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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 co-host and one of the advisors here at Decker Retirement Planning, Clayton Bradshaw.

CLAYTON:  All right, Brian, today we’ve got a great show planned.  Today we’re gonna be talking about the second quarter.  We just finished the second quarter of the year.  It was a great quarter.

 

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CLAYTON:  We’re going to be talking about some decisions that people can make over the next few months with tax rates being low, with market kinda bouncing back to near highs and we’re also gonna be talking about with the uncertainty that’s kind of come that we still have on the horizon, we’re gonna be talking about how we helped a group of retirees keep their accounts positive through the first quarter of this year through some pretty volatile times.  So, stay tuned for that.  And the other thing that we’re gonna be doing on the show, at the very end of the show we’ve got a giveaway that we’re gonna be offering.  So, we encourage you to stay tuned and we’ll let you know what that is at the end of the show.

 

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CLAYTON:  Let’s talk about the market.  So, we just finished the second quarter.  It was the best quarter in how long, Brian?

BRIAN:  Over 20 years.  So that’s generalizing DOW, S&P and NASDAQ.

CLAYTON:  Right, but it bounced back, and it recovered quite well from the first quarter that we saw some pretty big drops.  And so, there’s some positives that we can learn from the market bouncing back.  I think for a lot of retirees as they’re kind of approaching this point where, hey, I need to make a decision, that was scary for a lot of folks to see 30 percent wiped away from a portfolio in a matter of, what was it, just a couple of weeks, wasn’t it?

 

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BRIAN:  Right.  It was March.  From February, I think it was February 19th to March 29th, it was about five weeks the market took a 30 percent hit.  That fast.  Can I chime in?

CLAYTON:  Yeah.

BRIAN:  So, the people who exercised discipline and were able to protect their portfolio with, can we talk about the stop loss real quick?

CLAYTON:  Yeah, let’s talk about it.  So, we’re gonna be talking today about approaches that people are taking to try to either avoid losing money in their assets when the markets drop or, in some cases, make money when the markets are going down.

 

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CLAYTON:  So, what are some of the common approaches?  You mentioned stop loss.

BRIAN:  By far, it’s the stop loss.  So, when people put in a five, 10, 15 or 20 percent stop loss, they feel smug, very smart, they feel brilliant, because they got out.

CLAYTON:  So, tell our listeners what a stop loss is or what that means.

BRIAN:  Stop loss is you by X-Y-Z stock at 20 and you put in a trailing stop loss two points behind it, 10 percent stop loss.  It trails.

 

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BRIAN:  So as the stock goes higher, you’re trailing stop loss goes up.  It’s a function that’s part of TD Ameritrade, Schwab, Scott Trade, they all have the different trailing stop losses and it’s a way to protect capital.  So, if you have ETFs with the indexes or sectors or stocks and you’re feeling concerned about the market, you can put in that trailing stop.  So as the stock goes from 20 to 21, 22, 23 and then it has that pull back of 10 percent, you’re automatically out.

 

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BRIAN:  And at 23, pulling back 10 percent, you’ve booked a five-percent gain as it takes you out.

CLAYTON:  Sure.

BRIAN:  So that’s the easy part.

CLAYTON:  What’s the hard part?

BRIAN:  Here’s the hard part.  So, X-Y-Z stock, let’s say it’s a stock that you like.  Now right now, 25 percent of the NASDAQ is encompassed in five names.

CLAYTON:  And this just kills me.  I know what you’re going to say, but knowing this, it’s unbelievable that the markets are putting this much weight and money behind just a few companies.

 

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CLAYTON:  They’re pulling all the weight.

BRIAN:  It’s unprecedented.  So, what happened last time when capitalizations got so big was AT&T and they split ’em up.  Remember Ma Bell?  Well, I don’t know if you remember.

CLAYTON:  Well, I know of it, yeah.

BRIAN:  Okay.  They split up the baby Bells into five different…  They split AT&T into five different companies.  They’re not doing that this time, which I think will be shown to be a huge mistake.  I’ll get to that in a second.  But the five names are, we call ’em, FAANG.  Facebook, Apple…

CLAYTON:  Amazon.

BRIAN:  Amazon, Netflix, and Google.

 

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BRIAN:  Those five companies.  Microsoft, sorry.  Not Netflix, Microsoft.

CLAYTON:  Right.

BRIAN:  Those five make up 25 percent of the NASDAQ.  Now when you have a company that’s over a trillion in capitalization, capitalization is number of shares outstanding times market price.  When you get over a trillion and you’re a growth stop, your expectation is that you’re gonna grow 20 percent.  What’s 20 percent of a trillion?  It’s 200 billion, right?

CLAYTON:   Yeah.

 

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BRIAN:  Easy math.  Okay, 200 billion.  Do you know that Exxon is 60 billion?  Just to give that perspective.  Think of that.

CLAYTON:  Yeah.

BRIAN:  So, you are creating, your expectation, if you’re holding those five companies, your expectation is that you’re gonna create a massive company every year to continue that growth.  I just wanna say that’s never happened.  Once you get to a trillion, it’s never happened that you can continue to produce that kind of growth.

 

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CLAYTON:  It’d be similar to Microsoft creating a new IBM every year, wouldn’t it?

BRIAN:  Right.  Well, no.  Let me give you a specific example.  It’s similar to Apple receiving all the next 12 months of revenue by getting every person in the world, eight and a half billion people, to buy a new iPhone.

CLAYTON:  Which is not gonna happen.

BRIAN:  It’s not gonna happen.  And then, if they did that, what are they gonna do next year?  So, market capitalization is a problem right now for those five.  But when I talk about the hard part of protecting capital. is getting back in.

 

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BRIAN:  So, we had a very quick drop.  People felt smart.  They had protection of capital strategies in place.  By far the stop loss is the biggest, most popular.  And so, March 29th, market’s down 30 percent, anyone who would’ve sold…  Here’s a quick aside.  Human nature.  You are gonna sell when the stock goes down 10 percent, right?  But you’ve been burned before, and this is human nature, this is the human nature of fear and greed.

CLAYTON:  Sure.

 

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BRIAN:  So, when the markets took you down three times before and stopped you out, your stock turned on a dime and went higher five of the six last times.  So, this time, what are you gonna do when your index when your trailing stop hits?

CLAYTON:  Well, you’re gonna hold on.

BRIAN:  You’re gonna hold on.

CLAYTON:   Yeah.  And what’s the saying?  Greed keeps you in the market longer than you should be and fear keeps you out.

BRIAN:  At the bottom.

CLAYTON:  At the bottom, right.

 

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BRIAN:  At the bottom.  So, you sell it.  You buy at the top, sell at the bottom.  Fear and greed.  Okay, so now you miss the stop loss at 10 percent.  Now the stock’s down 15 percent and you’re telling yourself as soon as this stock gets back to the higher point, you’re gonna sell.  But this time it doesn’t.  You saw how quickly and rapidly that decline happened.  Now you’re down 20 and 25 and you’re losing sleep, the numbers are in your head about how much of your retirement is gone and how long you have to work to make that up, and now at 30 percent, you’re done.

 

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BRIAN:  You’re upset, your stomach’s upset, and you just hit the sell trigger and you’re done, and you sold right at the bottom.

CLAYTON:  Yep.

BRIAN:  Predictably.  There are very few people that can…  There’s two things on this.  There’s very few people that can afford to ride that out in retirement because, why don’t you cover this is something that you’re very good at explaining, the difference in the risk markets when you have a 401K and a paycheck and when you’re retired.  ‘Cause those are two totally different worlds.  And then, we’ll come back to these other strategies that people use.

 

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CLAYTON:  Yeah, sure.  So, one of the things that we see with clients that come in is it’s almost like there’s two phases in life when it comes to your finances, right?  So, you’ve got the accumulation phase, right, and that’s where you’ve got income from a source.  So, you’ve got your paycheck.  You’re getting that paycheck every month or every two weeks or however it works.  And then, you’ve got your 401K that’s on the side and that’s in probably the S&P 500, diversified, you’re one of those target date funds, but it’s able to make money when the markets are up but loses money when the  markets are down, but you’re contributing to it with every paycheck.

 

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CLAYTON:  And so, you’re dollar cost averaging, you’re lowering the price of your mutual fund and you still have that income.  And so, that 401K’s kinda doing the roller coaster ride.  But when you approach retirement and you go to make that shift into depending just on the 401K ’cause you’re not getting that income anymore, then you need to look at, okay, what part of this is my income that I can depend on?  And that’s where the change should happen for folks.  They should be looking, okay, now I’ve got a portion of this that’s set up for my income, a port of it can still be at risk and that’s what we do with distribution planning, which we’ve talked about before on the show.  Any other points on that you wanted me to cover?

 

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BRIAN:  Yeah, you covered it perfectly.  In 2008, if you’re getting a paycheck in from October of ’07 to March of ’09, you’re contributing every two weeks in your 401K.  You’re getting a paycheck, so it doesn’t bother you and you see your dollar cost averaging in in a down market.  And then, when it recovers, you benefit in a huge way.  That’s an accumulation strategy.

CLAYTON:  Right.

BRIAN:  That’s in your 20s, 30s, 40s and early 50s.

CLAYTON:  And that’s what just about everybody that’s using a 401K, getting a routine salary, is doing whether or not they know they’re doing it

 

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BRIAN:  Right.  Here’s entirely different rules.  Once you get that last paycheck that you’re ever gonna take, now when the markets go down like ’08, you’re not dollar cost averaging and you’re taking that full hit, number one.  Number two, you’re drawing money from that portfolio.  So, you’re doing the opposite of dollar cost averaging.  You’re pulling money out of an account that’s declining so that when it comes back, it’s coming back with less.

CLAYTON:  Yeah.

 

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BRIAN:  So that is lethal.  Mathematically, if you are pulling money out of a fluctuating account, you’re compromising gains when markets go up and you’re accentuating losses when markets go down.

CLAYTON:  Right.

BRIAN:  Okay, now, oh, anything more on that?

CLAYTON:  Well, yeah, and I mean just, and maybe this is gonna be a little too into the weeds with the math, but if you’ve got 100 dollars and you lose 10 percent, you’ve now got 90.  You’ve gotta make more than 10 percent to get back to 100.  Now, imagine if you’ve pulled money out of that when it’s down to 90, right?  You pulled five dollars out.  Now you need even more return to get back up to 100.

 

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CLAYTON:  And that’s what we’re talking about is that you just start digging a deeper hole.

BRIAN:  Correct.  Right.  Okay, so back to the stop loss.  Because you’ve been burned so many times before, Clayton.  I’m just using you as an example on the stop loss.

CLAYTON:  Sure.

BRIAN:  This time, you’re not gonna honor it and you take the hit.  And this is the time that you do take the full hit.  So, it’s hard to have rules based, and most of the people that we see when the stop loss has failed them so many times before.  So, the stop loss is usually number one thing that they do.

 

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BRIAN:  The second thing that they do is they have in their portfolio a 60-40 blend.  And, Clayton, that’s worked fine 10 years ago when you could get five percent on a five-year CD.

CLAYTON:  Right.

BRIAN:  But how about if I offer you that 40 percent of your portfolio is earning almost nothing and you have to live longer than ever before, mortality wise on your portfolio, where 40 percent is having 10-year treasury rates that hit point five this week.

 

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BRIAN:  And CDs, seven to 10-year CD rates, never before has happened before are sub-one percent now.  How can you have your portfolio last longer?  By the way, this is another show.

CLAYTON:  Right.

BRIAN:  Actually, we covered that I think a few times [later?].

CLAYTON:  Yeah, we’ve talked about it.

BRIAN:  But anyhow, so people think that they can protect their retirement by a 60-40 blend.  Not with interest rates where it is now.  That’s my point.

CLAYTON:  Right.

BRIAN:  But that’s point number two.  Those, by far, are the biggest, most popular ways that people use to control risk.

 

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BRIAN:  Now, we have something quite different that we’ll talk about.  But I wanna talk about the expectations that people have on where the markets go from here.  Can I spend a minute on this?

CLAYTON:  Yeah, well, and right now is a great time to make a decision because the market’s bounced back up from that 30 percent drop.  The S&P is almost to where it was.  There’s still a few more percent to go.

BRIAN:   The timing is great.

CLAYTON:  The timing’s great.  The NASDAQ is touching new highs in the last few weeks.  And so, because of this, it’s a great time to consider, all these, I mean, tax rates being near historic lows is another reason, but that’s a whole ‘nother show as well.

BRIAN:  These are great points.

 

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CLAYTON:  And so, with this now is a great time because we know that, so I’ll just talk about a couple of things on the horizon, and then I’ll turn back over to you to cover what you wanted to, but we’ve got Covid.  We’re seeing new, daily cases hitting new highs again because the lockdowns, people are starting to venture out and interact with people again.  And so, cases are surging.  But then, we also have a pending election.  And regardless of who gets elected, the other side is going to disagree with that.  And the country’s been very divided with a lot of different things lately.

 

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CLAYTON:  And so, because of that, there’s potentially going to be a mass riot and outbreaks again of these kinds of things because people are gonna disagree very strongly one way or the other, and that’s gonna affect businesses.  It’s gonna shut things down again and it will potentially affect the market as well.

BRIAN:  Politics, the economy, the uncertainty of the economy, Covid, the uncertainty of Covid, the uncertainty of the vaccine, all those things and the uncertainty of earnings.  So, in the past, three things have driven the stock market higher.  Higher earnings.

 

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BRIAN:  Right now, I’ve never seen this before in my 35 years in doing this, there is a scattergram of earnings expectations for year-end 2020.  They’re all over the place.

CLAYTON:  Yeah.

BRIAN:  In short, nobody knows how this movie’s gonna end.  So, you have earnings uncertainty, you have the Fed that single-handedly is propping this market up and you have interest rate that are very close to zero.

 

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BRIAN:  So there used to be a declining interest rate where people would say I can get five percent on a five-year CD.  I’m not gonna take my chances in the market.  But now, when you have a 10-year treasury at point five, you can look at the dividend of certain banks or real estate and say, well, I’ll just take the three or four percent dividend.  So, they’re taking their chances in the market.

 

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BRIAN:  Lower interest rates have people go into the market.  Now interest rates are almost at zero.  But you have the Fed single-handedly propping this market up.  There was a movie years ago, gosh, probably 30-plus years ago, probably 40-plus years ago, called “Dirty Harry.”  Clint Eastwood has a shootout with the guys.

CLAYTON:  Oh, yeah, great movie.

BRIAN:  This is classic.  And he captures this guy, puts him on the ground, puts his, I can’t remember the name of the gun, but it’s a huge canon.

CLAYTON:  Yeah.

 

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BRIAN:  Puts it right in his head and says, you know, in the ruckus I can’t remember if I’ve shot five or six shots.  I know I only have six in the revolver, but do you feel lucky?  Do you remember that?

CLAYTON:  Yeah.

BRIAN:  Okay.  So right now, you described it perfectly, we’re near the highs again.  People have a chance to lighten up and use a strategy that we’ll maybe touch on, and I’m not sure if we are or not, but there’s a strategy where you can limit your risk in two huge ways right now and they should be peeling it off.

 

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BRIAN:  The market valuation has never been higher with one exception.  The current market valuation.  So, stock prices are up, and earnings are currently down.

CLAYTON:  Sure.

BRIAN:  We’re higher in the market valuation than 1929.  The only exception is 1999 that we’ve been higher.  So, if you think that the stock market in 10 years is gonna be higher than where it is now, that’s never happened historically.  Once you got to these valuations, 10 years later, the market has never been higher and that’s three times we’ve hit these valuation level.

 

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CLAYTON:  And for those that, I’m sure most of you probably know, but 1929, followed it up with The Great Depression, right?

BRIAN:  Right.  Number two.

CLAYTON:  And then 1999, we followed it up with the Tech Wreck.

BRIAN:  And three is right now.

CLAYTON:  Yep.

BRIAN:  So, 10 years later, if you think that the market’s gonna be higher now, do you feel lucky?  Do you, punk?

CLAYTON:  Right.

BRIAN:  I mean, that’s what it is.  And people are betting their retirement.  So, let’s talk about two things that are very valuable that people in retirement can do right now today to limit their stock market risk.

 

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BRIAN:  There’s three parts to any retiree’s portfolio, cash, safe money, and risk.  On cash, we advise our clients to go use seven or eight banks that are getting one percent right now.

CLAYTON:  Yep.

BRIAN:  Most people are getting point zero something.

CLAYTON:  Right.  At one percent, while it doesn’t sound like a lot because people remember when they were getting five, six, seven percent 30 years ago on their checking accounts, but right now, that’s as high, and we do the research, so we know that’s as high as you can find right now on savings account money.

 

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BRIAN:  Right.  And then, we have laddered principle guaranteed accounts.  One to three, three to five, five to seven and seven to 10-year principle guaranteed accounts where the one to three, three to five-year principle guarantees are earning three percent, and five to seven, seven to 10 are averaging around six.

CLAYTON:  Yeah.

BRIAN:  So, if you don’t know about this, you should give our company a call at Decker Retirement.  The third and final is the risk portion.  So, we’re talking in this podcast about controlling risk.

 

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BRIAN:  Our clients only have about 20-25 percent exposure to the market.  Why is that?

CLAYTON:  It’s because of the income.  So, we talked about it.  And this is where the distribution side of thing, this is now we’re gonna kind of finish that conversation.  We talked about the accumulation side where you’ve got income that’s coming from a relatively secure, protected source.  That’s your employer, right, for people in their 20s, 30s and 40s.  And then, you’ve got your 401K money at risk.  So that’s the accumulation side.  So, let’s talk about the distribution side.  You’ve got the bulk of your money, 50, 60, 75 percent of your assets are going to be in a principle, protected account.

 

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CLAYTON:  That’s where you draw your income from.  So, you know, market takes a 30, 40, 50-percent hit, your income’s gonna be unaffected.  You’re still gonna be drawing from a source that didn’t take that hit.  So that leaves that other 25-percent portion, that risk bucket, available to go up and go down.  But I mentioned earlier that we were gonna talk about how during Q1 of this year we kept our accounts positive.

BRIAN:  Yes, let’s cover that.

CLAYTON:  So, Brian, let’s dive into it.

 

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BRIAN:  Okay, the last thing on that distribution plan that I love very much is if you start with X, let’s say a million dollars, whatever X is in your total assets, and you peel off 25 percent that grows at six percent for 20 years, you’ve spent 75 percent of that money in the first 20 years.  And yet, that 25 percent almost replaces and brings you back to the starting amount.  That’s one of the things that I love about the math-based approach that we have.

 

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CLAYTON:  Well, and the great thing about the distribution plan and the reason we know this is because we map it all out on a single page so you can see what your income looks like year after year and we run it out to age 100.  So, you know and can take comfort by seeing what that income looks like.

BRIAN:  Okay.  We’re running out of time.  So, the two things that we wanna cover is a way to limit risk for the risk side of our clients’ portfolios.  One is to have only 25 percent instead of all of your money at risk in the pie chart.  Number one.

CLAYTON:  Right.

 

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BRIAN:  Number two is to use the two-sided strategy in the two-sided market.  I don’t wanna be technical, so you help me with this.  But the market is a two-sided market.  It goes up and it goes down.

CLAYTON:  Sure.

BRIAN:  Ninety-plus percent of the people have a one-sided strategy by and whole in a two-sided market and their risk is considerably higher than having a two-sided strategy in a two-sided market.  So, a two-sided strategy is using computer models that allow you to make money if the market goes up.

 

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BRIAN:  And this is brand new to a lot of people.  Or, if the markets go down.

CLAYTON:  Right.

BRIAN:  So, on March 29th when the markets were down 30 percent this year, our accounts were up eight percent.

CLAYTON:  Yeah.

BRIAN:  That’s not a lot but we didn’t lose money.

CLAYTON:  Right.  Not taking that hit.

BRIAN:  Right.  So, these are computer trend-following models, and these have been around for 20 years.  If your planner, adviser is not using this, you’ve gotta ask the question why not?

 

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BRIAN:  Because they have less risk and the returns for the last 20 years are multiples of the S&P.

CLAYTON:  Yeah.  Well, and it’s something that for anybody that meets with any of our advisors, we go through all the different details of the manager.  We show you who they are, we show you the returns, they’re third-party verified managers, so we go through all of that.  It’s not something that we keep secret.  We’ll share it with anybody that talks to us.  So, if you wanna see who they are, you wanna learn more about it, give us a call and we can talk you through how these strategies work in more detail.

 

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CLAYTON:  We can talk you through what a distribution plan is gonna look like for you.  I mean, there’s so many things.  And we also have a giveaway for anybody that wants this, we’ve got something called the Retirement Playbook.  It’s a quick PDF that we can email it to you.  We’d like to give you the printed copy, but with not doing anything in person right now, we’ll email it to you.  And it breaks down just some points, nine points about different things that retirees can be doing to strengthen their position.  We’ve talked about some of these things today.

 

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CLAYTON:  But give us a call and we can give that to you.  We can email that to you.  Our number is 833-707-3030.  Again, that number is 833-707-3030.  Give us a call.  And we just wanna talk for 15 minutes.  It’s nothing that you’re gonna have to commit an hour or an hour and a half or anything like that.

 

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CLAYTON:  Just a quick 15-minute call with one of us to go over some questions that you’ve got about day, talk about the risk managers and talk about how you can set yourself up during this time.  We’ve got a window before things start getting crazy again and I encourage everyone that’s listening to take advantage of that.

BRIAN:  Smart.

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.