PPR 89: Will Taxes be Higher or Lower?

Full Transcript:

Kraig Strom: Okay, this is third times to charm on episode number 89. Having some issues with my mic levels. Generally able to turn on all of my systems and just fired up and go. But isn’t that the way with technology? Technology, always moving probably faster than any of us could ever imagine and the same exact set-up that I use to record the show week after week. seems like something is different and I haven’t had the chance to figure out exactly what it is, so if the audio quality is just a little off, you know I have to beg forgiveness, I will try and figure it out. This is one of the things in my world that I do enjoy doing this independently. Haven’t handed this off to a virtual assistant or anyone else on my team at this point.

So now, on with the show. Thank you so much for being here, really appreciate it. Wherever you might be, on your bike, in your car, at your office, at work on the weekend, riding your horse, whatever you doing, really appreciate the audience, the support for Personal Pension Radio and it is just bigger than I can imagine and could have imagined. So really truly appreciate it. Now broadcasting today again from the Personal Pension Radio studio here in my workshop in Horsetown USA Norco, California. Brought to you by personalpensionradio.com. So if you want to see or hear back episodes or see the transcripts from back episodes, head on the personalpensionradio.com and you can download transcripts there. Now if we are missing any transcripts, remember those of you who are new to the show it is because I am a licensed, regulated, certified financial planner professional that all of my content does go through to a compliance review process to make sure that I have not made any mistake in there or there was anything that was unclear. Just to make sure that it has been reviewed and that’s what sets me apart from financial entertainers and people like that who are unlicensed, unregulated, nobody is watching over whatever they say and they could be giving out, in many cases they do, horrible advice and no watchdogs are looking out for you. So that is why when you go to personalpensionradio.com and you are looking for back episodes and you do not find the transcripts so you might find an episode, it is because it is going through the review process and as you can imagine, there’s a lot of content.

Now, what is Personal Pension Radio all about? This is a show that I created specifically to talk about optimizing retirement income. This is a conversation that I, as a young financial advisor, nearly 19 years ago, did not get clearly. Retirement income when I was trained up in the business as it is still today being trained was about more products, more products, invest, invest, invest, buy more. I was educated by the same Wall Street financial advisory machine that is still teaching financial advisors to pay attention to the accumulation. It is all about save save more, save more, save more which is good for an accumulation strategy but it does not work in an income distribution plan. So optimizing retirement income is critical. And that is why I started this podcast and that is why it is titled specifically what it is. I am here to say that optimizing or maximizing retirement income does not happen with a product. It does not happen with life insurance, it does not happen with a mutual funds, real estate or annuities. It does not happen with any of these things by themselves. What you actually need is an integrated, blended approach where all of these assets work together where life insurance and mutual funds and annuities and real estate, stocks and bonds, where all of these things are balanced correctly. That is where maximization comes from, that is where maximum retirement income comes from.

And this show is meant to give you hope. I want you to have hope for retirement. Hope for the retirement that you truly wanted because if you’ve had a conversation with your financial advisor who has said, well based on the Monte Carlo income simulation and based on the 4% rule you’re gonna need to save a lot more money. I am here to tell you that you do not have to retire on the Monte Carlo income simulation. For those of you who are new to the show, if you do not know what the Monte Carlo simulation is, let me give you a quick primer, a quick update. The Monte Carlo simulation is a probability software program. What it does is takes a, let us use an example. You are going to retire at 65 years old and you have a million dollars in your retirement savings. Okay? Congratulations you got a million dollars. But now you need to take income from that million dollars, and the Monte Carlo income simulation runs many, many, many, some 5 to 10,000 different scenarios, these are income scenarios to say if you take a certain amount of money out of your million dollars, and if this multiple, multiple different investment rates of return and year by year performances happen, if these things happen and they run 5 to 10,000 of these scenarios, and if you draw out a certain amount of money, the Monte Carlo simulation calculates the probability of success or failure. That’s what it really looks at is the number of scenarios that fail. Meaning, let me simplify I guess. If you had a million dollars and you are 65 years old, and a financial advisor suggested that you should follow the 4% rule. The 4% rule says, you should only take out $40,000 out of your million dollars. Congratulations you are a millionaire, here is your 40 grand. Not very exciting right? But, let us take it one step further. If we take that $40,000 out of the million, and we are age 65, is it possible, if we are married for example. is it possible for one of the spouses to live 30 years or more, right? It is possible. Especially with married couples. So, if we then take that 4%, $40,000 a year and we put it into the Monte Carlo simulation, and we say if we take that and we ran our of probabilities, what is the chances that we might ran put of money? Well it can be anywhere from between 12-15% chance that the husband or wife will die broke. If they start with a 4% draw.

So, when you hear me say that you do not have to settle for the Monte Carlo income simulation and the 4% rule, that is what I am talking about, that with the right plan, a balanced approach, it has to be a balanced approach. For example, recently met someone who said that a financial advisor suggested that the solution to their retirement dilemma was life insurance. Well, for those of you again who know this show and who know me and you’re getting to know me, I am a huge fan of life insurance of specific types of life insurance. I really think it is an excellent asset. But I am also the first one to tell you it is not the solution to maximizing retirement income. The same would go for someone trying to pitch mutual funds and an investment portfolio and that has happen before, oh all you need to do is invest over here and that is the solution, that is not correct, okay? The answer is a blended balanced approach and this show is meant to give you hope for retirement. I want you to know that the light is on at the end of the retirement tunnel. You just have to be willing to step out of line, and what I mean by that is that the financial world has corralled most people into the line that says, this is how you do retirement. I am here to tell you that that is not working. Insider secret hello? From the financial advisor perspective, I am here to tell you that the last 30 to 40 years of retirement advice, it is not working that great for the baby boomers who are retiring. Okay? And I am in it full time, all the time, and I see it. It is not working.

So, if you want yo make sure that the light is on at the end of your retirement tunnel, you have to go to Personal Pension Radio, get in touch with me. Request your own retirement income analysis. You won’t know whether or not you really need to step out of line and change your direction unless you will know where you are headed. And if you are headed to the 4% rule on the Monte Carlo simulation conversation, you will not be happy, and you will be much much happier changing that direction sooner than later. Now, I got all excited here in the beginning and I forget to give you my quick disclosure. I am not an attorney, I am not a CPA, I am a certified financial planner professional but please please, that does not mean that you should act on things that you hear on this show as advice. I am putting this information out there hopefully to inspire you to take action, to find out more, right? To dig in deeper. But please do not act on the advice that you hear on, or things that you perceive to be advice on this show and especially please do not act on things that you hear from financial entertainers. Financial entertainers are people who do not have any regulatory oversight, no licenses, nothing that protects you the listener and they are not giving advice that has been carefully prepared. Oftentimes financial entertainers like Dave Ramsey for example, will dole out incredibly important financial advice that in my opinion happens to be wrong but they do it in less than 3 minutes. I have heard Mr. Ramsey and other financial entertainers hand out what could be just monumentally terrible advice without knowing so much as 2 or 3 minutes about that particular person or someone who called in. So please, meet with a qualified financial adviser. Obviously I would love that person to be me. But a good idea would be to look for a certified financial planner. Someone who has passed the certified financial planning board of standards exam. It’s 2-days long and it is 10 hours of growling and testing and thousands of hours of preparation. So if you find a CFP to work with, you’d pretty sure that you found somebody who is really dedicated to their trade, okay?

Now, let me jump in my segment number 1 today, short and sweet. Today’s episode is really gonna be short and sweet, because I scour the news and I pay attention to what is out there in the news just to make sure I know what is being spoken of and thrown around, and I want to be able to bring to you my perspective on these things that I find out there and hopes that if you come across these things on your web pages, on your TV, in your radio in your car, that you might have a different perspective with which to weigh that information, to evaluate it. So today, I actually did something a little different. I just went to Yahoo Finance on the home page of Yahoo Finance and I just wanted to see what would pop up, and it just made me smile, it made me mad, it made okay, this is, I am number 1 simple quick and dirty. So they headline said, Tom Lee Thinks The Market Needs To Be Bought Aggressively. Big capital letters! Tom Lee is a well known investment person, you know, okay, who cares? But the headline is, Tom Lee Thinks The Market Needs To Be Bought Aggressively. Really? Seriously! I’m gonna ask you a question here in just a moment but I do not want you to think to yourself, well I am not a financial planner, I do not know the answer to that. Oh! How could I be expected to know answer to that one. Let me ask you this question, I want you to assume first you are going to know the answer to this question, alright? So, what happens to the stock market every 5 years or so as it has risen up from a low point? What happens to the stock market inevitably, every time? 5, 6, 7 years of going up, what inevitably happens to the market? Yeah! You guessed it. The market falls. It will, correct, it will adjust downwards. Guess where the stock market is right now? It has been running up for years now since we’ve had the big recession. It has been up and now bouncing up and down, up and down off this highs and dropping back down again. And yet, here is this headline from Yahoo Finance, who cares who it is from. That says; you and I, oh the uneducated masses, we should buy aggressively. Are you kidding me? That is amazing. I hope that as you think about just simple common sense when anything has run up in price for year after year after year, when do you buy that item? Do you buy it at the high? Or do you buy it at the low? Right? This is one of those situations where simple common sense will help you avoid being sucked in to this kind of hype. I just, it amazes me that that was the first thing I saw. So, that is the Watch Your Step segment.

Now, segment 2, a client listener questions. Now, the first one actually was a quick question that came in that somebody had pinged on the last episode I think it was, just a simple little one-liner here says, workshop in your backyard? Question mark, right? Yes I do have a workshop in my backyard. My wife and I both moved into one of our rental houses last year in November. So after the recession, my wife and I were had been fortunate to be positioned well so that we could buy rental houses. We had a real estate partner and we were able to purchase 3 rental houses, turned out really well and last year in November 2015, we sold our rental houses and our primary residence and moved into one of our rental homes. It just happened to be here in the city of Norco, California, and the property itself is quite large. For me, quite large, which I never had a big, big, backyard before and I am a woodworker, it’s one of my hobbies, one of the things I enjoy as therapy. So I actually did put a workshop in the backyard, but I did it through to my efficiency first model. I believe in the 4 wealth objective and the first objective being, do it efficiently first. So I looked at all different ways to build a workshop in my backyard and the type of workshop that I wanted was going to be really expensive in that $40,000 range and it wasn’t gonna be a huge workshop but I really wanted to have air conditioning, and I wanted it to be well lit.

Now, that just was not going to happen, I was not going to pull the trigger on a $40,000 workshop. Now, this is where my efficient shoppers mind came in. I went to Craigslist.com. Now Craigslist is spelled with a C, my name Kraig Strom spelled with a K, but no affiliation. I went to Craigslist and started searching for sheds and shops and buildings and various things, and one day, sure enough I saw it, it was shining on my computer screen. A local school district was selling their old modular classrooms. These are the double-wide pre-manufactured, they’re not on wheels so these are pre-manufactured school classrooms that come in 2 pieces. One of the local school districts was moving and selling them and I purchased a large portable classroom, complete with air conditioning and lighting and just double-insulated walls and everything else and I had it deliver to my backyard and I am actually quite proud of it so I’ll tell you how much I paid for it. I actually will tell you after I tell you that at home depot they sell a 10×10 shed fully loaded for a basic shed for $4,300. $4,300 for a 10 foot by 10 foot shed. That is not lit, but it does have a window. I purchased this classroom that I am sitting in, in my workshop, it is 24 feet wide by 40 feet long fully air-conditioned, well-lit, nice floors, windows, etc., etc. I purchased it for $2,000. $2,000 and I spent a few thousand dollars having it delivered and set up and installed and it is not finished and it might not, you know knowing me, it might not be finished for a long time. I am always gonna be tinkering on it. My point being, I did buy a school classroom, put it in my backyard, turn it into my workshop, so that is the answer to the question. Yes, I have a workshop in the backyard where I can start building things like my new kitchen cabinets and things like that. So, that is the answer to the first question.

Now, the 2nd one actually came from a conversation here locally with a client and several other people actually, this conversation regarding the need to work on an estate planning. So this need to work on an estate planning, to mitigate future tax and preserve wealth. Now, I have to be honest with you. I cannot figure this one out myself. I do not know the psychology, I suppose if I was a psychology major maybe I could figure this out but if you find yourself sympathizing with this story that I am about to share, snap out of it. Okay? I do not know what else to tell you. Snap out of it. Like whoa! So here is the example. I know that there is a change in the tax laws coming. Now this is a specific part of tax planning and an estate planning for those who have larger estates perhaps real estate portfolios and businesses and things like that where in the long run, there might be a chance that the government could come after an estate taxes and other things. So this example is about an engineer, he is an engineer, an aeronautical engineer who took his dad’s great advice back when he was 18 years old. And he started purchasing multi-unit homes near a local university. Now he started when he was 18 years old. He bought his first place, I think it was a two or three unit place near this university. Which by the way did not have a 20,000 students as it does today, okay. Now it is a serious university, but back when he was 18 he took his dad’s advice and started buying houses. Well now today in his 50’s he owns multiple properties, has great cash flow, but he is also a multimillionaire. Multimillionaire because we are talking about 20 plus years right? 30 years of owning property in Southern California, he is now a multimillionaire. I suggested that, oh by the way there is major tax laws expected in 2017, this changes that could completely reduce or eliminate some fantastic estate tax mitigation strategies. And I suggested that he should visit with his attorney and his CPA ASAP, like right now. Notice I did not suggested that he visit with me per say. Just say, hey I’m just letting you know, there is a major thing happening that is going to affect you. He asked and I just don’t figure this out, this is the part that confuses me, so maybe you can help me out you know help me understand this. He says this, why should I spend money on a estate planning when things are most certainly going to change in the future? Well my response was pretty simple, it was a question and I am gonna ask you, the Personal Pension Radio listeners, I want you to answer this question out loud wherever you are. Please just out loud, okay?

So my question was this, do you believe that taxes will be higher or lower in the future? Higher of course, everybody says higher, I have never met anybody who says lower. Everybody believes it including the government, right? So then why wouldn’t you want to put plans in place today? That would lock in protection against future tax burdens, right? When the government changes tax law, it almost always grandfathers plans that were already in place. So if you have a plans in place in 2016 and they change that particular code in that particular part of the tax code in 2017, almost inevitably, they grandfather those plans that are already in place. So why wouldn’t you want to have as many layers of possible protection for your family and for your legacy as possible, right? Something to think about. I mean think about this again, I have covered this before. The national debt in the United States today is about 19 trillion dollars. US tax payers who filed taxes but owe zero tax. So think about this for a second okay? US tax payers who filed taxes but owe nothing, just under 120 million people owes zero tax. Right? Where $19 trillion in the hole, stay with me, those living in a poverty now over 46 million, medicare enrollees just under 57 million, food stamps 45 million, student loan debt $1.35 trillion, trillion dollars non-dischargeable in bankruptcy, the government owns you if you have a student loan debt. So social security liability, ready for this? $14.7 trillion. How much the government owes on social security? How much do they owe on medicare? $27 trillion. Total unfunded liabilities in the United States over $101 trillion. Now, I share that with you to come back to my friend the engineer who says, what would I want to do with anything with estate taxes and planning today when they’re definitely gonna change the things? Yes, they are gonna change things in the future, but if you believe that taxes will be higher in the future, isn’t it likely that you could put safe money betting the government is not going to change the tax laws to favor those multi-millionaires, right? Where do you think the government is going to get the money to pay for all this? They are going to get it from the rich. And here is the fun part, the definition of rich is a moving target. It is a moving target, it is whatever the government wants to call rich, right? So please, please, please, please, if you have a real estate or a significant business assets, know this, there is a major major tax law change coming in 2017. It is fully expected to be adopted and it will eliminate incredible benefits that hereto for people who have advisors like myself have taken advantage of and they have protected themselves in more so. But if you do not know it is coming, you cannot protect yourself and by the end of this year 2016 it will be most likely be gone forever. Okay?

So if you do not know what this is, if your accountant does not know, if your financial advisor does not know, go to Personal Pension Radio, send me an email. You can also find me online, just find Kraig with a K, K-R-A-I-G, Strom S-T-R-O-M, you will find me on LinkedIn, you will find me all over the place. Now, finally, a client heard me mention that I was starting a car dealership and asked me for details. Yes you heard it right. Starting a car dealership and asked me for details. So I thought why not share it with everyone, okay? So today, just absolutely preliminary, just very preliminary, I will give you more details as time goes on. But I have a passion for cars, I love cars, I love hot rods, old cars, new cars, just cars in general. I am a car guy. Now, I started even a car show last year. My show is called, Cars and Coffee Corona. Corona is the major city that is where my office is and where I have been living for many years so Cars and Coffee Corona started just over a year ago and now I have a weekly car show and it is very cool. I love it. I enjoy and I love the cars but I could never stomach the depreciation that comes with cars. Remember efficiency first and depreciation on cars is huge. Now, I know that there is money to be made in cars, between the wholesale price of a car and the retail price of a car, right? But only car dealers have access to that kind of a deal. So, why not? Right? Why not start a car dealership? Well, the question comes up with folks who ask, why not invest in stocks or real estate Kraig? Well, to be honest with you, real estate in Southern California is very high now. It has risen back up substantially, I do not feel comfortable buying real estate at this high point in the market. I also do not feel comfortable buying stocks at this high point in the market. So if not stock, what else? Well, I have money invested in first trust deeds where my money is attached to a piece of real estate acquisition financing and I receive a nice, healthy 10% rate of return on that money, so I already have some exposure to real estate that way. So as I looked at where to deploy my investment money, I have to be very specific where was I go to deploy that, right? The stock market and the real estate market did not really excite me, right? It did not really excite me, I wanted to be more cautionary. Cars are something that I have passion for and I know there is money in them darn wheels, so californiahighlines.com was born. I partnered with a friend and invested in the necessary infrastructure. It was not inexpensive, cost several thousand dollars to get it started I mean, it cost a few thousand just to start everything up. Right? But now, I have access to the dealer-only car auctions, and just recently, purchased our first 3 vehicles, we purchased a 2013 BMW M5, a 2011 Corvette, and a 2007 BMW M6. Now, if you want to see my cars and the ones that we have , please be my guest. You can go to californiahighlines.com and I will take you right to our listing page.

Now, I am gonna go through more details than that on future episodes. This is brand new for me. Am I taking a risk? Definitely. Am I excited about it? Absolutely. The fun part is I get to drive the cars that I want and I know that there is a profit in them. I know that I have a margin for error and I know what that margin is and I know that there is a retail price there that we can actually make a few dollars and enjoy the holy heck out of driving them, okay? So I am going into more details in again like I said, in the future episodes, but I wanted today to be a nice short and sweet episode. I got kind of excited there in the beginning and so I’ll smile and say, thank you again so much for being here on Personal Pension Radio. Go to personalpensionradio.com, make sure that you download the optimizing retirement income report and really, call to action, please get out of line, be brave, do something different and if you haven’t already done so, many have, request your own personal consultation with me. I am the income engineer, my specialty is helping you make sure that the light is on at the end of your retirement tunnel and I will promise you this. You will love the conversation. You will love finding out, you will love it, and you will have a direction and I look forward to it. Again, thanks for being here. I will talk to you again real soon.

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