income for the rest of your life. We total it up, minus taxes, that gives you annual and monthly income with a COLA, cost of living adjustment, to age 100. Now, I’m going to say something very, very important. Now only is it priceless to have laddered principle guaranteed accounts in place so that when the market crashes every seven or eight years, it does not affect our clients, but also, our clients know how much money they can draw from their portfolio so that they don’t run out.
BRIAN: Now, I’m going to split those. The number one fear after 2008 of retirees in the United States is running out of money before you die. Our clients don’t have that, because on the spreadsheet, they see how much money is coming in every month and where it’s coming from and they see the COLA, the cost of living adjustment, and how much they can draw next year, the year after, the year after that. Priceless to have that piece of mind. Second point, when you draw income from laddered principle guaranteed accounts, the markets can crash every seven or eight years like they have for decades and it does not affect our clients.
BRIAN: We went through 2008 with our clients and because the market were down 50 percent from October of 07 to March of 2009. With that 50 percent drop, our clients didn’t lose a dime in their emergency cash, not in bucket 1, not in bucket 2, not in bucket 3. And on the risk money, which they have, we use two-sided trend following models where the managers that we’ve got now made, not lost money. They made money. So our clients didn’t have to even change their travel plans and that’s priceless.
BRIAN: So, back to 2008, markets crash every seven or eight years. Let me give you some dates to prove that this is true. And by the way, stock market crashes destroy more people’s retirement in this country than inflation, than death of a spouse, then any other event. It’s the number one destroyer of people’s retirement. So 2008 was a market hit. Seven years before that was 2001 and twin towers went down in 2001, middle of a three-year bear market.
BRIAN: And that was something that was a 50 percent drop. 7 years before that was 1994, Iraq had invaded Kuwait, interest rates spiked up, the economy was in recession and the markets struggled. 7 years before that was 1987, Black Monday, October 19, 22 percent drop in a day, 30 percent peak to drop. 7 years before that was 1980, a 46 percent drop in the markets 80 to 82.
BRIAN: 7 years before that was 1973, 1974. That was a 42 percent drop. 7 years before that was 1966, 1967 bear market, 40 plus percent drop. And it keeps going. This is very, very important. In making sure you have certain things in your income plan for your retirement, downside market protection to protect your capital, in my opinion, is the number one thing. Our clients have it, our planners teach it and show it in our plans.
BRIAN: All right. So we’re talking today about, in this segment, about what components should be in your retirement plan.
BRIAN: We talked about liquidity. We talked about how to properly draw your income, knowing how much income you can draw, not guessing. There’s a lot of really smart people out there. If you use a pie chart, you have no idea, you’re guessing. If you’ve done the calculations like we have, and we’ll show you when you come in. We’ll show you what a distribution plan looks like. The third component that needs to be in your retirement plan is a COLA, cost of living adjustment.
BRIAN: Inflation is the number two destroyer of people’s retirement. Number one is stock market crashes. So we have the COLA, the cost of living adjustment, where we want to make sure that every year we have about a three percent COLA where you’re getting more money every year for the rest of your life to age 100. We plan to age 100, not because we think that everyone’s going to live that long, but in case they do, they need to know that their money is going to be there for them.
BRIAN: Now, for inflation protection, COLA, cost of living adjustment, having that put in place for your planning is very important. We also have three or four other components to that. The second one is do you have an inheritance coming in? If so, we plan for that in your distribution plan. We try to be conservative on the timing and on the dollar amounts. It’s really an awkward topic to discuss.
BRIAN: The third component is the real estate that you have. On purpose, we make sure at Decker Retirement Planning that, unlike our competitors, Mike, this kind of makes me sick to say this. Do you know our competitors, a lot of them automatically put a reverse mortgage in their home and use that income? That’s not…
MIKE: How is that taking care of your client?
BRIAN: Right. Right, it’s not in the best interest. A reverse mortgage is loaded with fees and our clients are much better off just to do a downsize.
BRIAN: We advise, this is our opinion, but we advise people to keep their home sacred, keep it free and clear and separate from their income plan. We do that, and we use their home as a hedge for inflation, because hard assets are a fantastic, hedge, historically, on inflation. If interest rates skyrocket, then hard assets like real estate and precious metals, things like that, hard assets go up in value if we have higher inflation.
BRIAN: The fourth thing is what we call a downsize. A downsize is where in your late 70s, early 80s, your back hurts, your joints ache. You’re no longer interested in gardening and stairs, so you sell your home for X, buy a condo for Y. And Y is less than X. Usually there’s an injection of capital that comes into your plan and it’s very important. We don’t include it, it’s icing on the cake, but it typically comes like clockwork when people are in their late 70s, early 80s.
BRIAN: The last thing is, on our client’s risk bucket, we use a two-sided model. We’re fiduciaries to our clients, that has made money every year, collectively, in 2000, 01, 02 when the markets were down 50 percent, these managers made money. And then when the markets doubled from o3 to 07, they made more than that. And then from 07 to 09, when the markets lost 50 percent, these managers collectively made money. And then from 09 to present as the markets have gone up considerably, these models have gone up more than that.
BRIAN: The highest returning risk accounts are computer algorithms that are trend following, two-sided models. So guess what? We’re fiduciaries, that’s what we use for our clients. Average annual return for these net of fees is 16 1/2 percent. When we do the planning for our clients, we plan with 6, not 16. So guess what happens? There’s a huge buffer that is built up for the next 20 years for our clients.
BRIAN: So if there is inflation, they have a huge buffer along with the other four items. Those five together give our clients tremendous inflation protection and we point that out. Now, it’s our job as fiduciaries to point out if our clients have inflation risk. Most of our clients do not, because of the hedges that we put in place. The last thing on income planning for your retirement plan in retirement, we hope that you’re taking income from the correct source.
BRIAN: A source that is not fluctuation. Because if you draw income from a fluctuating account, you are committing financial suicide. If you’re drawing income from the highest returning asset, that’s also mathematically stupid, because you want to – let me give you an example. So for our buckets one, two, and three, bucket one is principle guaranteed. It earns about one percent and it’s responsible for delivering income, monthly income for our clients for the first five years of retirement.
BRIAN: Bucket two is principle guaranteed. It earns about 3 percent and it grow for 5 years and it pays income for – monthly income for years 6 through 10. Bucket three, principle guaranteed. It grows around 4 percent, it grows for 10 years and is responsible for monthly income for years 11 through 20. Here’s the genius of distribution planning. Let’s say that there’s a client account, 1.2 million dollars, and it’s got money that in the first five years, now, Mike, help me on these numbers.
BRIAN: In the first five years, how much comes out of that account? Isn’t it around 240 thousand? It’s around 240, isn’t it?
MIKE: I think it’s – yeah, it’s about there.
BRIAN: 240. So, you would think that if you’re starting with 1.2 million and in 5 years your draw 240 thousand from 1.2, you would think that in 5 years, if you drew that out of the account, that you would have less money five years later. Is that true?
BRIAN: Oh, you got the numbers right here.
MIKE: Nope, I just pulled it up.
BRIAN: Okay, good. So imagine that you start – this is John and Jane, they have 1.4 million and in the first 5 years, they draw 230 thousand in income from their lowest earning account. At the end of five years, bucket one is gone. But let me get to this point. The genius of distribution planning is, at the end of five years, they started with 1.4 million, did the account go up or down?
BRIAN: It actually went up. In the five years that they drew 230 thousand from the lowest earning account, it gave 5 years for the three higher earning accounts, buckets 2, 3, and the risk bucket, to grow and compound more than offsetting the 230 thousand of income that they were drawing from bucket one. At the end of five years, bucket one is gone. Bucket two grows for 5 years and pays monthly income for years 6 through 10.
BRIAN: At the end of 10 years, John and Jane have drawn 550 thousand dollars from a starting balance of 1.4 million. Did the account value, the total value, go up or down? It went up. How did we do that? In the 10 years that we drew income from the 2 lowest earning accounts, it gave 10 years for the two higher earning accounts to grow and compound more than offsetting the 550 thousand that they drew as income. It’s a beautiful thing.
BRIAN: So our clients, in this case, are going 10 years and they’re drawing income and they’re actually making money as they’re drawing their buckets 1 and 2 to 0. So my kudos to the guy-I think it was-who was the guy with the wild hair? The mathematician? The genius?
MIKE: Einstein?
BRIAN: Einstein. He said that if there’s seven wonders of the world, the eighth wonder of the world is compound interest.
MIKE: [LAUGH].
BRIAN: Compound interest. So we are using compound interest to our advantage in distribution planning models.
BRIAN: Now, Mike, when people come in, they get to see what a distribution plan looks like. And on this last point, for income planning, making sure that you’re drawing income from the proper source, it is not drawing income from bond funds. It is not drawing income from fluctuating accounts. It is drawing money from laddered, principle guaranteed accounts so that you can have the benefit of compounding to your advantage. All right, now once, in your income plan, you have in your retirement plan the income components that are working for you, now let’s talk about comprehensive tax minimization.
BRIAN: In comprehensive tax minimization, the first thing we do is on lines eight and nine, there are – that’s where dividends and interest show up. A lot of people in their non-retirement accounts or non-qualified accounts, they will have dividends and interest reinvested. So, they get a 1099 at the end of the year and they’re paying taxes on 10 or 15 thousand of income that they never touched. That’s in inefficiency of paying taxes, probably 4 or 5000 dollars on money you never touch.
BRIAN: So, we try to optimize the taxes and minimize the taxes by repurchasing those in retirement accounts to get the benefit of reinvestment, but not having to pay tax on interest and dividends that you’ve never touched. The next thing is social security optimization. Decker Retirement Planning is a math-based firm. So, we forget about what our opinion is. We want to show you the math of where mathematically, logically, these are the highest returns, these are how you minimize your taxes.
BRIAN: When it comes to social security, we run your social security options where in a 10-page report, we can show you all the hundreds of ways to draw social security for a husband and wife. And we will show you the one strategy with to the month specifics on how you can maximize your social security income. That’s part of your income and we want to make sure that it’s maximized. Now, a little bit about social security. Your social security grows 5 percent a year from 62 to 66 and 8 percent from 66 to 70.
BRIAN: Now, a little not humor, but contempt for what the government has called this. They no longer call it your money, they’re calling it a government benefit. But the government is trying to have you wait, wait, wait, wait, wait and then die and do you think that they send you the money that you earned in your social security? That’s actual money, that’s your money that you draw from your paycheck. It doesn’t come back to you.
BRIAN: When you die, if you’re single, that money stops. If you’re married to a spouse, your spouse has a choice of keeping their own social security or your social security. Obviously, it’s whatever is higher. The next thing about social security is your full retirement age is very important. Typically, it’s 66 or 67 with the retirees that we’re seeing right now. If your full retirement age is 66, let’s say, that’s an important number for two reasons.
BRIAN: Number one, if you draw social security before your full retirement age and you earn more than 16 thousand in income, you are penalized a dollar for every 3 on your social security. So, you are incented not to draw your social security until you stop making more than 16 thousand a year in W2 or 1099 income. That doesn’t mean that your investments can’t be tapped.
BRIAN: It does mean that you have a limit on how much W2 or 1099 income you can draw. The second important thing about your full retirement age is that you have a cap or the maximum that you can draw from spousal benefits no longer increases after your full retirement age. Let me give you an example. Just like your individual benefit maxes out at age 70, your spousal benefits max out at age 66 or your full retirement age.
BRIAN: The next thing is in optimizing your social security, we hope that your financial plan has that in place so that you know, and you have that piece of mind that you are getting the most benefit that you possibly can. Now, there’s two reasons why we would deviate from drawing your money at the maximum. One is health. Obviously, if you’re diagnosed with something at 62 or 63 or 64, you’re not going to to wait till age 70, you’re going to start right away, especially if it’s horrible news on your health.
BRIAN: The second and final reason that we would deviate from maximizing your social security is if there’s a gap. We define the gap as if you retire at age 65 and you’re drawing social security at 70, there’s a five-year gap there where the bulk of your income is coming from your portfolio. So, let’s say that you had a 700-thousand-dollar portfolio. For those five years, if you were drawing 100 thousand each year, you’ve just destroyed your principle while you’re waiting for age 70 for your social security benefits to max out.
BRIAN: We would never recommend that. So, in a math-based firm, a fiduciary firm like Decker Retirement Planning, we’re going to run the numbers and make sure that your social security is maximized and optimized, but dynamic such that if your health changes, that we’re ready to make that change too. All right, the biggest tax benefit for our clients in the IRA to Roth conversion.
BRIAN: Now, let me define what a Roth account is. A Roth IRA is golden for three reasons. It grows tax free, it distributed income back to you tax free and assets pass to your beneficiaries’ tax free. This is a golden account. In fact, in our distribution plan, we have the risk bucket colored gold, because that’s exactly where we put our Roth money if you have it.
BRIAN: So, we as a math-based firm know to the dollar how much money you should have in a Roth account. I challenge you, Decker Safer Retirement Radio Listeners, to ask your planner how much money you should have in a Roth. We know specifically. Now, a Roth account, once you retire and you’re not earning any income, obviously, you cannot contribute to a Roth account.
BRIAN: And if you are working, your income is probably too high, that prohibits you from contributing to a Roth. We’re not talking about contributions. We’re talking about conversion. So, let me give you a trick question, Mike. You’ve heard this before. If you have a 250-thousand-dollar IRA and we grow it to 1 million dollars in 20 years, are you happy with us?
MIKE: I should be. That’s some incredible growth.
BRIAN: Right, you would think.
BRIAN: But…
MIKE: But [LAUGH].
BRIAN: When it comes to taxes, you should be furious, because you could have paid taxes on 250 thousand. Now you’re paying taxes on 1 million dollars. So at Decker Retirement Planning, we do the planning such that every year we get with our clients and we estimate what you’re AGI, your adjusted gross income is, we look at your deductions and without raising your bracket, we convert what we can from an IRA to a Roth. Usually, it takes five to seven years to get it all done, and we don’t do it all at once. We spread it out over five to seven years.
BRIAN: But now all of that growth is tax free.
MIKE: Can we talk about, too, another big part of this that we might be missing with our listeners. If you grow your accounts in your IRA and you think, oh, I’ll just pass it on to my beneficiaries, don’t forget about your RMDs, your required, minimum distributions. If you grow your IRA and don’t do these distributions or these conversions, you are going to force yourself to have to take income and pay a large amount of taxes just because you didn’t plan properly.
BRIAN: Here’s what it comes down to, would you rather pay tax on 250 thousand or a million?
BRIAN: ‘Cause you can be proactive, you have that choice. This is a six figure, typically for our clients, this is a six-figure tax saving strategy. So…
BRIAN: Sure.
MIKE: This one’s huge. So if you have an IRA or even a 401K in your retirement and that’s going to be the bulk of your retirement, this is for you to be able to come in and visit with Brian or one of the licensed fiduciary planners at Decker Retirement Planning to come in and have the conversation so you can have the road map, the plan, on how to convert these and be effective with your taxes, to be efficient.
MIKE: You’re listening to Decker Talk Radio’s Protect Your Retirement on KNRS 105.9 in the greater Salt Lake Area and KVI570 in the greater Seattle area. Brian Decker, Decker Retirement Planning, licensed fiduciary, published author. Let’s keep going.
BRIAN: All right, so that – we’re talking right now this whole hour about the components, the, in our opinion, the critical components of a properly drafted retirement plan. We’ve talked about liquidity, potential income, inflation protection and taking income from the correct source.
BRIAN: We’ve talked about tax minimization, looking at lines 8 and 9 on your 1040, social security optimization and we just talked about the biggest tax saving strategy in your lifetime for most people and that’s the IRA to Roth conversion. All right, the last thing we want to talk about here for tax savings approaches is for our bigger clients, where their investable assets is 3 million or more, there’s other options that we want to talk about with your CPA and that is…
BRIAN: There’s, gosh, what’s a-these are legacy accounts where we look at Nevada corporations, family-oh my gosh. I’m having a loss here. Family limited partnerships, there it goes, and Nevada corporations. Those are three different ideas that we explore for different clients. If they have a ton of rental real estate, we look at family limited partnerships. If they have a corporation, we look at a foundation.
BRIAN: If they have a Nevada corporation-or if they have another corporation, we look at a Nevada corporations, too. There’s ways that we can significantly lower your taxable income and we explore those with your CPA. So that is how we comprehensively try to minimize your taxes. Now let’s talk about asset security. In asset security, the first thing we want to cover is an umbrella policy.
BRIAN: An umbrella policy is typically a rider on your home owner’s insurance. So think of who’s carrying-what insurance company is carrying your homeowners, they will give you a rider that’s an umbrella policy that is attached to you specifically, or if you’re married, you and your spouse. Now, these days, we live in litigious times. If you bump someone in the parking lot, they’re going to grab their neck and they are going to sue you just because they can.
BRIAN: If you have rental real estate and they slip on your property, they’re going to-they have a blank check. If during winter time, you haven’t shoveled your walk and you go out and you have friends or people that you know that slip on your driveway and hurt themselves, they have a blank check. Insurance companies did not build those big buildings on paying claims. They built those big buildings on denying claims.
BRIAN: [CLEARS THROAT] An umbrella policy is they follow you and they are there to pay you and cover you for liability. It would be a shame for you to work 40 years, have an accident and then have a seven-figure judgement leveled against you that wipes you out in retirement. So, we want to warn you that this is an easy fix. Three or four hundred bucks a year buys you a million dollars in coverage. This is prudent, common sense, responsible element to your retirement plan.
BRIAN: Next is long-term care. Darn, we are not going to get through everything. Long-term care, we are licensed to sell long-term care. Mike, in all the years that you’ve been with the company, how many have we sold?
MIKE: I can’t remember a single one every being sold.
BRIAN: Right, I’ve been doing this for 32 years. I might have sold one or two. So the reason is, because there’s a-I wish I could say it differently. There’s a disingenuous, dishonest statistic that’s put out there by the long-term industry saying that 70 percent of Americans will spend time in a long-term care facility.
BRIAN: The reason that that’s dishonest and, by the way, you can pull up the US census and see that that number actually is only 14 percent. But the reason they use 70 percent is they count even one day in hospice as part of your statistic to be in a long-term care facility. So, because of that, we define long-term care risk as the risk where one spouse bankrupts another spouse due to healthcare costs.
BRIAN: [COUGH] So, technically, if you’re single, using that definition, you do not have long-term care risk. You have your estate to pay your long-term care bills. Back to we’re a math-based firm. We are fiduciaries to our clients. So, what we do is we hope for the best, but we plan for the worst. And the worst-case scenario for most people when it comes to long-term care is to have a health body with Alzheimer’s.
BRIAN: That’s the worst combination when it comes to long-term care costs. So, I’m going to tell you what you probably already seen. It’s a tragic journey, but the first third of the journey doesn’t cost you anything. It’s where one spouse is taking care of the other spouse. Is there a cost to it? No, but there is an emotional cost, because it is horribly draining emotionally. The second third of the journey is where it’s too much for the spouse so now they’re calling in-home care.
BRIAN: It starts at around 1500 a month and goes up from there as your usage increases. The third, third is the heartbreaker and that’s where you’ve got to check in your spouse to a full-time facility, because he or she needs to have full-time care and it is a heartbreaker, because now, at this point, he or she, your spouse doesn’t even know your name.
BRIAN: This is where it is now 10 thousand dollars a month in today’s dollars. Typically, these cases in the third are-we’re talking about 18 months, 2 years. So 24 times 10. Do you have a quarter of a million dollars for long-term care coverage? And then answer is most of our clients have it in the equity in their home or they have it in the risk bucket, the extra that’s there, the excess that’s there in their risk bucket. That’s the cushion that we have for inflation protection built into our client’s plan.
BRIAN: And it’s also a long-term care protection. So, there’s five different ways, actually, six. Six different ways that you can protect yourself from long-term care expenses. The first of them is to self-finance. And most of the clients that come in, we recommend that they self-finance. Now, if they have a long-term care policy, we tell them to keep it. But if they do have it, we tell them to watch out for what’s called the letter.
BRIAN: Now, I’m going to talk about the second option. This is easily-if you have long-term care coverage, this is easily the most popular. It’s called traditional long-term care. So, the first option is to self-finance. The second option is traditional long-term care. This is where, for 4 or 500 bucks a month per person, you have access to 3 or 400 thousand dollars in long-term care benefit and you’re premiums are called, Mike?
BRIAN: Guaranteed level premium. Are they guaranteed level?
MIKE: Absolutely not [LAUGH].
BRIAN: What? We have people that say, “No, it says right here. Guaranteed level.” So at age 70, usually in your late 60s, early 70s, you get what’s called the letter. And the letter informs you that your premiums have gone up.
MIKE: Yeah, it’s so bait and switch, six percent, right?
BRIAN: 60 percent.
MIKE: 60 percent is just nuts.
BRIAN: Yeah, it’s gone up 60 percent and what the insurance companies want you to do is panic and cancel your benefit. So now the insurance companies have kept all your premiums risk free.
MIKE: How do the lawyers-how did they write that up?
BRIAN: Wait, there’s more.
MIKE: I mean, that-there have had to be some creativity to get-to call it a guaranteed level and allow to still increase.
BRIAN: Oh, insurance companies didn’t get where they are by being charitable, no. They have figured it out mathematically. But, Mike, the first option is for you to panic and cancel your policy. The second option is equally bad and that is where you cut your benefit in half. So, now the insurance company is getting paid the same for half the risk. So, we want to let our clients know so that they don’t panic, and we just plan around it.
BRIAN: We encourage clients if they have a long-term care policy, to keep it and we plan around it. But we want to know if you haven’t bought one, that that letter is coming. And we want to make sure that you’re prepared for that. The third option is where and insurance guy gets a hold of you and says, “Hey, Mike, you know that if you get hit by a bus and you just die, you paid into your long-term care insurance premiums all these years, you get nothing ’cause you never went into a facility.”
BRIAN: So what you should do is you should buy whole life through me and put a long-term care rider on it. Now you get that 3 or 400 thousand either way, whether you go into a facility, you have access to it or when you die. The problem is that it’s very expensive. It’s about 1000 dollars per month, per person for life. It’s very, very expensive.
BRIAN: The next one is if we do have to-and by the way, the quandary of long-term care is if you need it, you can’t afford it and if you can afford it, you don’t need it. But these are the two cases that I did use it on, this is what I did. And it’s called asset-based long-term care. In asset-based long-term care, you have account where you put 10 thousand dollars are year in it for 10 years and you build up 100 thousand.
BRIAN: Now, when you die, you get a 2X death benefit. If you go into a facility, you get a 3 1/2, 4X long-term care benefit. If you change your mind, you’ve got liquidity, you can pull all of that back. We like the flexibility of that. The problem is it’s hard for some people who can’t afford to put away 10 thousand dollars per year, per person to fund their account. It’s really difficult for people to do that.
BRIAN: Now, the fifth one, I’ve saved the best for last. I’m going to talk about one other, but this is ridiculous. It’s called safe harbor trust. A safe harbor trust is where, because you’re freaked out about the 70 percent statistic that long-term care insurance companies trot out saying that you’re going to-70 percent of Americans will spend time in a long-term care facility, you say, “Not me.” You call a sibling, you move all your assets over to the name of that sibling and now in that safe harbor trust, they technically own your assets.
BRIAN: And now, when one of your spouses or yourself goes through this journey with long-term care, now the tax payer is paying for it and when that spouse dies, you call that sibling and you get all the assets back. That’s called a safe harbor trust. The IRS got onto this and they have a five-they instituted a few years ago, a five-year claw back where if you’re diagnosed with Alzheimer’s that sent you to a facility within five years of your diagnosis, they get to claw all of that money back and you pay for it not the tax payer.
BRIAN: But here’s the biggest common-sense problem. Your sibling can call you from Cabo and say, “Hey, sis or bro, thanks for your assets. We’ve decided to keep them.” And legally, they could. So we don’t like this on a whole bunch of different levels. Now, sadly, tragically, there’s a sixth option and the sixth option is for people that out of financial desperation just divorce. And they divorce, because one spouse doesn’t recognize the other anyhow.
BRIAN: And they divorce for financial survival. So, those are the six options. Because we are fiduciaries, we sell it, but we haven’t, because we are fiduciaries and we’re a math-based firm. We can show our clients that they’re better off to self-finance that risk, because the statistic, according to the census bureau, isn’t 70 percent of Americans going into a facility, it’s around 14 percent. All right, Mike, if someone has-well, we’ve got a couple minutes left, right? Do we have a couple minutes left?
MIKE: We’ve got a couple minutes left. Let’s hit the last topic you got on your list today.
BRIAN: Gosh, it’s too much. It’s life insurance. If people have questions about what we’ve covered, let’s refer them to-where can they pull up an audio tape of what we’ve just covered?
MIKE: Yeah, absolutely. So, the best place to catch this show, the program, is actually via podcast. We post the show first on iTunes and Google Play every Friday afternoon.
BRIAN: So you can catch it first there. If not, you can catch this show or any previous show on our website, DeckerRetirementPlanning.com or you can catch up every-if you’re in the Salt Lake Area, KNRS 105.9 FM, 570 AM radio, Sunday evenings. And then we also are in the greater Seattle area on KVI 570 every Sunday morning at 9 AM.
MIKE: Okay, take care everyone and we’ll talk to you next week.
