RR S4 E12 THE HEADWINDS OF RETIREMENT & HOW TO AVOID THEM [00:00:01]
BRIAN: Welcome to Safer Retirement Radio, where you get the transparency you deserve. With over 35 years of experience in finance and investing, we help you stay up to date on market news and retirement strategies. I’m Brian James Decker, owner and founder of Decker Retirement Planning and host of Safer Retirement Radio. With me is my cohost and one of the advisors here at Decker Retirement Planning, Clayton Bradshaw.
CLAYTON: Today we’re gonna be discussing some of the headwinds that retirees seem to be facing in today’s markets.
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CLAYTON: We’re gonna be going through those. We’re also gonna be talking later on in the show today about what retirees can do to help themselves avoid those headwinds. So, Brian, why don’t you start us off? Let’s talk about these headwinds. I mean, I know that we’re kind of in a crazy time right now with Covid causing this crash and then we’ve had some rioting going on. So, companies are having to dramatically shift and adapt and that’s causing some issues in the market. So, what are the headwinds that you are seeing?
BRIAN: Right now, there’s three headwinds that make retiring right now more difficult than, in our opinion, in the past hundred-plus years.
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BRIAN: The first thing is people living longer than ever before. So, the mortality, the length of time means that you’ve got to have your money last longer than ever before. Point one. Point two is interest rates have never, keyword never, been lower than they are right now. So, that means that if you’re gonna stretch out your money longer than ever before, you’re doing it with interest rates that have never been lower, making it extremely difficult.
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BRIAN: And then number three, we have a stock market that is when I say higher, I don’t mean by points, but the valuation of the markets based on price earnings, price to sales, price to GDP, different measures, is valued next to only 1999. So, it’s higher than the valuations we saw in 1929. You have a highly valued market, record low interest rates, and people living longer than ever before.
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BRIAN: And good luck making your money last that long. So, it’s very difficult. And the tools that used to work, people don’t know Clayton, what they don’t know. They don’t realize that there’s tools out there that can overcome that, and we’ll talk maybe about some of those things.
BRIAN: But there are tools and strategies that allow you to overcome this. But the other guys haven’t been using those tools. So, we’ll dive into contrasting strategies.
CLAYTON: Yeah. So, let’s talk about the first one that you mentioned, the mortality rates.
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CLAYTON: So, the issue then that comes up, I mean, we know, I mean, what’s the average life expectancy for most folks, it’s your early eighties, right. Depending on, I mean, men and women, it’s a little bit different. But it’s usually about that point.
BRIAN: It’s 86 now for women and I think it’s 84 for men. Something like that.
CLAYTON: So, that being the case, as people are getting… and I love to talk about this with clients, I make the joke that a deceased patient doesn’t pay a doctor very much, right.
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CLAYTON: So, doctors are incentivized to help extend that life expectancy. But you got to be able to pay for that and afford it and pay your bills as you’re going through that treatment. For folks that are healthy, that do just live a great life into their nineties and on the rare occasion for those that hit over 100, you’ve got to have something in place to get you that income to help take care of yourself afterwards so you’re not a burden on those around you, which unfortunately we have… I’ve talked to couples that have dealt with that burden before with their parents.
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CLAYTON: That they had take on some responsibility that they weren’t expecting. And so, when you’re talking about the mortality rate, let’s talk a little bit more about what effect that can have and why that’s a problem for kind of the traditional model that most other advisors are using for their clients. And a little bit, and we’ll get, I guess, dive into more on the distribution, the income distribution side in a little bit. But address how we can help people avoid those issues.
BRIAN: Right. So, the models that are standard practice in the industry today, banks, brokers, financial planners.
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BRIAN: They’re trained in modern portfolio theory, asset allocation. It’s an accumulation vehicle that has you grow your money, and we all used it in our twenties, thirties, and forties. We had step one is the risk questionnaire; you fill that out. Based on how you answered those questions, you were given a diversified portfolio of stocks, bonds, cash, and alternatives. Alternatives, precious metals, real estate, things like that.
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BRIAN: Depending on your level of risk, you would in your twenties, thirties, and forties, grow that money as fast as possible and it didn’t matter Clayton, if the markets dip, because your paycheck paid your bills. Your 401(k) was separate. And in fact, if the market dipped 50 percent and stayed there for a few years before it came back, good for you, because that gave you a couple years to every two weeks add to your 401(k).
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BRIAN: So, when that came back, you made a lot of money on that recovery.
CLAYTON: Right. So, dollar-cost averaging is what you’re referring to.
BRIAN: So, that is called an accumulation strategy. Now, once you retire, let’s say that you retire at 65. I just described a situation where the markets dropped in half and it was good for you because of dollar-cost averaging. Now, you retire, no longer get a paycheck. And the markets drop in half. Is that good still?
CLAYTON: No. It’s not. If the markets are dropping in half and you were drawing out of that, that means you’re likely taking a 50 percent hit to your income.
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BRIAN: Right. Not only, well, yeah, that’s the portfolio that’s generating income along with hopefully other sources, hopefully you have social security income coming in. But you’re depending on that portfolio, that’s your life savings that was invested wisely and frugally to generate income for the rest of your life. So, if the markets drop in half, that does affect you financially because that portfolio is what’s generating your income. So, the strategies need to change then, right.
BRIAN: Okay. So, let’s talk about that.
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BRIAN: Now that interest rates are this low, the standard practice is to put your safe money in bond funds. So, let’s talk about interest rate risk, this is a new topic for a lot of people.
CLAYTON: And real quick, I want to mention I’m sure that a lot of our listeners are feeling that pinch on low interest rates right now. I keep getting the emails from my bank that says, “Oh, by the way, we’ve dropped your savings account interest rate again.” I think I got four of those over the last two months as the interest rates continue to dive.
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CLAYTON: So, I’m sure that listeners are probably nodding their heads, saying, “Oh yeah, I feel that in my own account directly on the effect that it’s having.”
BRIAN: Yep. On interest rates, we’re talking about CDs, treasuries, corpus agencies, municipals, as well as bond funds. Now, usually it’s bond funds in the asset allocation pie chart. That’s where we’re seeing the yields going way down. Along with interest rates. So, when you’re getting a yield with a 10-year treasury at 0.5.
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BRIAN: Let’s say your bond fund, let’s say you’ve got a great one. I’m just making this up. But let’s say you got a great one that’s with a 10-year treasury at 0.5, let’s say it’s yielding 1.5. That’s still not much.
BRIAN: Now, what happens to your bond fund capital or principle when the 10-year treasury goes from 0.5 to 1.5? In other words, interest rates have just tripled. What happens to…
CLAYTON: So, you got interest rate risk, so you’re losing principle when interest rates are going up.
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BRIAN: Most people don’t know that. Most people haven’t experienced that because since 1980, interest rates for 40 years now have trended down.
BRIAN: It’s only been a few times. So, I think it’s 1999. 1996 and 1999 were two years where the 10-year treasury in ’96 went from six to eight percent. Can you believe that? The 10-year treasury.
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BRIAN: And people lost 20 percent in that one year.
BRIAN: In 1999, the 10-year treasury went from four to six percent, and that was a 15 percent loss. So, if the 10-year goes from 0.5 to 1.5, we’re talking about at least a 50 percent loss of principle in your bond fund. Think about that.
CLAYTON: Yeah. And most people think that they’re gonna be safer, they’re told by their advisor, “Oh yeah, this is the safe haven for your money.”
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CLAYTON: When it’s not the case.
BRIAN: Right. So, that’ll be a massive loss on what the other guys are saying is your safe money. So, two things about this before we move on. One is that when interest rates are at all-time record lows, interest rate risk is at all-time record highs. So, interest rate risk is the amount of risk that you have on losing principle on your safe money.
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BRIAN: And why would any advisor tell you to put your safe money in bond funds when interest rates are this low? I don’t see it.
CLAYTON: It doesn’t make sense.
BRIAN: Okay. So, that’s the first thing is interest rate risk. The second thing we should cover is credit risk. We’re in uncharted territory right now, and by the way, the states have it in their constitution that they’re supposed to have a balanced budget at year-end, 12/31 every year. Did you know that? And they have what’s called off-balance sheet transactions that carry things over.
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BRIAN: So, every… no, I shouldn’t say every. Most every state has record deficits right now because especially with the Covid virus shutting things down, the tax revenues are low. And before Covid hit, the states were still in a pinch because of massive pensions that they’re supposed to owe and other things. So, right now you have credit risk issues.
BRIAN: Do you want to go into credit risk?
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CLAYTON: Yeah. So, credit risk is the risk that when the bond matures, you don’t get all of that principle back.
BRIAN: The municipal bond, right.
CLAYTON: Right, the municipal bonds. Right. And so, with municipalities is they issue these bonds and if they go on to default and they can’t pay their bills, then you’re the one that suffers. You’re hosed. You don’t get your money back.
BRIAN: That’s right. So, credit risk has never been higher. Interest rate risk has never been higher. And by the way, we should do a little community service here and offer people a way that they could look at their municipal bonds to make sure that they’re okay or not.
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BRIAN: And we’ve been giving this advice for a lot of years.
CLAYTON: And so, if you’ve got like a notepad, make a note of this, ’cause this is pretty helpful.
BRIAN: Yeah. There’s a way that you can tell if your bond is at risk and has serious credit risk issues. So, right now with interest rates where they are with a 10-year treasury is at 0.5, you have a two or three or four percent coupon municipal bond. They should be trading at 115 to 120 depending on the maturity date. If you have a mature, if you have a bond that is priced on your statement below 100.00, that’s called par.
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BRIAN: If your bond is below that, your bond has credit risk issues, especially if it’s got a three, four, or five percent coupon rate. If you call your banker or broker and say, “Hey, I’m just worried about my bond,” and especially if it’s the person who sold it to you, I’ve just seen this too many times being in the business for 35 years. They’re gonna CYA, they’re gonna make sure that it wasn’t their fault. “No, nothing’s wrong with that bond.” I’ve just seen this all the time and I’m sure you have too, Clayton.
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BRIAN: So, we hope that what you do is if there’s a bond in your municipal bond portfolio that’s trading below par, we hope that you just sell it. Just sell it. This is your safe money, it’s not your risk, and what we’re seeing is that municipalities like the Northeast, New York, New Jersey, Connecticut, Vermont, as well as Chicago and Michigan and California. We’re seeing those areas dropping below par right now today.
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BRIAN: And if you have those bonds and they’re dropping par, we hope you sell them. I’ll never forget Clayton, six years ago, we were giving this advice to people and they saw a certain bond dropping below par. Just cascading below par, in fact, this category. And they were Puerto Rican issues. And now we know that Puerto Rico is broke and those same bonds, those people that listened to us saved themselves a lot of money, because those Puerto Rican issues today are trading at 25 cents on the dollar.
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BRIAN: They’re not gonna pay.
CLAYTON: Right. And that’s, I mean, you imagine if that’s where you’ve got a lot of your savings, thinking that it’s safe money when it’s not.
BRIAN: Right. Right.
BRIAN: And when you bought those bonds, your banker or broker or the other guy told you, “Why would you buy Washington or Utah or California bonds? Why not just buy Puerto Rican issued because they’re giving you an extra 30 basis points. You get a little extra yield.” Well, now they’re paying a huge price for that.
CLAYTON: Yep. Yeah. So, and as you go through your statements, if you’re trying to do this yourself and you’ve got questions, give us a call.
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CLAYTON: We can help talk you through it. Our number’s (833) 707-3030. Again, that number, (833) 707-3030. We can talk you through it, just take 15 minutes is all to go through your statements and we’re happy to have the conversation. We want to make sure that you’ve got a better understanding of your investments, so we’re happy to work with you on that and talk you through it.
BRIAN: Yep. Okay. Now, let’s contrast in the rest of this podcast, let’s contrast the pie chart with the distribution plan.
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CLAYTON: Right. So, you had talked about that kind of traditional strategy that most other advisors are using right now in the pie chart and just kind of hold on for the ride and hope for the best and they’ll try to convince you to just wait it out and ride it out and you’ll be okay, is typically what most people hear. But I don’t like it when I talk to folks that can’t sleep because they’re so worried about what the future holds.
CLAYTON: And so, let’s talk about that distribution plan. So, in contrast to that, when you’ve got a plan set up where you can see monthly income, you can see how much tax you’re gonna be paying. You can see where your accounts are invested.
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CLAYTON: You can see how minimized you are on risk. That’s what we want to show with the distribution plan, and you get all of that on one page.
BRIAN: Right. So, before we talk about the distribution plan, I loved the points you hit on. There’s high anxiety with people who have the pie chart, who are over 65, for two reasons. One, is from the pie chart you’re supposed to look at that and see how much money you can draw for the rest of your life. Do you think anyone can do that?
CLAYTON: No. [LAUGH]
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CLAYTON: ‘Cause I mean, there just isn’t a way to be like, “Hmm, well, do I draw two percent or three percent or four percent?” And then you’re hoping and that’s where you get that problem that we talked about that if the market takes another dive, your income takes that same dive.
CLAYTON: And then it takes you years if you can even ever get back to normal, it’s gonna take you a very, very long time.
BRIAN: Right. So, the one high anxiety that most people have that are over 65 years old is running out of money before you die. Because looking at that pie chart, you can’t know how much money you can draw. The second anxiety they have is when the markets drop, and you hit this.
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BRIAN: Their portfolio has taken a 30, 40, or 50 percent drop because all of their money is at risk, all of it’s exposed to the markets whether it’s bond funds with interest rate risk or stock funds with stock market risk. All of their money is at risk and it’s all unnecessary. So, in distribution planning in contrast, what we have is instead of a pie chart, we’re a math-based firm. We use a spreadsheet.
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BRIAN: So, the spreadsheet has on the left side of the spreadsheet all the sources of income. We have them live to age 100, even though they probably won’t. But if they do, we want to make sure that their money outlives them.
CLAYTON: It’s conservative.
BRIAN: It’s conservative, right.
BRIAN: So, we show their social security income streams, we show their pension if they have one, we show real estate if they have it, and we show their portfolio income. We add it all up, minus taxes.
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BRIAN: And that gives annual and monthly income with a COLA, cost of living adjustment, to age 100. It’s a beautiful thing. Now, on this first high anxiety that most people have of looking at a pie chart and trying to guess how much money they can draw before they die. Our clients don’t have that fear because they can see on the spreadsheet how much money, net of tax, that they can draw. And we meet with our clients at least annually.
BRIAN: To go through that and update that every year, so that they have incredible peace of mind knowing how much money they can draw. That is huge.
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CLAYTON: Well, and I think for a lot of, ’cause I have talked to folks that say, “Oh yeah, well my advisor, they send me an update once a year.” And the advisor spends probably 15 minutes just updating a couple of numbers and then they email it out. We spend several hours going through every facet and detail of the plan to make sure that it’s done correctly. For people that are affected by RMDs, we help walk through that. I mean, there’s so many things that we do, and this is probably a whole ‘nother podcast that we could do. But talking about what it is we do to make sure that that ongoing relationship is still very much a high-touch relationship.
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BRIAN: Right. So, that’s the left side of the spreadsheet is all the income streams, including portfolio income. The right side is the portfolio itself. Every portfolio has three parts. Cash, safe money, and risk. So, on the right side of the portfolio we carve out some emergency cash. Every retired person should have some emergency cash. And then we have laddered principal guaranteed accounts. Cash, one to three, three to five, five to seven, and seven to 10-year laddered principal guaranteed accounts.
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BRIAN: This is by far the most important thing we do for our clients because with laddered principal guaranteed accounts, when the markets crash every seven or eight years, they are unaffected. They go through these big hits in the market and they usually happen every seven or eight years and in retirement with a distribution plan, with this key foundational strategy, our clients are unaffected. So, on this second anxiety, our clients don’t share that anxiety either.
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BRIAN: Because they know how much money they can draw, and number one, and number two, they’re not gonna take that hit when the markets go down the next time, 30, 40, 50 percent. Because their income for the next 20 years, they know is coming from laddered principal guaranteed accounts and that is huge.
BRIAN: Okay. I think we’re almost out of time, but I want to cover one more topic and that is something that we do. We do five things. We have five things that we focus on in the financial planning strategies that we use.
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BRIAN: Maximize income, minimize taxes, minimize risk, make sure that the liquidity is there, and portfolio optimization. So, when it comes to portfolio optimization, I’ll just end with this. This is a big teaser to have people call. Most commercial banks are paying out 0.0 something. Our clients are getting close to one percent on their cash and their money market balances.
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BRIAN: When it comes to laddered principal guaranteed accounts, we’re getting two and a half, three percent on the short-term money, and our seven to 10 years averaging six percent on principal guaranteed accounts. And the reason on the risk bucket that we were able to make money, we were up about eight percent when the markets were down 30 percent on March 29th, when the markets were down. Our clients use models that are computerized and they’re trend-following. I know that’s jargon, but I’m just teasing for the hook so that they can call and get more information.
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BRIAN: When the markets are trending higher, our clients can make money. When markets are trending lower, with the managers, the six managers that we have in place, our clients can make money as markets go down as well.
CLAYTON: Right. So, for anybody that’s listening, if you want to get a sample plan or get your own plan put together, give us a call. Again, the number is 833-707-3030. Again, that number, 833-707-3030. We can talk about if it’s estate planning, we can talk about how a financial plan would fit together with your estate plan. We can talk about tax minimization, social security.
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CLAYTON: I mean, any of these topics, we love to go through ’em all. We’re happy to talk to you about it. So, give us a call. 833-707-3030. Just takes 15 minutes for a quick intro call, it doesn’t cost anything, it’s free. We love doing it just to make sure, even if you’re set with your plan, you can have confirmation that you’re on the right track. So, we look forward to those conversations. Again, I’m Clayton Bradshaw, your host, with Brian James Decker, the owner and founder of Decker Retirement Planning. We look forward to talking to you soon.