Ron: Good morning Business Growth Innovators. It’s a little bit of time since I’ve been up here, but I’m glad to be here. The situation out there financially is pretty crazy, as it always has been. We’re in pretty volatile times. A little background on myself was I started my insurance agency in 1996, worked for a large insurance company prior to that for about 7 years. Prior to that, I owned a production company. So I was put out of business with my production company by the wonderful Walt Disney Company. It was a good thing though. But, I do refer to Mickey Mouse as the rodent, affectionately.
A couple things I want to talk about today, and not bore you to death, although money is a serious topic. I always say to my clients that money is probably one of the most emotional things that we have or try to get in our lives. We have great attachment to our money and hopefully our future. But the real truth is money is very emotionless. Money is just about math.
Money is really just trying to get your income, and part of your income to work for itself. If you do that over many, many years, you can succeed. There’s a degree of success. Some people can succeed tremendously, and those who have pensions, remember I asked you a couple of weeks ago, who here has a pension? A few of you raised your hands. But the more telling question was, who here has a pension that actually is going to set them up for life, for the rest of their lives when they do retire? Nobody, of course, raised their hand on that.
Very few people anymore today retire with full income, and it makes sense too. Because, as I’ve said before, and I’ll say it again, because it is germane to the topic. When they first set up pensions and retirement plans for you, when we worked in the corporate world, the expectation of longevity, of life expectancy, was only 3 years past retirement. So for our grandparents, when social security was set up, all of these programs were set up, quite honestly, they didn’t expect you to live very long. That’s changed dramatically. Today it’s very common for people to live 25, 30 plus years past retirement.
There has now become a new phrase in the industry when it comes to retirement and retirement planning, and it’s called longevity risk. The longevity risk is the single most important thing you need to take into account when it comes to your retirement, because you can’t always count on working physically or mentally. Jim. No, excuse me. No, he’s the smartest guy I know. That’s why I just brought that up.
There are 5 major factors to the longevity risk that we all have to take into account, and the first one is the withdrawal rate risk. As you get near or on retirement and you’re in your withdrawal phase, the rate at which you withdraw vs. the rate at which you’re returning on your money. If you can take out as much as your money is basically earning, you can live in equilibrium. So you basically know that you’re not going to run out of your money. The problem with most is how do you gauge that? How many years do you know you’re going to live? What is your withdrawal rate is the big $64,000 question. Obviously, it’s best to know what you can take in income before you get there. So you really need to make plans for income because that really is the key.
The second thing is the rate of return, the risk of the rate of return. So it’s great to have money. It’s great to save. If you don’t save, you won’t have anything. If you don’t properly invest, needless to say, there’s nothing going to be there when you’re 65 or 70 or 75. But you have to get a return on your money, and it has to be a relative return, and it needs to outdistance inflation. Although Will Rogers said, “I’m more interested in the return of my money than the return on my money.” With all the losses we’ve had in the markets, and real estate, and whatnot, sometimes just having the money you’ve saved is a good thing. Then there’s the sequence of return, the risk of the sequence. What that basically means is the timing.
Are you in the red zone? The red zone is basically, are you in 10 years of retirement or already in retirement. OK. So your needs at that point are very different than the person who’s outside of the red zone, maybe still has 20 or 30 years. For some of you, like myself, you’re in the red zone. For others, you have children, or grandchildren who are well out of it with a very different approach and long term plan for them. There a great lead for me, even if it’s just a few hundred dollars a month. That type of person is a great lead for us, and they need to get started, and they need to have a plan that actually will work.
Fourth is market risk. Obviously this is a huge concern. The markets, if you had your primary retirement in the last 15 years, you’ve not really got the kind of return that you were promised, or that you were hoping for. There’s been a lot of volatility in the market. Hopefully it’s bouncing back, who really knows. I will say this though. If we lose our world currency reserve on the dollar, if we lose that status, our markets are going to be really long term in trouble. That’s huge, because see, the world trades in dollars. If the world doesn’t trade in dollars, then we’re just another market.
So our markets have always been relatively strong and growing because of the fact that we are the world standard. If we lose that, based on rising debt and out of control negative economy, already, Asia is deciding to trade on some levels with itself. Not in dollars. So this trend is already happening. If this completes all the way through, then if your primary investments and retirement is in the market, you may want to reconsider that, just because it will have a dramatic effect on the markets. Not necessarily on any one company, depends on where you stand in your marketplace.
The last thing and most important from a retirement standpoint is running out of money. OK. If you live 3 years past retirement, you’re probably fine. OK. But if you live 30 years past retirement, you better have planned for income that you can’t outlive for some of your income. OK. There are a lot of ways you can do that. Now money under management, I have an associate and partner who’s great with money under management. I personally do not handle the stocks and bonds and really love passing that over to my partner. They are part of a group called the Harbinger Group out of the Midwest. Very aggressive, very talented group of people.
The problem with going into the conventional institutions is they generally will stick you into mutual fund and it kinda dummies down your money. The average mutual fund returned over the last 15 years right around 3.5%. Well let me tell you something, 3.5% will not get it done, especially when you’re taking all that risk. Some people will tell me; well I’m in really safe mutual funds and programs because that’s what my broker is doing for me.
Well let me tell you something. At the turn of the century some of the safest mutual funds had Enron in them. There is no absolute safety in the market. Trust me. I’m not anti-market. I do own stocks. Crystal and I do own stocks, but that’s not the issue. The issue is, where is your retirement money, and how are you counting on it to produce income for you for life? OK. There are some other solutions besides the market. There are some insured solutions which I’m very high on. There are some great programs, particularly for the person who has more than 15 years still. Terrific programs and the best part about it is there are some great programs that can create tax-free income.
The best income is free. The second best income is tax- free. OK. So free would be the kind of matching dollars that you work for a corporation and you have matching dollars in your 401K. That’s the best kind of retirement money you can spend up front, but anything over and above the matching dollar is no longer free. The next best thing is putting money aside for tax- free income, because if you need $60,000 of income to supplement Social Security and that rental property that you have and you’re piecing this all together. If you could get $60,000 of tax-free income, that’s like making $90,000 or $100,000. But if you need $60,000, you better have an income of $90,000 or $100,000.
You gotta think this through, and there are a lot of solutions. One of the biggest things I always say, whoever’s the bank wins. In life and in high finance, whoever has the money holds the cards, right? Whoever is the bank is the winner. You know there really is a way to create your own bank, get 4% guaranteed on your money, and borrow against it while it’s still returning 4% plus dividends? There’s a way to create your own bank. Not short term, long term. This is European finance that just hasn’t caught on in America because we are such short term thinkers. That’s our problem, Americans, we want it now.
The stocks have to perform now, etc., etc. You have to take on a much more long term view of your money. Lastly, when you’re talking about creating, whether it’s your own bank, The Duncan Family Bank that can benefit generations to come, you should have it. Crystal and I should. Everyone here should. You should understand what it means. What’s that?
At the end of the day, what you’re really after, and by the way, those insured solutions, a lot of the ones that I love the best, over the last 25 years they’ve averaged over 8%, not 3.5%, with not the kind of market risk. You’re indexing your money with some of this product which basically means you’re paralleling the market, but you’re in the insurance company’s portfolio, not a mutual funds portfolio. OK. Well that’s a huge difference, again that’s a long term topic. It’s not a one size fits all and there’s a lot of different ways to go, but in the end, what you’re really after, if you want to retire ever remotely well, is you’re after income.
It’s great to say I’ve got $300,000, $400,000, $500,000 dollars in my IRA rollover from a previous employer and I’m doing real well with my business and whatnot, but even a million dollars in today’s market conventionally, if you’re going to take income that you have to now live on. Let’s say you’re 70 years old and you’re going to live to 100. How can you take that income and not eat up the principal? You know that there are 6 trillion dollars, right now, scared to death, in retirement funds making less than 1%. 6 trillion dollars. Why is that? Because CDs aren’t paying anything, so let’s say you could get 3%, which 3 times better than the average CD. On a million dollars, that’s still only $30,000 of income without eating up the principal.
You need to have a better plan. Conventional wisdom, the way that we’ve been told over all these years may be conventional, but I don’t think it’s that wise, because people aren’t succeeding. 4% or less actually retire today on $48,000 of income. 4% or less. Two minutes, thank you. OK. I’ll go to questions.
Business Growth Innovators Member: What’s your favorite inflation rate on RCA?
Ron: Well, it’s pretty low because the interest rates are low as well and it depends on what market we’re talking about. Here’s the real issue. Is the inflation rate going to skyrocket and what’s going to happen to those interest rates? The cost of money right now is very low, one of the reasons why the return on money is very low. On any instruments that are relatively guaranteed and inflation’s running only a percent and a half, but what if it was running 4%, 5% or 6%. Now if you’re looking to sell your home in 5 years, you really want it to inflate. But pretty much if you’re looking to live and buy gas, and food, and what have you, and not sell your home, you really hope that the interest rates stay low and inflation stays low.
But that has a dramatic effect on your long term gain on your money. So how do you get long term gain on your money in a very low interest rate environment? That’s a strategy that you really have to think through. It’s not enough to just say anymore, I’ll just stick my money in the market and trade stocks and the long term view of the market is this and blah, blah, blah, blah, blah. That hasn’t worked in the last 15 years. We’re just in a different world today and it’s going to get worse if we lose that monetary reserve status. Any other questions? OK. Thank you very much.
18555 Santa Andrea
Fountain Valley 92708