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The Little Red Book of Retirement - The Foreword

In 1995,  my first  year as  an  advisor,  my  grandfather  passed  away  after fighting dementia for over five years. The experience was not only emotionally devastating but financially devastating as well. The cost of his care completely bankrupted  his estate, teaching me a valuable lesson. Proper planning and the protection of capital are the most important attributes to a successful retirement. Unfortunately, most of you have not implemented the planning that is required.

The question that may be difficult is, "What is proper financial planning? Most of  you are not able to  answer  this question, but what is most concerning  is that most advisors cannot answer this question either. Have you ever asked your advisor, "How is my retirement plan?" The answer is usually ''Don't worry about it, you will be fine."In many cases, there has been no real retirement income planning, only some type of investment portfolio. An investment plan is NOT a retirement plan. S0 what is a proper retirement plan? Not only does a plan need to be implemented but also integrated. You need to have a retirement income distribution plan, that includes a budget, social security planning, tax minimization and estate planning.  Most importantly, this plan needs to be in writing. This requires a lot of work and most advisors do not have the experience nor the desire to do  this work.  Most firms are only concerned about managing your money not creating a comprehensive retirement plan. The big "bank owned'' firms employ  thousands of advisors making it nearly impossible to train them all to apply this type of strategic planning. Their primary objective is to gather assets under management, not to do real retirement planning.

Do you have a comprehensive plan that includes everything that I mentioned?  If not, then you will not have the most secure , successful and stress-free retirement possible. A word that is overused and very misleading is diversification. If you are diversified, or  have a balanced portfolio everything will be ok. WRONG! I have a word for this, "Di-worse-ification".  There are two real problems with this: first, clients feel overconfident that their portfolio will be protected.

Second, when you need diversification the most ...  it does not work.  You would think  that in a bear market (or down market) that  if you are diversified you would not suffer significant loses. For example, in the 2008 financial crisis, if  you  had  a portfolio mix of 60% stocks and 40% bonds, you were down as much as 30%, that is $300k of a $1M portfolio. Are you comfortable with that type of loss? I can tell you from meeting hundreds of clients over 20 years, that the answer is NO. I always ask the question, how much are you willing  to lose in your portfolio?".  Can you guess what the number one answer is? I want to lose Nothing! Once we have a real conversation about risk, most of you do not want to lose any more than 5- 10% at any time during your retirement. Losing $50k - $100k is far different than $300k.  In addition, a 10% loss only requires an 11 % gain to get back to even, while incurring a 30%  loss will  take a 43% return  to get back to even. This can take up to 5 years! Not only have  you  lost a  lot of money as well as a lot of sleep but most importantly, you lost a lot of time.

Time is the only thing we can never get back.

So, what  is  the  answer?  In  retirement,  we  need  three  things  to  ensure  the safety of  our portfolio. First, we absolutely need diversification, but with most advisors that is where it stops. A diversified portfolio of stocks and bonds is not enough. Second, we need to diversify with the use of other strategies. We may want to use other asset classes like hard assets such as real estate. We may also want to use principal protected annuities for guaranteed lifetime income. There are also several other strategies that we use to help reduce risk and increase portfolio performance. The  one  thing  that  they  all  have  in  common  though,  is that they have no correlation to the stock market. The overall returns of these non-correlated  strategies are  not  dependent  on  the  movement  of  the  stock market, but  on  the  individual  strategy.   The third strategy to help ensure the safety of  your portfolio  in  retirement   is  to   have  some type of  downside protection in your plan. This can be done a couple of different ways. One is the use  of financial  instruments  that  act  as  a form  of  insurance,  not  guaranteed principal  protection;  but  securities  you can invest  in  that  will  go  up  as,  the market goes down, creating a floor on the portfolio. Another is using stop-loss strategies  that  will  pre-set  the  maximum amount of  loss,  usually  5  to  1 0 %. Finally, you could use low or zero fee fixed-indexed annuities that has principal protection in which you participate in some of the upside of the stock market but do not participate in the losses.

If you only receive 50%  of the S&P 500  returns and none of the downside, you can beat the market.

Finally, my only job as your advisor is to make sure you have the best retirement possible, with the least amount of risk and ensure you never run out of money.

I hope this book gives you some insight into what is needed and what is possible.



Read below for David's personal message found in this video:


Thanks for joining me this week. We are going to do our weekly blog-vlog here today. And I’m excited to talk about our new book, The Little Red Book Of Retirement. I am going to do a series here going through each of the chapters. They are small. Really proud of the book. It just came out a couple of months ago, very readable. And I’m excited to share this with you.

So my impetus to do what I do, in par to writing this book, was that, you know, 1995 was my first year in the business and green behind the ears as an adviser. I was 27-years-old. And unfortunately my grandfather passed away, which was very devastating. Unfortunately he was diagnosed with dementia about five years earlier. He worked for Sears back in the 70s – 60s and 70s when that was a very successful company. He owned Sears stock and had a good retirement. Again, he wasn’t a wealthy man. He was just very conservative. His home was paid off, all those kind of good things. Social Security. He had a really good life.

Problem is that he private paid in his long-term care. I mean he used his own money. And then he qualified for Medi-Cal. When you qualify for Medi-Cal, basically, you’re bankrupt. You can only have $2000 in the bank, a burial plot, a wedding ring, a car and a home. So not good. Save your whole life to have nothing in the end. And so that really taught me a big lesson about how to manage money, how to protect against capital loss and devastation of capital.

And so you need to have proper planning to deal with these things, holistic integrated planning. And, unfortunately, you know, most of you don’t know what that means. And most of you don’t have this type of planning – which is really sad is most advisers are not interested in this type of planning because it takes a lot of work. Most of advisory firms – I’m not picking on them, it’s just what they do, the big firms like Merrill and those types of firms – basically, you’re doing asset allocations. They are taking your investments and doing this pie chart, pretty little pie chart – these different colors and really pretty, but the fact is, it just doesn’t work. What you learned about diversification of portfolios in retirement does not work.

Let me give you an example. In 2008, the market was down at one point in time 55%. Bank stocks were down 80%. Devastation. The average balance portfolio of stocks and bonds was down 30%. Let me ask you a question. Does that sound conservative to you? No. But you were sold, or you were told that this type of balance of stocks and bonds would be something conservative and would be okay with you in retirement. Well, that is just too much of a loss. It is too much of a risk. So if you had a million dollars in 2008, you lost $300,000.

Now,  our firm is not – we are not going to have that kind drawdown in our type of portfolios. But the problem is you need to worry about this stuff because most of you have an investment plan, which I will disagree with most times, but we don’t have a retirement income distribution plan. And that takes a lot more effort and skill and experience doing this for 22 years. And you have to really want to do it. It is a lot of work.

But in order to have the proper retirement planning you need to have this type of comprehensive, integrative planning, such as a retirement income distribution plan. We want to make sure we stress test your assets to make sure that we are not taking undo risk. We want to have a fee analysis, make sure paying the least amount of fees. We want to have a written plan. And, unfortunately, I have not run across one client that has all of these things that we need to have a stress-free retirement.

So we like to call it “The People Have The Worseversification.” So you’re diversified but the fact is that is not enough. We can’t afford to lose 30% in the down market. So one of the things we need to have is – secondly, we need to have diversification not just by asset class, but by actual different types of strategies, like real estate. Because, for instance, we don’t want to suffer losses like in 2008 we talked about, again, the 60/40 portfolio stocks and bonds was down 30%. So one of the things we want to do to help mitigate risk is we want to have assets like real estate, other assets may even be annuities. Other things that are not correlated to the stock market. So the stock market goes down 20, 30, 40, 50%, we have other assets to help to mitigate that loss and it also to have their own returns.

So, for instance, real estate’s a great asset class to give as an example that we use quite a bit is a hard asset because when the market goes down, is the income from that real estate going to go down 50%? No. So we have real estate properties, and in no way did your income drop by 50% in your real estate? No. So real estate I’m giving you one example of many that we use to help mitigate risk.

So we want to diversify within our stocks and bonds, that’s good advice. We want to do that but it’s not enough. We want, also, to diversify by strategy that other strategies that do not rely on the stock market for their returns.

What’s the nature of these things? First, we need absolute diversification. We need to be in investments like I talked about that have all these attributes that will give us our truly diversified portfolio. The third thing we want to see is that we want to have some risk management to the stock portfolio, the equity side, which most of you don’t have either. Because it does take some work.

What do I mean by that? What I mean is diversification is not enough, so if the market is going to fall 30%, your portfolio in an ‘08 financial crisis, what can we do to help mitigate those losses above and beyond the additional diversification that we are doing? We use strategies to help insure the portfolio, not like we’re buying an insurance policy but to help mitigate the downside. We insure everything. We insure our homes. We insure our life, our health, all these things. But why do we not do insurance, or use insurance, a {6:16} form of insurance for a downside protection to protect against catastrophic risk – what we do for our clients.

Let me give you an example. One of our basic strategy is what’s called a Stop, Launch Strategy. Let’s say you have a million dollars in one of our stock portfolios. We’re going to put a predetermined amount of loss is going to be a maximum of 10%. Now, if the market goes down 30 or 40, we’re capped at 10, so that’s one way to mitigate risk. The average person, the average one of you that I’m doing reviews for, your average loss is about 30%. Average, and you considered yourself a conservative investor and you’re really not investing conservatively, and you just don’t know it. So those are the things that we do.

This is the first set of a series I’m going to do. So the bottom line is I want to teach you how to mitigate risk, how to maximize return. We want our cake and eat it. So our goal is to mitigate risk, mitigate volatility, and have the opportunity for more income and more returns.

So join me next time. We’re going to talk about, again, our next addition is going to be the next chapter here on The Little Red Book of Retirement.

Thank you.

Click on the link to watch the attached video to learn more about: What are RMD's and How are they Determined?

Click on the link to watch our interactive video to quickly and simply understand: How to Strategize for your Social Security Benefits. 

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