Listen to this week’s episode of the Dr. Friday Show, broadcast live every Saturday at 2:00pm Central on on 99.7 WTN! Hank Parrot joins the fun and together they talk about tax an money topics such as:
- Estate Planning
- What’s the Biggest Determinant of Volatility?
- What are Annuities?
- Can You Still Lose Money After Retirement?
- Healthcare Costs
- International Stock Investments
- How Index Funds Work
- Earned Income Credit
- Why You Should Be Honest on Your Returns
Announcer: 00:01 No, no, no. She’s not a medical doctor, but she can sure cure your tax problems or your financial woes. She’s the how-to girl. It’s the doctor Friday show. If you have a question for Dr Friday, call her now. 7370-WWTN, that’s 737-9986. So here’s your host financial counselor and tax consultant. Dr Friday.
Dr. Friday: 00:30 Good day! I’m doctor Friday and the doctor is in the house. It is so awesome outside driving around in my convertible. Yeah, life is tough. Someone’s got to live this life and I am volunteering so it’s a beautiful day. And you know what, I’ve got one of my best buds showing off his sexy legs. We’ve got Hank Parrott.
Hank: 00:52 Hi there! Speaking of sexy legs, yes indeed.Any anybody’s legs look good on the radio. So you got, you got that going for you, right?
Dr. Friday: 01:02 That’s right. I mean what does it, the doctor John Haggard always says about Dr. Electric. He’s got the face for radio. So I’m sure Joe, you appreciate that comments and we’ll let that go from there. Cause I know you and you will get back. All right, so we are alive here in studio, obviously talking about some of my favorite subjects, taxes. And since my bud Hank is here, we’re going to talk about estate planning. Not just the planning, but what will happen if you decided to retire today? What’s your plan? Retire today, retire five years from now, 15, whatever it is. Can you really afford to retire? Especially with the current marketplace, you know, we’re looking at our cost of living seems to be continuously going up. Yet, I don’t know if my retirement account is keeping up with the cost of living of things. So, Hey, talk a little bit about this. What’s snugly, what do we need to do?
Hank: 01:51 The markets have been a, it’s been very volatile but in a good way of late. So we’ve had, if we look over the last, say 18 months, approximately, so over 2018 the the markets were down about 4.59%. So if you’re looking at the SND 500 index was down just under five, well a little over four and a half percent for 2018, then since that time it’s up about 17%. I think it is now year to date with some, you know, again, we had a nice little run, then it flattened out then and down and then back up again. So volatility, we don’t mind that. Positive volatility, we love in fact getting those big high years. It’s those negative ones we don’t like. So we want to, we want to balance out the volatility by the way that we construct our portfolio.
Hank: 02:36 So the biggest determinant of what kind of volatility, what kind of risk you’re going to have in your portfolio. And of course, what type of return you’re going to have, how much you’re going to get is about asset allocation. That’s the biggest determinant. So if you’ve got your asset allocation models down correctly, you’re going to be able to get the best return with the least amount of risk. And we’ve got 60 years of Nobel prize winning academic research showing us how to do that starting with Dr Markowitz back in 1990 and Doctor Fahmy here most recently. So the models that we have that we utilize for the portfolios, that’s our goal is to minimize the volatility as we go, help you to attain and maintain your standard of living quality of life no matter how long you live, starts with the financial engine of your plan. And then from there, having a plan, things like once we’ve gotten the returns that we’re looking for and minimizing volatility at the same time. Another piece would be tax efficient investing. So this is where we’re looking to how can we invest in such a way to minimize taxes on our investments as well? And understanding how the tax code works is a big part of that.
Dr. Friday: 03:45 Okay. So one of the questions I’m often asked, because a lot of times people are like, no way am I ever getting into an annuity. Annuities, all I’ve ever heard is that they’re a bad chance. But I know for a fact that there are some that you, you talk about from time to time either on your radio show which will be tomorrow at two o’clock, 15, 10, and then he also has a live or a TV show, a news channel five plus, which I believe is still Comcast 250 or no, Comcast 250 which he does live on Friday mornings from eight to nine and then it repeats again a couple of different times throughout the entire weekend. So it’s called the Retirement Report, but you know, so what’s your, when someone says that to you, you know about a new yes, sorry.
Hank: 04:26 Basically you’re looking at out of about a thousand different annuity products. About 75% to 80%. So 7000- 5,800 are variable annuities. And yes, if you’re going to invest in the market, the problem with variable annuities, which have sub-accounts much like mutual funds, so you’re investing in the market, but with higher costs. These fees that you get with these variable annuities, you’re talking two and a half to three and a half percent a year. And sometimes even more than that if you’ve got additional riders and that on these products. So I would definitely avoid variable annuities and there we go. That takes some care about 75 to 80% of annuities. Then you have fixed annuities, fixed annuities are basically like cds. So if I’m making a looking at a three year fixed annuity and a three year CD or five year, five year, I’m just looking at rates, you know what’s going to be my trade offs here is what’s giving me the best interest rates.
Hank: 05:16 So right now you can get, for instance, I think a three year a fixed annuities paying around 3% and a five year I think you can get up to 4% on. So that gives you an idea as far as those fixed rates. And it’s the same as a CD. Basically. I put it in for the three years and at the end of the three years, if they give me a renewal rate that I like, I can renew for three more or I can just take my money and do something else for them. So that’s fixed annuities. Now we’ve just eliminated a bunch more. Okay. And how they used those compare. Now the next is fixing it now and those may may play a role, but that’s not going to be enough. At the rates that they’re paying on these fixed
Dr. Friday: 05:52 Like CDs they are very low. They’re not going to be high enough to really put a lot of money, probably in them more of a just he loves you have these little buckets. So some may go into something like that, but so fixed and variable, is there some other, yes.
Hank: 06:05 Okay. And so now in those we, we, we, we, again, we’re gonna limit, cause they’re not gonna keep you ahead of inflation and taxes. You’re going to lose purchasing power if you had your money all parked in bank or fixed annuities or cds and that kind of thing. So then they have what are called a fixed index annuities. And you gotta be careful here because there are different types of fixed index annuities and they have all kinds of different moving parts and you’ve, you know, again, you can get those that are not very good. They have some that have high fees,
Dr. Friday: 06:30 You hear a lot about right. The fees. So you know, when you really read into it the fees, a lot of people try to sell this product because I understand that the commission can be pretty, not this particular one, but annuities overall people get into trying to sell that a lot. Like probably a life insurance, I dunno. But annuities seemed to have a very high commission, you know, higher the commission typically the less beneficial to the individual. Absolutely. That’s a great thing. And do they, you know, I heard something that they don’t actually have to disclose their commission or whatever,
Hank: 06:59 Depending on the yeah. Depending on on the advisor that you wish if you’re just working with an insurance agent and that I don’t have to disclose that or, or even the brokerage agency, which, you know, they’re doing more and more of these. So if you’re working with a registered investment advisor, typically they are going to disclose what they make on anything that you’re in. But in fact our an investor advisory agreement for instance, would have in it what our investment schedule our fee schedule rather would be to based on what, how much money you’ve got invested and what kinds and what you’re invested in. And that would include disclosures about any annuities that you,
Dr. Friday: 07:34 And that’s because you don’t necessarily represent the company you’re selling for, but a fiduciary
Hank: 07:39 So, as a fiduciary, you’ve got to act in the best, best interests of your client and put their, their interests ahead of all others, including you. And that’s that, that’s the legal standard for a fiduciary. Now, having said that, when you’re looking at fixed index, you gotta look at uncapped. Okay. All right. They can’t, if they’ve got caps, then usually you want to walk to, you almost always want to walk through. By the way, I can’t even think of an exception. So let’s just say no, we won’t qualify. Walk the other way. All right. Uncapped fixed index annuities, and then it depends on the index and it depends on the company. You narrow it down out of a thousand different products out there of all the annuity universe, there’s maybe about 25 or 30 products that where you can benefit. And then understanding there’s some new white papers from people like a Roger Ibbotson, some, some academics out there.
Hank: 08:22 Doctor Schiller won a Nobel Prize in 2013. Who’s the other one? Jerry, Jeremy Siegel, another wisdom tree if you’re familiar with their, a ETFs. So one of the things when you get into them with this is understanding where they fit. If you are going to have them, that sometimes people will use annuities as a way to get guaranteed income for life. So sometimes that can play into it. For many, it’s also just I want to, you know, add it into a portfolio in place of some bonds. Okay. Cause the white papers that we’re seeing, the research favorites we’re seeing are showing that uncapped fixed index annuities outperform the bonds in a portfolio. And that’s where I wouldn’t want them to replace all the bonds. But that’s where you may blend that in as another asset class. They’re actually going to be a debate. Again, this gets into the company, but they can be safer than bonds in most instances. Yes.
Dr. Friday: 09:13 Cause I mean I think one of the reasons a lot of people purchase bonds is it’s a little safer than obviously the market or index or something like that. You give someone $20,000, hopefully you walk away with a $20,000, at least, hopefully with some interest on top. You know what I mean? But you secured that principle normally. Yeah, I’d say one always but…
Hank: 09:30 Yes. You want it as many guarantees as you can. You want that safety and understand with bonds. In fact, I did a a this week on, on the, on the TV show, on, on retiree report and I’m going to repeat it again tomorrow when we’re on a, we talked about the women, right? In this situation, investing basics for women in this came off of the vanguard website for investment advisors and it’s great educational piece and it gets into talking about all the different, you know, basically how to invest in the market, stocks, bonds. And then one of the pieces is understanding that bonds are not necessarily all that safe and understanding how bonds work. So you have stocks where you, you’re investing in a company, you have ownership of that company and bonds where you’re loaning that company money, you become a creditor, right?
Hank: 10:16 Right. So you’re, you’re loaning the company money and you are a, or a government entity is same thing. So you want to know what’s the credit quality of the company. If you see, I’ll give you a little tip. If you see on a mutual fund, if you’re looking on your 401k for instance, it’s a list of options or your, you’re on a website somewhere and trying to figure out where to invest. If you see high yield bonds and you look and you say, wow, look at these returns over the last three years and years were really great. Yes, but exactly, those are typically junk bonds. So they’re going to have very low credit quality within those kinds of bond funds and that’s going to be very risky. Now it’s not, you know, we want a good return on our money, but even more importantly, we want a return of our money, you know, down the road. So we want to get it back.
Dr. Friday: 10:59 That’s it. Yeah, because that’s, you know, otherwise, if you’re going to take that kind of risk, most people would say, well, go into the stock market. Right? I mean, at least then it’s a little bit more risky, but you have a higher potential of return. When someone says bond, you don’t think of it normally as being a risky situation.
Hank: 11:16 It’s supposed to be safer. It’s supposed to help reduce risk in a portfolio, but it’s the type of bond. So if you go high yield, that’s gonna increase risk if you go long duration bonds. So another would be like mortgage backed securities typically, or bonds that are over 10 years in duration. So when you look at bonds, look at, you know, are they short term, intermediate term or are they long term bonds or mortgage backed securities, which typically could be 2030 year bonds. They’re going to be much more interest rate sensitive. So even though we’re talking about rates maybe even coming down here this year a little bit surprisingly. Right? Yeah, the Fed is going to be, you know, just met and putting signals out that they may reduce rates as early as next month. So we might see some of that. And especially after last year when rates were going up is much or longterm bonds are going to be more interest rate sensitive. And so when it, and let’s face it, we have very low rates. I mean I was amazed the 30 year or not 30, 15 year mortgage rate of three and a quarter percent.
Dr. Friday: 12:15 It’s pretty sweet right now. So that’s why the real estate market’s going in. All right. We’re going to have to take a quick break, but before we do, why don’t you make an offer that you make? Not only to me but mostly to me because I’m special to my listeners. What do you got to give them?
Hank: 12:28 There we go. I’ll do a free comprehensive financial plan. This is a, again, it’s not just a free consultation where you come in for an hour and we drink coffee and I answer questions. We’re happy to do that kind of thing, but we’re going to give you a lot more than that. We’ll give you a free comprehensive plan that includes the investment analysis. Some of the things we’ve been talking about. I will show you your financial future based on what you’re doing today and in share strategies with you on how to improve that future. Typically, it’s two to three visits. We gather information like what you have for income now, income in retirement expenses, what’s your lifestyle expenses are, assets, liabilities, all of that. We apply tax rates, so we look at what it is on your, your income after tax. We look at inflation, how that’s going to affect your expenses, what’s the needed rate of return on your money to accomplish your financial goals?
Hank: 13:14 Starting with being able to attain and maintain your current standard of living, right? For no matter how long you live that you’re not going to have to worry about running out of money. That’s where we start. And then we add in fun money so that you’re not just surviving in retirement, right? Thrive and retire. You want to have fun. So we do all of the, all the, this is a comprehensive plan for you. And if you call my office first 10 callers, first 10 callers, six one five three, seven, six, five, three, two, five. Tess is standing by. She’ll get your information. She’ll send you out a packet of what you’ll need to bring to your appointment with me. And when you come in to see me, I’ll give you a free copy of my book, “7 Steps to Financial Freedom and Retirement”.
Dr. Friday: 13:52 All right, we’re going to be right back. If you want to join the show, we are live (615) 737-9986 (615) 737-9986. Taking your calls, talking about taxes or maybe you’re thinking maybe I’m not invested in the right place and you’ve got a question. Pick up the phone. Time’s flying by. We’ll be right back.
Dr. Friday: 14:18 Alrighty. We are back live in studio, Dr Friday and enrolled agent licensed with the Internal Revenue Service to do taxes and representation. So if you’ve gotten any love letters, maybe you’re not too sure what they’re saying. Maybe you’re thinking, oh, I haven’t gotten the love letters, but I haven’t filed taxes in a number of years. Well let me tell you, now will be the time to start thinking about that. And the same
Dr. Friday: 14:39 Time with women. You know, a lot of times we are, we’re a lot stronger. I mean, my mom was a strong woman, the next generation, my sister, which is kind of between me and my sister and my mom and I she was a single mom, you know, I mean, and I think she was even stronger possibly. Cause mom ruled the roost in my family when it came to the finances. But Dad was the one that earned the money. And then of course there was eight kids in our family, so mom figured out how to stretch that money. But you know, it was more of a team. And then obviously a lot of people, like my sister, she was always a single, so she had to make a lot of decisions. But nowadays, you know, I mean myself, even as much as I love numbers, I don’t think I’ve ever really paid a lot attention to retirement.
Dr. Friday: 15:19 You know, I mean, you get a CEP, you put money in it. You hope that it’s going the right direction. You know, you get talked into a life insurance annuity, you keep putting money in it. But is it right? I mean, if I’m sitting across from the man that has not sold me either, those products, may I point out he does handle everything else for me. But my point is I need to make an appointment with him because I don’t know, Hank, I mean, you know, you work all the time and yes, and you trust the people that you know, okay, this is someone who knows me, blah blah, blah. But then I talked to someone like yourself and I’m always sitting there going, okay, wait, you know what I do? I mean, I need to get one of those seriously free consults and say, I mean, be honest.
Dr. Friday: 15:59 I’m 50 now, you know, so now we’re on the other side going down. Now I have no intention of retiring, but that doesn’t mean I don’t want to have enough money to retire. And how much is that number? I don’t know that number. So what, again, I know I’m throwing all that you after 20 years of knowing this guy you think I would’ve already conquered. But you know, we’re so busy always thinking of our clients, working for our clients. It’s like anything else when it comes to these things, it’s like, oh, we filed my taxes on October 15th because I don’t think about them until the very last minute besides paying quarterly. Exactly. But you know, and it’s, it’s one of those things that we’re always trying to tell people, you know, make sure you have a will or a trust and makes sure, but you should make sure you have an estate plan. How do I know that I, when I hit whatever age nowadays they’re talking to, could change to like 72 for RMDs and things. There’s some conversation that I’ve been hearing.
Hank: 16:51 Yeah. The, in fact there’s, there’s legislation, it’s actually been passed, it’s not in law yet. That’s, I’ve heard the rest of the, but in the house there’s been legislation passed for that new retirement income planning.
Dr. Friday: 17:01 So you know, I mean, who’s going to steal 20 years and do I have to be putting a lot more aside? Should I stop buying some issues? Should I be putting more of a towards… You know what I mean? Again, I’ve, I got a window.
Hank: 17:11 How much does she weigh on? What do you need to make on your money? That’s where you know, a lot of clients when they come in for the first time, this is one of the things they’re looking for is like, I want to retire at, you know, x, y, Z, whatever. I want to retire yesterday. I want to retire next year, three to five years. Or in some instance I’m already retired, but I’m worried am I gonna run out of money? Do I need, you know, what am I here? Yeah, exactly. Or you know, do I need to be making some extra money? So we’ll run the numbers and this is why I say when we talking about it, you know, what you have for income, what your expenses are. We look at all those things and then we can do in through that, I can show you your financial future. I can show you 10 years, 20 years down road, how much money you’re going to have based on what you’re doing today.
Dr. Friday: 17:53 And I do want to say yes. And at one point out really quickly, again, if you want to join the show, if you have a question for myself or Hank, (615) 737-9986 (615) 737-9986. But I’m also thinking, you know, will you tell, I mean, if someone sits down, okay, this is my salary, blah, blah, blah, this is the age. Do you tell them that we need to be setting aside $3,000 a month from now until that time or whatever? Is that what you get up here?
Hank: 18:20 If we’d, if we’d run their numbers and they’re gonna run out of money money and it happens. I, you know, I have clients come in and that’s the case where you’ve really got a spending problem.
Dr. Friday: 18:30 Divorce. Sometimes it splits up assets. So therefore I’ve got a lot of people that may have inherited a half of their, their ex’s 401k so that’s the only thing they’ve ever really, they’ve never really made enough money to retire, you know? So, Yep.
Hank: 18:43 Put, you know, two, three, how many ever children through college we paid for that. I mean, there’s all these different reasons where they sometimes put themselves back or you know, and here again, not I, I would say the majority of my clients, the biggest strength that they have is that they’re good savers. They’re really excellent savers. And because of that they’ve set aside money and now it’s like, am I being a good steward of that money? Am I, you know, getting the most out of it? What about risk in my portfolio? Here’s how I’m investing. How did I happen to do that? I Dunno, you know, it’s likely they, they kind of haphazardly came about their investing, you know, their investing strategy, if you will. Yeah. If you even want to call it that, they just may be accumulated things or they listen to other advisors and these advisors that you need to go here and there and the other way or you know, and they’re not sure.
Hank: 19:31 Now they’re saying, well, you know, am I doing the right thing? And this is where we stress test a, a portfolio. We’ll say, I can pull out Morningstar reports, we take a look inside, as I mentioned about a high yield funds. We look for stuff like that. Or do you have junk bonds in your portfolio? Do you have long duration bonds? These are going to had risks and instead, so the next market bear market that we go through, instead of your bonds helping, you know those risks, right? Mitigate those risks. What’s going to happen instead is it’s gonna add to it. You’re going to have even a bigger potential problem. So what we want to do is in that stress testing is saying, well, here are some weaknesses and here’s how we can, you know, we can correct that. You know, here’s some things that we can do to, to minimize that risk.
Hank: 20:12 And in particular, when you’re getting closer to retirement or in retirement, you have to be even more concerned about what we call a sequence of returns risk. And what this has to do with when you’re putting money into a portfolio, when you’re, you’re saving the whole time and it’s just feeding money in market goes down. I’m just buying cheaper shares now and I just keep feeding them right and then the market comes back up and I’m going to look really good. And so we can ride out the volatility, However, when we’re taking money out, oh, now it’s a problem. Now they now, if you keep taking money out when the market goes down, that could put you at risk of running out of money. And yet then what do you, what is your choice and not you cut back on your lifestyle. Do you all say, well, we’re not going to the movies this week, or it’s hot dogs and weenies this week.
Hank: 20:52 You know, that kind of stuff. So we don’t want those kinds of choices. A good plan helps you ride out that volatility by reducing the volatility in your portfolio and also adding in some other strategies so that we can ride it out. So let’s say if I, you mentioned a bucket of money, well, let’s put a in one bucket of money, let’s put three to five years worth of income that we’re going to need from our money. And let’s put that in something even safer and stabler for that period. And now we go, we can, you know, pay it. We don’t have to worry as much about this money. Yeah. So if we go through a bear market, we just switch over where we’re taking our income to this stable pool of money and we can then let this row our portfolios, write out the volatility and then switch.
Dr. Friday: 21:29 So what’s your opinion? I mean in this chart will tell me like social security, when should I take it? Sure. Yes. I’ve got a lot of options.
Hank: 21:36 Exactly. One of the things that we have to get into is you know all your income sources. So when it comes to social security, if you’re not already taking social security, we want to talk to you about when the best time to take social security would be, if it’s a couple, some of the different planning strategies that may come in, they’re filing strategies for that. Another, if you’re already taking social security while the, how about how to minimize taxes on social media so you can keep more of that money. Exactly. Up to 85% of your benefits can be subject to income tax. So
Dr. Friday: 22:02 And Medicare. They just keep increasing the cost of Medicare the more money you make.
Hank: 22:06 There’s another one we have to get in and talk about healthcare costs. How can we, you know, manage those costs in retirement as well and make sure we’ve got enough set aside to cover those costs. Cause just because you have medicare doesn’t mean you, all of a sudden everything’s covered. It’s not, not by a long shot. You’re out of pocket. According to recent health, say a recent research, now they’re talking about medicare costs or healthcare costs in retirement for a couple aged 65 being over $250,000 a year. I think that’s a terrifying,
Dr. Friday: 22:33 Well, of course I always heard it costs like $1 million to raise a kid or something like that. And I can kind of believe that watching some of my clients mainly the grandkids, I think they’re more expensive than the children were. All right. So if you’ve got me sold now I need, even if I have a financial person, I need to get a second opinion. I need to find out am I too diversified cause I got this guy over here, this handling this and this person over here handling this and blah blah, blah. Even as much … exactly, everyone’s cooking. But I don’t know if I’m making anything right. So what do I do if I want to come see you?
Hank: 23:03 All right, so if you, again first 10 callers, six one five three seven, six five three, two, five. We’ve got operators standby. They’ll get your information, they’ll send you out a checklist of things you’ll need to bring to the appointment. What I’ll do is a comprehensive plan. We will look at things like social security, Medicare. We look at course at your investment portfolio and what you’ve, what you’ve got there. If you’ve got annuities, we’ll do an analysis of the annuities. We’ll even, this is one of the areas I’ve got clients to come in now and then that have got variable annuities that they’ve picked up at different places along the route. So we’ll, we’ll get into that with them. I’ll call up the company and I’ll, I know the questions to ask and they’ll read off the different fees that are there so they can see what it’s costing them and then show them some good alternatives to help them get something better.
Hank: 23:47 That’s going to be less costly. Costs are another part of investing that’s very important. And when it comes to investing, I mentioned asset allocation being a big part of that. That’s the biggest determinant that you need and course you want to be diversified. That’s going to reduce your risk as well. And then keep minimizing costs as much as you can after these. So it’s a priority thing first. That, so first asset allocation, diversification and then minimizing costs is a part of that. And if you, so if you’re getting one of the first 10 callers, six one five, three, seven, six, five, three, two, five comprehensive plan. At the end of this I will show you your financial future. Okay. You will be able to see if you’re going to run out of money or if it’s, you know, it’s a are you going to have enough fun money to enjoy life… We don’t want to do that. And then I’ll share strategies with you. We can improve it. We can definitely make it better. If it’s net you need more. If it’s about saving more, investing more, getting a better return on your money, whatever it is, we’ll figure out what the issues are and we will help you then develop better strategies so you’ll never have to worry. You’ll be able to again, maintain your current standard of living quality of life no matter how long you live.
Dr. Friday: 24:52 All right, we’re going to be right back with the Dr. Friday show. We are live here in studio, so if you’ve got questions, six one five seven three seven, nine, nine, eight, six we’ll be right back.
Dr. Friday: 25:08 Alrighty. We are back in studio. We’ve got some callers, Steve and then Dr. Rishi. So Steve, let’s the first. Hey Steve
Caller: 25:19 Hello.
Dr. Friday: 25:20 Hey, there you are sweetheart. What can we do for ya?
Caller: 25:23 I have a quick question. I wonder if age in bonds is a good rule of thumb for a conservative investor.
Hank: 25:28 What kind of bonds?
Caller: 25:30 Age in bonds… Your age in bonds?
Hank: 25:35 Oh, I follow you now. Okay. As far as the asset allocation mix. Gotcha. you know, that’s a rule of thumb that people follow. They actually will say something. I think it’s something like your age minus 100, you know, that kinda thing. That’s a rule of that rule of thumb. However, it has more to do with advisers avoiding lawsuits than it does about the investment. Too risky. If you’re reducing it, if you’re putting more to, if I’ve got, if I’m 60 years old, then you know, for me, maybe I want 60, you know, 60, 40 stocks to bonds. And the older I get, the more I wanna reduce that down. Or maybe the other way around, excuse me, a 60% in bonds rather than 40% in stocks. And the older I get, I keep increasing the bond part.
Hank: 26:18 The reality is it more has to do with your, your allocate and and keep in mind what I was saying earlier about bonds are not necessarily a lower risk investment. It depends on the bond you’re in. You need to stick with short term, short to intermediate term investment grade bonds if you want to, if you want to make sure that you’re going to reduce that volatility, they typically have a negative correlation to stock. So therefore when the stock market is down, they will pick up some slack for you on that. And as I mentioned, uncapped fixed index annuity…
Dr. Friday: 26:48 What if you’re a hundred years old, you wouldn’t want a hundred percent ever. I mean…
Hank: 26:51 This is where it actually goes more to the point of not that, but what is a needed rate of return because the amount of stocks you, if you’ve got a a 60 40 portfolio for instance, that’s still a pretty moderate risk or 50 50 even.
Hank: 27:05 That’s a very moderate risk portfolio. It’s not going to, if properly, again, with proper asset allocation. I’ll give you an example. In the last a two bear markets, 2003, 2002 and back in in 2008, these portfolios again with proper and these model portfolios I’m referring to, they fared quite well. They reduced the risk. In fact, even in 2008 one of the worst years in the history of the market, I think we hadn’t seen a year like that since 1933 and even then this portfolio loss only about half what the market went down. So I’ve seen targeted funds in that that have higher bond percentages in them that did worse in that period. So it’s not just stocks and bonds, it’s understanding the principles of asset allocation and properly applying those. That’s what’s going to reduce your risk. And the next piece is what’s the needed rate of return because the more stocks, the more return, how much money do you need to make on your money to not run out of money? And that also is a bigger determinant of what you need as far as your asset allocation. And then of course, another big piece is your risk tolerance. How comfortable are you with the volatility in the market? That will be the other, those are the determining factors though, for what that allocation needs to be.
Dr. Friday: 28:15 So I don’t know the answer, but I’m thinking he doesn’t agree with the whole age, bond thing.
Hank: 28:19 No. There’s a lot more to it.
Dr. Friday: 28:19 Thanks Steve.
Caller: 28:23 Let me ask you one other question. What does he feel about risk tolerance questionnaires from people like vanguard and so forth. Reliable or not?
Hank: 28:34 Sure. Yeah. When it comes to risk [inaudible] and we use one to as well and, and, but it’s at the end of the deal. So an example would be back, you know, over 15 years ago now when I was in that broker dealer network, that was the way we were trained. Okay. So when I first got my securities license over 25 years ago, the training was that you did a risk tolerance questionnaire. And the goal being, you’re trying to determine what your risk tolerance is to then construct a portfolio to maximize the returns without you, you know, getting scared and getting out altogether. So that’s the goal. However, it’s not real practical because most people, when you’re sitting in a, you know, doing one of these tests and nothing, you’re not really losing money. It’s a different tolerance. We find your risk tolerance is going to be quite a bit higher. So when you lose 50,000 or a hundred thousand or something on a portfolio, so what we do is we, it’s in there, but it’s the last consideration, not the first consideration. First, we wanted to determine for how we’re going to accomplish your goals and we’re looking to always minimize risk in the process. So needed rate of return helps us to determine your investment plan and how we can minimize risk and accomplishing that goal. And now are you compatible with the risk involved in doing that?
Caller: 29:44 All right, I appreciate your help. Thank you.
Dr. Friday: 29:46 Bye. Hey Doc. Hi Dr. Rishi.
Caller: 29:54 Hi Dr. Friday. Hi Hank, how are you doing? Haven’t heard with you for a long time.
Hank: 29:56 Yes, it’s been a long time! How are you doing, Dr. Rishi?
Caller: 29:58 Good, good, good. You know, so let me, you know, I came out from with the original concept and up and just wanted to ask your take on it. I mean the last call was asking how do you, you know, asset allocate to minimize risky, right? And, and you know, some of the things I’ve written is basically a lot of them have been, you know, 60 40 50 50 or 75 25 I mean, the father of investing with Benjamin Graham mean, even the teacher of Mr Buffett, he said,
Hank: 30:27 The value of a value investment,
Caller: 30:29 25% in stock all the time. Doctor Friday was a you question 800 that mean, you know, and that was his teaching at that time. I mean that was 1940s and 50s but I think you know, better than percentage what I came out and a thank for [inaudible]. I feel like when you’re very close or within five years of retirement, you are to figure out what is your need money and what is your want money. The need money is what you need for food, shelter, clothing, property taxes. No matter what you needed month after month without having to worry about it, you know. Want money basically, where you could minimize the time of difficulty like traveling or giving donations or buying some pleasure things and so on. Right. And all that.
Hank: 31:18 We call that Fun money. Yeah.
Caller: 31:22 I feel like after 60 or around 55 I took them from fixed income. If you’re a high income tax bracket, you could use muni-bond. If you have low income trek bracket, you could do something which is the safest in investing with your treasury bonds and you know, part social security would be part of it and maybe some dividends income from the stock market
Hank: 31:45 The downside can be that with us with this, with such a strategy and yes, it’s a very safe strategy if you’re using munies or if you’re using now and Munies as you mentioned, unless you’re in a higher tax brackets that you’d be better going with corporates as far as returns go. But if you’re…
Speaker 7: 31:59 Hank, I mean I hate to contradict you, but you know, need money out to come from something which is…
Hank: 32:04 Yes, there are other strategies besides just bonds to do it. That’s all I’m saying. But yes, that can be done and we could, here’s how we look at it. We look at the as an example, okay, I’m determining what is the needed rate of return on your money to first to be able to maintain your current standard of living. Now that doesn’t mean you should give up vacations or account. That is just the fun stuff. Now having said that, maybe fun money is what if I had an extra thousand or $2,000 a month just to go out and enjoy with it’s hobbies or other entertainment or you know, special trips, vacations, things like that. So we call that fun money and we want to make sure that you can accomplish both. We want to, there are ways that you can get stable income and you’ve listed a couple of options. Okay? There are some other ways that we use as well that can improve your returns at the same time. And that’s where we can get you guaranteed income is one example. Or we can use guaranteed income can a lot of times give you a better return. And this was where annuities can come in and play, can do better for you in accomplishing that goal. Then you’re going to get with municipal bonds or even with dividend payers because dividend payers the same thing. You’ve got risks that go with them,
Caller: 33:15 But Hank, the problem is that the entities, and I’ll tell you my own feeling about that. I know you had invested some of your former wife money at 8% at Allianz. And you know, my thinking is they have over promised in the past and not with the negative rate in the Europe. You know, and Japan, they clearly haven’t troubled to meet their obligation. When you are for you putting your retirement.
Dr. Friday: 33:38 Yeah. Don’t want any money in the market, Rishi. Do you put any money actually in stocks or do you just get into
Caller: 33:45 Tell you how I get the allocate. So my need money is coming from mostly muni-bond. I’m getting, you know, 70 to $140,000 there. I’ve got real estate with is generating 150, $200,000. You know, the, mostly those two are using, that’s what a stock market I use for. Basically for one, you have to invest globally all 8,000 companies all around the globe. Second, you need to take care of your financial term life which is our expense ratio. It should be below 0.1%. Second, you should not have portfolio turnover more than 15%. So basically you are not turning over you invest in whole markets, right? You’re not turning over your portfolio and fourth. You have to be currency neutral means half in us, half outside us, like 1000 companies.
Hank: 34:32 Okay. This is where I would I, were going to differ a little given Doctor Rishi. Cause one is that I’m not going to go as heavy in the international as 50% of my portfolio. That would make me very nervous. I’m going to have considerably less than that. The other parts when it comes to the asset, when you’re looking at your asset allocation mix is, in looking at your expense ratios and your turnover ratios. What you’re describing basically are index funds and I am a big believer in index funds and most of the portfolios that I use there are, there are a number of companies like a dimensional funds that has some great funds. Also vanguard we like, I like their funds, but again, if you look even at their target funds, if you look at a vanguard target fund based on your age and when you’re going to be taking money out, even there, they do not do as well as the model portfolios. We use you using these principles and modern portfolio theory that of of Doctor Markowitz since I mentioned and Dr Fama, we would use those principles and apply those in terms of our asset allocation model. And in doing so we have lower standard deviations, lower risks and greater returns. When you look at when you compare him over those, say the last one, three, five, 10 years or even 20 years. So it’s about again, the asset allocation models. Very, very important….
Caller: 35:47 But what do you do, Hank, with the need based modeI and the want based model. Want money, go to the stock market. Global stock market and need money goes towards Muni or treasury bonds and real estate.
Dr. Friday: 36:00 You got it. All right. I, unfortunately children, I have to take a break. Thanks Dr. Rishi, talk to you soon. Bye. All right, we’re gonna take a quick break here, but the really quick Hank, why don’t you give your offer one more time for people cause this will be the break.
Hank: 36:17 You got it. Six one five this is the number six one five three seven, six, five, three, two, five. If you would like to get a comprehensive plan, if you would like to see how your investments are doing currently on investment analysis, that includes stress testing your investments, how are they going to do, not just over the last 10 years, the longest bull market in history, but how would they have done over the 10 years prior to that when we had two bear markets and with the two balls, that’s what we want to take a look at. How can we do that? So we’ll stress test. You’ll get a comprehensive financial plan. We cover all kinds of topics for you as I mentioned, (615) 376-5325 first 10 callers when you come in to see me, I’ll also give you a copy of my book, seven steps to financial freedom and retirement.
Dr. Friday: 36:58 All right, we’re going to be right back with the Dr. Friday show.
Dr. Friday: 37:09 Alrighty, we are back in studio. You got just me, doctor Friday and enrolled agent license for the Internal Revenue Service that you taxes and representation. This week I was at a seminar talking or should I say listening and talking to some of the experts, talking about some of the things that are happening.
Dr. Friday: 37:28 And I thought it was interesting about a couple things when it came to audits. The audits continued on their down road. They’re doing less audits. I don’t necessarily agree that the numbers are less audits. They’re doing less face to face audits. They’re doing a lot more paper audits. I mean how many of you guys are listening, cause some of you have come to me receive that piece of paper from the IRS. We like to refer to that as a love letter and it says right in it that we are thinking of changing your tax return goes to this, this and this reason you either understated income, forgot to report something. They, they for some reason see something and then they change it. Well that is considered an audit. So I think that’s important. Also the one area that the audits have went up are people making $25,000 or less and you’re sitting there going, wait, that doesn’t seem fair.
Dr. Friday: 38:15 I’ll tell you why. Those people are apparently they’re finding a pretty large number of them, maybe overstating what their earned income tax credit should be. Meaning maybe they’re claiming children that aren’t really allowed to be claimed on their tax return. So not only are you getting a child credit, but you’re also getting earned income credit. Along that same story, there are quite a few people, according to the IRS that was at our office, our I should say this seminar that basically said that a lot of people believe it or not are reporting income that they never earned. They’re showing that they received or have a business and they’re saying that they made $15,000, no expenses, but boom, guess what kicks in. Earned income credit. So they’re getting earned income credit on money that was never truly made. So this has become a big audit area.
Dr. Friday: 39:06 So there’s people that are making $25,000 to basically $25,000 or less. And then the people making $200,000 or more, they call them upper income people, the upper income people making $200,000 or more, those have went up to about 1.4% up from about 6.6% so those are the areas, corporations, LLCs and partnerships. Depending on the situation, they are finding that a lot of them have went up. They’re doing a little bit more in auditing, averaging out, but they’re showing a lot more, no change taxes because the people are doing a pretty decent job in representing, but they’re hiring enrolled agents to represent them. So that I think is great. So you know, part of doing taxes is great. Throw some numbers on a tax return, send it off, boom, I filed my taxes. But what if the IRS came knocking? Could you justify the numbers?
Dr. Friday: 40:00 Could you prove that you made the money that you did or that you have the expenses that you have? Did you, by chance, walk into your tax person and they asked you how many miles you have and you looked up in the banana and you look sideways. And he said, Oh, I made about 40,000 miles. Had to do at least 40,000 miles. But you also worked a full time job, but you do real estate on the side and you put 40,000 month. Yeah, that doesn’t make sense. People. You cannot put 40,000 miles on a car most likely if you are working a 40 hour a week job, it just, you know, Time wise the IRS would definitely questioned that and request a complete log to justify it. So making sure that you are keeping a mileage log. You know what, I have people that physically work seven days a week, 14-16 hours a day.
Dr. Friday: 40:46 Those individuals could physically put 40,000 miles on a car and still work a full time job. But you know, if you don’t have the documentation, the IRS first response is what? Nope, no way. No possible way. You are not getting that tax deduction. So you want to always prepare your taxes with the idea that Uncle Sam is going to be looking at them that way. Then when an, if something happens, they come in, they knock, and unless somehow you forgot something, it happens. Sometimes you worked a job and you forgot, oh, that’s right. I did do the first two weeks of January, the year before I did my taxes, and you forgot that W2 because maybe you moved and that employer did not forward it to you. It is possible. Those are kind of easy fixes, but when a self employed person only reports on the 1099-K or the 1099s that they have received throughout the year, I’m going to tell you right now, the IRS has got a flag in it.
Dr. Friday: 41:43 They’re going to flag that return because almost zero businesses get a 1099 from every single person they work for and or you deposit 100% of your money. Now, I will tell you, I don’t get a lot of cash in my world. It’s not something I get a lot of. So my business is pretty much a hundred percent cash or credit cards or checks, but it all does go through the bank. But restaurants, seriously, people, no one’s ever walked into your restaurant and giving you cash. Yet the IRS is statistically saying that there’s like 20% of businesses reporting more or reporting what they say is legitimate and almost 80% of restaurants that are not reporting 100% of their sales. Now, the way they’re finding this out amazingly enough is the lifestyle of the owners. So you’re reporting a business and saying, you know what, I made you know, 150,000 in sales after all my expenses, I paid everybody.
Dr. Friday: 42:43 I made $30,000. Yet you own $150,000 or $200,000 home and guess what? You’ve paid the mortgage off. You own a couple of cars paid off! But yet you’re only showing 30 $40,000 on your tax return. Yeah, unless you were gifted somewhere along the line, it would take you a lot longer to pay off those homes or those cars. And so that’s what’s happening. The IRS has access. Don’t fool yourself. They have full access to car titles. They have full access to homes. They know if there’s liens or levies against those products. They also know if you’re buying guns, anything with a license, they’re able to see if you own two or three rental properties. How’d you, how’d you borrow the money? Where’d they come from? How are you reporting this information? Are you showing one set of tax returns? And that’s another thing banks, many banks have been basically a bank is now told if tax returns are turned into them that don’t make sense, that don’t seem to call a phone now.
Dr. Friday: 43:42 They do have to pull a 45 or 60 on all tax returns now. Part of the reason was people were producing tax returns for the bank and tax returns for the IRS. Yeah, they’re not really very happy about that. So all I’m saying guys is you’ve got to be smart. You’ve got to start being more logical. I mean, if you’re living raising kids and doing things and you’ve got enough money to do it and your tax return doesn’t reflect that, then you need to consider that you may be on the IRS radar. And that doesn’t mean don’t file taxes. It means start paying quarterly, start doing things that you’re going to want to do and live the life where you’re not looking over your shoulder because it’s so much easier when you’re able to do that. If you’ve got questions, maybe you haven’t filed taxes in a number of years or maybe you’re saying, you know what, maybe I need someone else to review my taxes because maybe I’m showing or not showing enough money, whatever that might be.
Dr. Friday: 44:36 You can call me directly. The office is open on Monday morning at (615) 367-0819 we do review of taxes. If you need help doing your corporate returns, your trust tax returns, you’re any business or individual tax returns out of state returns. We do all 50 states. We can help you do that. We can help you get caught up. We can help you. If you receive love letters, I can help you with offer and compromise. I can represent you. So I’m like a little bit of a shield between you and the IRS. I can be there so I can answer the questions. We can handle the audit and we can get in there and help you do what you need to do. Make sure if you do get into a love letter that says, Hey, we’re going to be auditing, we’re gonna come to you. Maybe the person that prepared that tax return isn’t the right person to represent you. I’ve got two cases right now where they just use someone that, because if you prepared the tax return, in many cases you can give that person the power of attorney to represent it doesn’t mean they’re an enrolled agent. It doesn’t mean they even if they are a CPA or an enrolled agent that they ever do representation.
Dr. Friday: 45:41 So you need to make sure you have someone that actually can stand behind what they do and if you need that help, all you have to do is pick up the phone. (615) 367-0819 we’ve got a new website coming out, but we still got the one out there, so just stay tuned. Keep looking, but it’s dr.friday.com that is drfriday.com easiest way. Tell me about what you need, how you need it or anything else is to email me, it’s pretty easy. My first name is Friday, F RI D A Y at drfriday.com email@example.com and again, if you need help, check me out on the web, understand what you need to do. Maybe you’ve got a friend or someone else that might need that kind of representation. We do it every single day. We’ve got a lot of people that have been able to read, start up again, their lifestyle, so it’s been awesome world. I’ll catch you next Saturday, call you later.