The following is a transcript from the Radio Show "Decker Talk Radio - Protect Your Retirement. The following comments are of the opinion of Brian Decker and Mike Decker.
MIKE: Good morning KVI listeners. This is Mike Decker.
BRIAN: And Brian Decker.
MIKE: And we are so excited for what today is a two-part series, maybe even more. We've got such a great topic today. The topic is what is a financial plan? And I think one of the best things we could do for our show, this is Decker Talk Radio, "Protect Your Retirement" with Brian Decker from Decker Retirement Planning and Mike Decker here, is to define what actually is a financial plan. If you can't define it, you don't know what it is; right Brian?
BRIAN: Right. So I wanna go through and talk about what is a financial plan.
BRIAN: What's involved in a financial plan and all-... but I wanna start with what it's not but before I get into this topic, I owe listeners the finish of the Brexit. Do you remember we promised?
MIKE: That's true. We did promise, so let's finish the last thought about Brexit, and then we'll go into this.
BRIAN: This is Britain's UKs, exit from the European Union. The reason, there were two major reasons that the British voted against remaining in the European Union and that was number one...
BRIAN: The amount of immigration costs that were coming in, so when open borders came in and the... the powers that be made... were making decisions for the British, they didn't like that. They didn't like losing their autonomy and their... the pride of their country and also the expense of the refugee cost culturally, financially.
BRIAN: That was weighing on them number one. Number two is the exposure that the British and the UK government had for the failing banks in Ireland, Italy, Portugal, Spain, and Greece. There's a contagion that will happen. It's not if, it's when, and I think it's brilliant that Brexit happened. I would have been a proponent but I know that a lot of the people, it was a tough vote but we talked about currency fluctuations and how George Soros made so much money when he was short.
BRIAN: The British pound when, gosh, this was probably over... easily over 35 years ago. The size of the currency fluctuation was four times that a few weeks ago when Brexit was announced. It was four times the currency fluctuation of the British pound when it was announced this year.
MIKE: All right.
BRIAN: That's all I wanted to say on the foreign currency and the reasons for Brexit.
MIKE: Just one real quick recap as of today and... or about this time. Brexit happened.
MIKE: I mean, financially, how is Britain looking right now? I mean, is... did it go into a huge depression, are they okay, just for the listeners that know what happened but don't really know what actually is... their financial status?
BRIAN: They voted to go independent and break away from the European Union. Very smart move financially for the company. Autonomally [PH] for the company... for the company; country.
Mike: For the country. Well, a company, a country. They kinda have to operate similarly, I guess.
BRIAN: Right. But it depends on their leaders whether it's a success or not. It depends very much on their leaders. Whether they take advantage of their independence and the power as a trading partner for an independent country.
MIKE: So it still could go either way as a positive or a negative is what you're saying?
BRIAN: Yeah, very much depends on their leaders.
MIKE: Okay.
BRIAN: All right, back to what we wanna talk about. What we're gonna talk about today and I think Mike, this might take three different radio segments. Three weeks to cover what is really involved in a financial plan? A true financial plan has several parts. I'm gonna name those parts and then I'm gonna go back and name what a financial plan is not. A real financial plan, a true financial plan: number one, you're dealing with the fiduciary Mike, and not a sales person. A sales person is a banker or broker, not independent.
BRIAN: They sell you whatever their bank or brokerage tells you they can sell and sometimes the bank or the brokerage firm will incent the broker to raise commissions and move product. Gosh, the most horrific story that I can think of as far as dealing with a sales person has to do with several years ago there was a bond float, tax free bond that covered Washington Public Power Supply. They are called the Whoops bonds.
MIKE: [LAUGH] That’s a terrible name.
BRIAN: Whoops bonds, when they came out they were highly rated, tax free municipal bonds. Merrill Lynch had the majority of the bonds and they bought them, they underwrote them, had the bonds in inventory, and then the news broke Mike, that the bonds were down-graded and in fact, were worthless and instead of eating that loss, Merrill and some of the others that were involved in the underwriting told their brokers to sell them and so they got on the phone and they sold them.
BRIAN: A fiduciary can't do that, so that's story number one.
MIKE: Well, let me ask you a quick question before you go to story number two. Can a banker or broker claim to be a fiduciary? Can they rewrite their association with that or is that just something that they just can't do?
BRIAN: Well, let's define what a fiduciary is. A fiduciary is someone who is required by law to put their client's best interest before their company's best interest.
MIKE: Mm-hmm.
BRIAN: A banker is not a fiduciary. A broker is not a fiduciary. They are a salesman. Sales people that sell what the institution tells them to sell.
BRIAN: An insurance guy is not a fiduciary. He's a salesman.
MIKE: But the thing I think that I'm trying to ask here is when I go to the bank, the guy I talk to, and I see him over and over, he's a nice guy but that doesn't make him a fiduciary and isn't that because he's associated with someone that custody of funds or something like that because just a nice guy might feel good? I might feel like they actually do wanna do good but they're not actually a fiduciary.
BRIAN: Okay, the definition of fiduciary is someone who is Series 65 license, not Series Seven like bankers and brokers are, number one.
MIKE: So the licensing's different.
BRIAN: Licensing is different.
BRIAN: The... They're registered investment advisory corporation RIAs, so the structure of the company is different. Licensing and structure determine if you are a fiduciary.
MIKE: So for listeners, KVI, the reason why I'm asking this is I hope you don't get tricked by the smoke and mirrors of people doing a round-about answer when you're talking to them. Are you a fiduciary? These are things you can ask, so you know for sure if they are or not.
BRIAN: Well, I had a conversation on... last week. I think it was Thursday or Friday. I think it was Friday. Where the guy [LAUGH]...
BRIAN: I was talking to someone. It was a first time phone call and outta the blue this couple announces, "Oh, by the way we've got Eric on the phone." "He's from XYZ bank."
MIKE: Great couple; right? They just were... they were getting to know us. They were trying to see if...
BRIAN: Right.
MIKE: If we were a good fit.
BRIAN: Right.
MIKE: So that's fine.
BRIAN: I said well, this call might not go well because we clean-up far too many messes of bankers and actually, I have disdain for what the disasters that bankers and brokers have done.
BRIAN: And then this guy... and I told him that I was a fiduciary. This guy claimed that he was a fiduciary. I wanna stay on task here. The first point of a financial plan is to deal with the fiduciary. This guy claimed he was a fiduciary and I said no you are not. First of all you have a Series Seven license, you're not a 65. He said, "Well, that doesn't make a difference." And I said yes it does and the corporate structure at your bank is you... you're not a registered investment advisory firm...
BRIAN: Number two, and number three, you're not independent. You can't claim to be a fiduciary when strike, one, two, and three, you don't qualify on any level. He argued for a little bit and went away but the DOL rules, the Department of Labor came out in April of this year and redefined the fiduciary rules. It requires more disclosure of language and commissions that are charged typically because the bankers and brokers with two specific products Mike.
BRIAN: One is the variable annuities that have 8 to 12 percent commissions on those. We hate those. We can't stand those. We would tell you KVI listeners, I hope that we can be influential in saving people from making a horrible financial mistake. If you're in the process of deciding on a variable annuity, I hope you walk away. Bankers and brokers pedal these variable annuities. They have huge commissions up front. Let's say eight percent commissions up front. The banker, broker gets paid every year you own it. The insurance companies get paid every year you own it and the mutual fund companies get paid every year you own it.
BRIAN: Three layers of fees that typically add up to five to seven percent in total cost before you make a dime; before you make a dime. There's five to seven percent in costs per year. There's no... when the markets go up you lag because of the expenses and when the markets go down you lose more because of the expenses and the scam of a variable annuity Mike, is they're told that here's a way for you to invest in the markets with a guarantee but what they don't tell you is that you have to die, 'cause it's on your life, you have to die to get that guarantee.
BRIAN: That guarantee is the high level mark during your life, so insurance companies make a ton a money. Mutual fund companies make a ton a money and the broker makes a ton a money, you don't. We don't like variable annuities because they're not in the best interest of clients, so that's number one. Number two is the non-traded REIT. The non-traded REIT is something that is ill-liquid. It's ill-liquid and it's a real estate investment trust and there's incredibly high commissions on it, so it's a wonderful thing for the banker or the broker. It's not in the best interest of the client.
BRIAN: So two to three years down the road, you may or may not be able to sell it if you wanted to sell or needed to sell. There's a liquidity issue and there's just problems.
BRIAN: Okay, so just to make the point, it's very important step one that you deal with the fiduciary. A fiduciary is someone's who's required by law to put your client's... put our client's best interests before our company's best interest. Bankers, brokers, insurance agents are not fiduciaries. We are fiduciaries, step one. Step two is to make sure that your plan has an income component that generates the income you need and want for the rest of your life. That's very, very important.
BRIAN: What we use to do this is we have a distribution plan. I like to talk Mike, in contrast to things, so in contrast to what the bankers and brokers have which is an asset allocation pie chart, we use a distribution plan. Pie chart is the... where you answer questions on a risk questionnaire, you submit it, it spits out a recommended portfolio of stocks. I'm sorry, mutual funds and large cap, mid cap, small cap growth value, international emerging markets, and your bond components.
BRIAN: It gives you a diversified recommended portfolio and then spits out an investment policy statement that you signed and dated. Now you've got your buy and hold asset allocation pie chart. That works as an accumulation plan in 20s, 30s, and 40s, but if you use it when you're over 50-years-old, it will hurt you because in retirement, you cannot take the hits that the markets dish out. Every seven or eight years the stock market gets crushed hard. Seven or eight years the markets get nailed and also...
BRIAN: The exposure that you have for the downside that you're not protected, the interest rate risk on your bond funds, they... bankers and brokers will put you in all risk investments. What we do is we use in distribution planning, it's a spreadsheet and it organizes all of your sources of income, so Mike, picture a spreadsheet where you have, you and your wife have your social security, we have your pension, we have your...
MIKE: Mm-hmm.
BRIAN: Income from rental real estate.
MIKE: Mm-hmm.
BRIAN: We have your portfolio income. We total it up minus taxes. Gives annual and monthly income with a COLA, cost of living adjustment for the rest of your life.
MIKE: It's a plan.
BRIAN: It's a plan but when people see it, when they come to our seminar or come to our office Mike, when they see it for the first time there's a wow factor. They say, "Oh my gosh, why isn't everyone doing this?" The number one fear in the country before 2008, I know you know this answer.
MIKE: Mm-hmm.
BRIAN: But before 2008, the... I'll do the David Letterman. Number three was the fear of war; number two was the fear of death.
BRIAN: And number one fear in this country was public speaking before 2008. After 2008, the number one fear is running outta money before you die.
MIKE: And for those listeners are listening in right now or just tuning into KVI, this is Decker Talk Radio's "Protect Your Retirement." We’re listening here. My name's Mike Decker and we're listening to Brian Decker from Decker Retirement Planning and this is huge. We're going over what is... we're defining what is a financial plan and that's just amazing. The number one fear of people is outliving their money. It's just... it's sad that we've gotten to that fear and that the markets are that volatile and things like that are happening.
MIKE: And for a number of reasons, so let's keep going down this list. I know we're summarizing deeply right now what we're gonna be covering for the next few shows but it's just so important. This is just huge.
BRIAN: Okay, on income here is what the bankers and brokers will do and we hope KVI listeners that you stay away from this. It's inappropriate, it's financial malpractice to have you with an accumulation plan when you're over 50-years-old. That's strike one.
BRIAN: Strike two is when the bankers and brokers use what's called the Rule of 100. The Rule of 100 says that if you're 65-years-old, you should have 65 percent of your money in bonds or bond funds. That's problematic in two areas. With low interest rates, that means you have 65 percent of your money, your investible funds earning almost nothing, almost nothing 'cause interest rates are so low but the bigger problem has to do with something called interest rate risk. If I could show a chart over the radio I would. We have a 100 year history of interest rates on the 10 year treasury yield.
BRIAN: And it shows that we are at new lows. Ten year treasury is around one and a half percent. When interest rates are at or near all time lows, interest rate risk is at or near all time record highs. What is interest rate risk? Interest rate risk is the amount of principle that you lose when interest rates go back up, so for bankers and brokers to tell you that your safe money is in bond funds when interest rates are at all time lows is like a math teacher telling the class that two plus two equals 10. It's ridiculous.
BRIAN: It is demonstrably false. We can show and no one can disagree. It's not an opinion when interest rates go up, you lose money on bond funds. When interest rates go up, you will lose money on bond funds. Interest rates...
MIKE: Now...
BRIAN: Eventually will be going up.
MIKE: Do you think that that's just because it's standard procedure on what they're trained on or do you think they may be pushing bonds that they're supposed to get rid of?
BRIAN: Two things. They've been trained on it, so they preach it...
BRIAN: But the bigger thing is they don't get paid on money that's not at-risk. The biggest reason why your banker or broker has all of your money at-risk is because they do not get paid unless your money is at-risk. Bankers and brokers cannot get a fee, a management fee, a portfolio fee on CDs, treasuries, corporates, municipals. They only get a fee, a management fee, if your money's in funds. Bond funds, stock funds, et cetera.
MIKE: Makes sense.
BRIAN: Okay, in contrast to that we have a distribution plan.
BRIAN: Now a couple years ago Mike, I had a skiing accident and ripped my knee. I needed a meniscus.
MIKE: Which time? [LAUGH]
BRIAN: Yeah, I've done it three times on my right knee, so I needed meniscus repair and I needed an ACL reconstruction. I wouldn't go to a dentist for that. It's not that dentists aren't good people. They're nice people. They're professionally trained but that's not what I needed. If you're over 50-years-old and you're using an asset allocation pie chart and dealing with a banker or broker, it's as foolish as having an ACL tear and going to a...
BRIAN: And going to a dentist to try to have him or her fix it.
BRIAN: Okay, so the six essential parts of a plan is to: number one, deal with the fiduciary, number two, make sure that you have the income that you need and want for the rest of your life. I wanna finish this topic by saying...
BRIAN: That if you have not retired yet you owe it to yourself to do the math. That's what a distribution plan does to see if you can retire. Let's see if you can retire. It's a win-win because if you can retire then great but if you can't retire then we build a plan to help you get to that point but thank goodness you didn't go into retirement and find out that you're short and then what? Have to reenter the workforce 10 years later? It's very, very important, number one, to do the math.
BRIAN: Have us help you do the math to find out if you can retire and if... do you wanna make a point?
MIKE: Well, I was gonna say if you are... and I don't advise people to go cliff jumping; right? But if you're gonna go cliff jumping, you're gonna check the depth of the water before you jump off a cliff; right? That just makes sense. So instead of just jumping off and hoping the well is deep enough or the water's deep enough, you need to check it and make sure that it's even safe to go in there. You shouldn't enter retirement unless you know that you have the room, that you have the assets...
MIKE: And you have the plan that's gonna work to fit your lifestyle that you want. Is that right Brian?
BRIAN: Yep, that's a good point. Okay, so there's two very important points. Number one, if you haven't retired yet let's run the numbers to see if you can. If you are in retirement, I'm gonna say this twice 'cause this is very important. If you are retired, no matter how much money you've got, you can't know how much you can draw from your portfolio until you do the math with the distribution plan. You can't know how much you can draw.
BRIAN: So we can run the numbers for you to find out how much you can draw for the rest of your life so you don't run outta money before you die. The number one fear in this country is running outta money before you die. Our clients don't have that fear because they cannot only see how much they can draw, they can see where it's coming from. This is priceless, precious information financially in retirement, so that you don't have this lifelong, end retirement anxiety of wondering if you're drawing too much. One quick story. There was a... I think you've heard this Mike...
BRIAN: Where a Boeing guy came in and saw me last year. He was over 70-years-old, still working at Boeing. He had six and a half million dollars and sadly, he told his wife she could not spend more than $15,000 dollars a month because he had this anxiety of running out of money before he died, so sadly, he has really messed up his retirement 'cause he could have retired many years ago but he didn't run the numbers like I'm talking about. All right, in the six parts of a financial plan I should have started with this.
BRIAN: Number one is to deal with the fiduciary. Number two is to make sure that you have the income that you need and want for the rest of your life. Number three is tax minimization but Mike, I wanna dial this all the way back. I shoulda said this at the start of the show and that is what is not... what is not... here's what a plan is not and that is when I call and ask... when people come into the office and I ask them if they have a plan or a financial plan, they say, "Yeah, I've got a broker.
MIKE: [LAUGH]
BRIAN: And then I wait for more information and that was it or "Yeah, I have a banker."
BRIAN: And I said no, I didn't ask who is managing your money. I asked if you had a financial plan and they said, "Yeah, I told you I've got a banker or I've got a broker." "I've got a financial advisor." That is not a plan, number one. That is not a plan, so it's very important if you are retired or you're within a few years of retirement that you have a plan, that you're dealing with a fiduciary, that you have the income you need and want for the rest of your life and then this next point, tax minimization.
BRIAN: Comprehensive tax minimization. This is... this is very important, so there's three part to this. Actually, there's four parts to it. Part number one of comprehensive tax minimization is to look on your Schedule, your tax return, your 1040. Look on lines eight and nine and this is where... this is where you have dividends and interest that show up and sadly, a lot of bankers and brokers have reinvested dividends and interest on their mutual funds for their clients.
BRIAN: And so they're paying taxes inefficiently on money they never even touched and this can be $5 to $7,000 dollars a year that we fix by simply doing one of two things. Either number one, we will have people receive that income instead of reinvest it or if you want the benefit of reinvestment, we put those in retirement accounts but we save our clients $5 to $7,000 by doing that because ideally, this is the ideal...
BRIAN: The only money we want you taxed on is the income that you're spending, period. So that's number one. The second part of comprehensive tax minimization which is point number three on a six-part financial plan is to look at your... your IRAs. Now this next point is typically the biggest, most... this is where we save clients the most money Mike. So let's say KVI listeners that we are managing $250,000 dollars of your IRA and in 20 years we grow it to $800,000. You're ecstatic; right? This is a trick question.
MIKE: Yeah, but I mean, I'm just gonna play along and I'll say yes, I am ecstatic.
BRIAN: You're ecstatic 'cause we just took your IRA from $250,000 in 20 years, it's now $800,000. Tax-wise you're not ecstatic at all 'cause you... now you're in your mid 80s and your required minimum distributions, we have you in the top tax bracket and you are not happy because you realize with an epiphany, that you could have paid tax on it at $250,000, so to say things differently, we tell clients, do you wanna pay tax at $250 or do you wanna pay it at a higher amount?
BRIAN: It's not all or none. It's not that extreme but what we do is run the math. There's a theme here.
MIKE: [LAUGH]
BRIAN: Our approach in retirement is mathematical. It is quantitative. It is computer driven. Forget about Brian's opinion or Mike's opinion. We run the numbers and we can objectively, factually tell you how much money you should have in your different buckets, 'cause we use a bucket system. We have a laddered approach in our distribution plan but we also have a very specific, to the dollar amount that you have in an IRA...
BRIAN: And convert it from an IRA to a Roth.
MIKE: I'm gonna pause you right there. For those KVI listeners that are just tuning in, you're listening to Brian Decker here from Decker Retirement Planning. On the show is Decker talk radio's "Protect Your Retirement" and he really is hitting some huge points here that mathematically, factually, opinions aside, these are things that you can do. You can look at and you can know on your retirement, your plan. What is your financial plan and really on this point specifically, how to minimize your taxes. I mean, you don't wanna go down the wrong path here. You wanna do the right things. Be proactive with all this, so this is huge and we appreciate Brian Decker from Decker Retirement Planning from Kirkland. And giving up this outstanding information.
BRIAN: Okay, so this is hard to describe on the radio but if people could look over my shoulder they would see a distribution plan where the portfolio has laddered, principle guaranteed accounts and we have a bucket one. In the first bucket, it's responsible for your principle guaranteed income for the first five years. The second bucket, bucket two is responsible for your income for years six through ten. Bucket three, for years 11 through 20 and then we have your risk accounts. With your risk accounts, that's where we put your IRA.
BRIAN: Because we want your IRA to grow tax free.
MIKE: Free. I was waiting for...
BRIAN: Not tax deferred, tax free, so an IRA doesn't grow tax free. This is where over five to seven years we convert that account from an IRA to a Roth. Why that account? Because in the first, second, and third buckets the returns are too small and you're taking the money too soon to get the benefit of a Roth account. What are the benefits of the Roth account? The Roth account grows tax free. It produces income back to you tax free and it transfers to your beneficiaries tax free.
MIKE: Now Brian, is it true that you don't have to pay RMDs, required minimum distributions on an RMD as well?
BRIAN: Right. We...
MIKE: Or on a Roth?
BRIAN: Not on a Roth. You've... that's after tax money.
MIKE: So that's one less thing to worry about; right?
BRIAN: Correct. And so if someone has... and someone that is looking for how much money they should convert from an IRA to a Roth, if you ask your banker or broker, chances are they won't have a clue. We have to the dollar specifically how much you should have converted from an IRA to a Roth in your plan, so that is point number two.
BRIAN: The difference in tax that you pay on $250,000 and $800,000 is over $100,000 in taxes that's saved. So this is where we save our clients a lot of money is using the Roth IRA and converting IRA to Roth. This is huge. That's point number two for tax minimization. All right, point number three is estate tax planning. In estate tax planning, these are for people who have over two and a half million individually at the state level. Five, a little over five million at the federal level for State of Washington.
BRIAN: If you want to... there's two different philosophies on estate taxes. One philosophy KVI listeners is where... and we have an equal, about 50/50 split on this. Half of our clients will say, "Well, whatever Johnny and Sally get after we're done with the money, and Uncle Sam taxes it is more than we ever got, so we're not gonna do any tax planning or estate tax planning." That's... I would say half our clients feel that way. The other half say, "It's not about getting this... Johnny or Sally more money."
BRIAN: "It's about me rolling over in my grave after paying a lifetime of taxes and then for the government to take another hunk of flesh after I'm dead on the estate." "It's not about Johnny and Sally." "It's about I've paid enough tax." "I'm done with that." So estate tax planning is very simple. We help people accomplish that with different strategies, so that's point number three of four. The fourth and final point of comprehensive tax minimization as part of your financial plan has to do with the larger accounts.
BRIAN: So accounts that over $3 million in size, we will at least run by you the Nevada Corporations strategy. The Foundation strategy. The Family Limited Partnerships strategy and we want you to be able to see the advantages and disadvantages of those options. You... it may not work for you. The foundations have worked for the Clintons. Just sayin'.
MIKE: But real quick, I mean, what's the point of doing the foundation or...
BRIAN: Here's why.
MIKE: Doing these things. I know that those are very specific investment strategies...
MIKE: Or planning strategies but what in a broad brush statement are they actually doing?
BRIAN: Well, there's different ways that you can receive your income and receive that income in a taxed advantage way, so KVI listeners if you have not heard of those three options and your assets are more than $3 million in size, you have an opportunity that's being missed because of foundations, Family Limited Partnerships, and Nevada Corporations are popular ways that they're strategies with advantages and disadvantages but you should check them out to see if they're a fit for you.
BRIAN: So Mike, I just went through for KVI listeners, comprehensively how we can shrink taxes as much as possible, so we're actually half-way done with the six parts of a financial plan. We've talked about what it's not.
MIKE: Mm-hmm.
BRIAN: A financial plan is not having a broker.
MIKE: That's correct.
BRIAN: That's not a financial plan.
MIKE: That's correct.
BRIAN: Or a banker but there's six parts to a financial plan and in this segment we've talked about dealing with a fiduciary, number one. Generating the income that you need and want for the rest of your life and we just covered tax minimization.
MIKE: Let's go to point number four.
BRIAN: Point number four is risk reduction and that's gonna take up all of one radio segment, all of it.
MIKE: Should we save that for the next show?
BRIAN: Yeah. So I'm gonna finish up today's program skipping to number five, asset protection. What is asset protection? After taking a lifetime of gathering assets, you've got to protect them, so this is car insurance. This is home insurance. This is life insurance. This is liability insurance. This is... these are things that need to be in place. Now we don't have to tell people to get car insurance, it's the law.
MIKE: [LAUGH]
BRIAN: It's just the law but life insurance, now here's an example of us being a fiduciary again.
BRIAN: We sell life insurance. Ninety-five plus percent of the time we don't sell it because it's... by the time you get to retirement life insurance, a lotta times helps you get to the finish line. Now we use life insurance when someone is retired generally two very important ways. One is income replacement, so Mike, KVI listeners, if you... if spouse one has a pension of $70,000 a year and social security of $30,000 a year...
BRIAN: And the other spouse has $35,000 in social security, here's the tragedy. When spouse one dies and that.... there was no survivability with the pension that means that the pension of $70,000 dies with him or her and the social security laws are that you get the larger of the two, so you'd stay with $35,000. A $100,000 dollars in income just vanished. That's a lifestyle change. That's not just some little thing.
MIKE: Right.
BRIAN: That's huge.
MIKE: Right.
BRIAN: So no matter what age you are...
BRIAN: We wanna make sure that the surviving spouse is protected and a lotta time we will use life insurance to plug that gap, so that's example number one. Number two is we use life insurance quite a bit for estate planning. Now I've seen estate planning done very well. I've seen sadly, estate planning bungled like the Keystone Cops, so the islet, the Life Insurance Trust is where life insurance on a second to die life insurance policy is paid for by gifting money outside of the estate.
BRIAN: Having the recipients of those gifts using the Crummy law provision, pay for the insurance premiums on a second to die policy of the... usually the parents and then when the parents do die, the life insurance benefits come due outside of the estate. Let's say that there's a $15 million dollar estate. KVI listeners, I've seen this happen where life insurance is held in the estate, so you have $2 or $3 million that comes due. Now you're not being taxed on $15 million.
BRIAN: Now you're taxed on $18 million and it's ridiculously pathetic. It's financial malpractice to have an advisor set up a plan to increase your estate taxes. It's silly, so we don't do that. It's held outside of your estate. Your estate estimated estate tax bill comes due in cash when you die via a life insurance trust and money is there to pay for the estimated estate tax which by-the-way, is owed nine months from date of death in cash.
BRIAN: So rather than trying to break up a business or a farm or a company or selling property, this is something that allows someone to... to replace income.
MIKE: And real quick for those KVI listeners just tuning in, this is Decker Talk Radio's "Protect Your Retirement." We're listening right now to Brian Decker from Decker Retirement Planning out of Kirkland and we're going over and we're defining very specifically what is a financial plan or more specifically, what is a retirement plan. Now we've talked about fiduciary. We've talked about how you gotta draw income.
MIKE: We've talked about tax minimization. We've talked about just asset protection right now. We're going to continue to talk about more things that are relevant to what his a financial plan but I do wanna remind the KVI listeners if you're just tuning in now, you can go to the website, www.deckerretirementplan.com and you can start the show over. We post it every week right after the show airs, so you can hear the full segment over and over, as many times as you want because this content is gold. I mean really, it's... we're probably one of the most specific radio shows out there in finance but we want to be specific; we want to be measurable, and we want you to have information that's tangible.
MIKE: That you can actually use and not just some feel good ideas, so Brian, let's keep going.
BRIAN: All right, so we talked about life insurance and how we use it. We've talked about car insurance and home insurance. The last one is liability insurance. Liability insurance is the umbrella policy. It's the rider on your home owner's insurance that gives you an additional, typically million dollars of liability coverage that is very inexpensive, $4 or $500 dollars a year for an extra million dollars. Why would someone want that? Because when you bump someone in the parking lot and this is a true story. Gosh, this is three years ago now.
BRIAN: Client bumps someone in the parking lot, Safeway parking lot. Bear Creek and Redmond. Our clients are very nice people. They got outta the car, saw there was no damage on either car, politely went up and wanted to see if the gentleman was okay. He already had his attorney on the phone and when asked if he was okay, he said, "I don't have to answer that now but I need you to call my attorney and send him a net worth statement. Let that sink in. A net worth statement. And he was right.
BRIAN: It was required by law to send in a net worth statement and then the end was he didn't sue but he could of. I just want you to know we live in a very litigious society and it would be a tragedy to take a monster hit like that when you don't have liability coverage or we had this situation where a friend of our daughter was bouncing on our trampoline, landed on her neck, hurt herself. She had to go to the doctor. She didn't break her neck but I was holding my breath.
BRIAN: Now I did have liability insurance but I was worried about the girl. We were friends with the parents. You just don't need that in retirement. By-the-way, you probably won't have a trampoline in retirement either.
MIKE: [LAUGH] Well, grandkids come over. I know my grandparents-in-law, they've got a trampoline but I do know they have liability insurance too or I certainly hope so. I should probably ask them about that 'cause you just don't want the extra stress. Retirement is supposed to be enjoyable. You're supposed to have peace of mind and you shouldn't have to worry about all the different ways that your life can be ruined. Whether it be financially or legally or whatever it might be.
BRIAN: Okay, so now the fifth part of a complete financial plan and by-the-way, I'll just do a quick review. What a financial plan is not is to have a banker or broker.
MIKE: So you're saying it's not...
BRIAN: That's not a plan.
MIKE: It's not good enough just to have a guy.
BRIAN: Have a guy managing your money. Managing your money is not a plan. Six parts of a comprehensive financial plan is number one, deal with the fiduciary. Number two, make sure you have the income that you need and want for the rest of your life. Number three is to have taxes comprehensibly minimized. Number four is risk reduction.
BRIAN: Which by-the-way, we're gonna cover next week. Comprehensive risk reduction.
MIKE: This is... that's a huge topic.
BRIAN: Yeah, so we're gonna dedicate the entire next show to that.
MIKE: Yep.
BRIAN: Number five is asset protection. We just talked about that and then number six is liquidity, so I'm gonna cover liquidity and I'm gonna go back to generating income to fill in some time and talk about the Four Percent Rule that I should of and I didn't. Liquidity. It makes no sense to have all your money liquid because that means it's not working for you. It also makes no sense to have all your money locked up. That's equally silly.
BRIAN: We define liquidity as money that is available next day, no penalty. That's how we define liquidity. Next day in your savings or checking account. We wanna warn you that in a financial plan life happens, life happens, and you've gotta make sure... you've gotta make sure... by-the -way we just looked at an Osprey that's sitting on a branch of a tree right outside of our office. Everyday we see this Osprey, or I do and he goes out and he kills a fish in the bay here, in Lake Washington. Takes it up to this branch.
MIKE: Your financial plan shouldn't be that fish.
BRIAN: Yeah, no, but we wanna make sure that for a liquidity, that because life happens that you carve out... we target around 30 to 40 percent of the plan that can be next day liquid. Does that mean it's in cash? No, that doesn't mean that. We do have emergency cash as part of anyone's plan. That's part of the plan that people have been for years, they keep a certain amount in cash. If it gets more than that then they think of taking trips. If it gets less than that then they hyperventilate until it's replenished.
MIKE: [LAUGH]
BRIAN: But we have liquidity parts.
BRIAN: Liquid parts of the plan that if they had to come up with a big chunk of cash that they could. Okay, that's all I wanna say on liquidity. The reason that we talk about liquidity like this is because we have competitors in our industry that sadly, will lock you up. We hope that have written down the six components. The sixth one being liquidity because each component is very, very important. Now I wanna go back to point number two Mike...
BRIAN: which is the income component. In the distribution plan we distribute income in a distribution plan by using principle guaranteed accounts to distribute income. Bankers and brokers don't do that. Bankers and brokers will use the Rule of 100 like we talked about in this segment to identify if you're 65-years-old, you should have 65 percent of your assets in bonds or bond funds and from your portfolio, they will tell you to put your safe money in bond funds.
BRIAN: We've already talked about that and here's the killer and I'm gonna spend the rest of the radio show on this.
MIKE: This is huge. If we have to go a little bit over to the next radio show, I know the Four Percent Rule and what you're about to talk about is huge.
BRIAN: Right.
MIKE: Super important.
BRIAN: The Four Percent Rule is how bankers and brokers decide how much money that you're gonna get distributed in retirement as income. In my opinion, the Four Percent Rule is the most lethal, dangerous, destructive financial advice out there.
BRIAN: And in my opinion it's responsible for destroying more people's retirement than any other piece of financial advice. Here's how the Four Percent Rule goes. The Four Percent Rule is where I would say to you KVI listeners the stock market has been around, has averaged around eight and a half percent for the last 100 years. Bonds have averaged around four and a half for the last 36 years. Let's be really safe and just draw four percent from your assets for the rest of your life and you should be fine.
BRIAN: The problem with that is that works in up markets but not during flat market cycles, so if I were to show you a 100 year chart of the Dow Jones, it would show that stocks cycle. They do not trend, they cycle. It's not semantics. Stock market seems to go in 18 year cycles, so from 1946 to '64, there was a nice Bull Market. From '64 to '82, 18 years of chop, just flat chop. Then '82 to 2000, the biggest Bull Market we've ever had...
BRIAN: And from since January 1, of 2000, even though the markets are at an all-time record highs which by-the-way just recently happened. Most people haven't made a lotta money in 16 and a half years, so let's say that KVI listeners you win the lottery. You get $4 million dollars and you invest that money January 1, of 2000. Now I'm gonna cover two things at once Mike, here. I'm gonna cover the Four Percent Rule and also why drawing income from a fluctuating account is financial roulette that will destroy your retirement.
BRIAN: Do you wanna... should I keep going?
MIKE: I've got a question but I'm gonna save it for the end here because this is so important. I wanna keep going.
BRIAN: Okay, so on the... on fluctuating accounts, this is common sense, it's mathematical. If you draw income from a fluctuating account, you compromise the gains, you accentuate the losses when you pull money out of an account that's dropping, so it is financial roulette. It's something that a financial advisor should not be advising you to do but back to the Four Percent Rule. You get $4 million dollars. January 1, of 2000 you retire.
BRIAN: Great news. Bad news is 2000, '01 and '02, the markets dropped 50 percent but you lose more than that because you're drawing four percent a year, so now you're going into '03 down 62 percent. The good news is the markets double from '03 to '07 but you don't get all that because you're drawing four percent a year and then when the market's hammered... get hammered in 2008 by 37 percent and you take four percent on top that you are done, you're done. In 2009, we saw evidence, factual evidence.
BRIAN: All the gray-haired people that were going back to work because they had to. They had to sell their home. They had to move in with the kids. They had to go to Plan B because their retirement just go crushed by their banker or broker that told them to use the Four Percent Rule. They went back to work at banks. They went back to work at fast food. They went back to work at Walmart. They had to go to Plan B, so we wanna emphasize that the Four Percent Rule, in fact Mike, this what makes my blood boil. The guy who invented the Four Percent Rule in 2009, came out and retracted it.
BRIAN: Said, "That is was dangerous." Said, "That he himself personally would not use it." And yet the bankers and brokers still use it today as a distribution strategy. This makes my blood boil. It is financial malpractice to have a distribution strategy that's been totally retracted and denounced by the founder of it, so in contrast to that, we in our distribution planning use buckets, buckets one, two, and three. Those are principle guaranteed accounts. They're not fluctuating.
BRIAN: So the most important thing we tell our clients is we show them the bucket system. We show them the laddered approach and then after going through 20 years of income, KVI listeners, after we describe it, I ask the question now do you see why our clients sailed through 2008, unaffected, unaffected. Because we were drawing income from principle guaranteed accounts. All the clients that did the planning, none of them had to go back to work. None of them had a lifestyle change in 2008.
BRIAN: Think of that. From October of '07 to March of '09, there was over a 55 percent drop in the markets and our clients sailed through that period.
MIKE: Ouch. But we’re out of time now. We can continue this next week.
MIKE: Decker Talk Radio with Brian Decker from Decker Retirement Planning. To hear more or read more, you can rehear this show... relisten to this show at deckerretirementplanning.com. You can read the articles that we're writing about these very topics that go into more detail or you can write us, questions@deckertalk.com. They come right to us and we... you're able to respond. We wanna hear from you. We wanna talk about the topics that you want to hear. That's all we care about. We want this to be a good community service and give you actual valuable information that you guys can take to your bankers or brokers or whoever you're planning with and have tangible, actual information.
MIKE: Thank you so much for listening. Tune in next week as we continue our cast here, our show for what is a financial plan as we define the very specific details. Until next week this is Mike Decker...
BRIAN: And Brian Decker.
MIKE: Have a great week everyone.