On this week’s episode, we welcome back Creative Planning’s Director of Tax Services, Ben Hake, to share essential last-minute tax insights as we wrap up this pivotal tax year. Plus, we explore how having your advisor and CPA collaborating under the same roof is a compelling differentiator when it comes to your financial plan.
Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!
Episode Notes
John Hagensen: Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m John Hagensen, and ahead on this week’s show I’m tackling some big questions. What does the election mean for your taxes, is your do-it-yourself tax software really enough? I’ll be joined by Director of Tax Services Ben Hake to talk about year-end tax moves that you don’t want to miss. It’s time to get proactive, challenge the status quo and make the most of this final stretch here in 2024. Now join me as I help you rethink your money.
So much of what you try to control in life doesn’t go the way you expect it to. I think about parenting in my life for example. My wife and I were recently driving in our 12-passenger van with our kids and it hit me just how little control I actually have. My kids … Asking them to be quiet in the car. Okay, let’s do a quiet contest and then you give some incentive at the end. That can be better sometimes than just threatening what’s going to happen if they’re not quiet. But there’s something about a car ride that creates this inherent desire for kids to scream and go crazy. On our last road trip you combine that with kids getting sick, puking into buckets while we’re driving on the interstate. Don’t you want to be in my family? Do you want to join me on my next vacation? You are welcome to join as long as you’re willing to hold the bucket for my three-year-old. She’s cute, I promise. But it’s hilarious. I was joking with my wife at one point during the car ride. We had one kid screaming, one kid needing something else, one kid sick. This is genuine psychological warfare. You think you’re in control, whether it’s parenting, whether it’s with your career or other relationships or your retirement or the election, but maximum frustration comes from trying to control things that you can’t actually dictate.
Let’s look at a few examples of personal finance aspects that we try to control but can’t. And there are a multitude of examples. Here are just a few. How about the stock market? We love to track it. We love to check our accounts. You’re turning on CNBC in the morning. You’re looking at your iPhone, the stock app. What are things doing today? But ultimately you have absolutely zero control over market returns, especially over the short term. And by short term I’m talking years. And it’s really illogical when you think about it how much energy so many people spend obsessing over the daily movements of the market. How about the economy? Huge hot button during election seasons. Same goes here as with the stock market. Whether there’s a recession, whether there’s inflation, whether there’s deflation, whether there is stagflation, you can’t directly control the outcome. Neither can I. You can go cast a vote.
However, how much time and energy and stress is spent thinking about the election? So you’re not going to be able to control the stock market or the economy or election results, but what can you control? Well, you can control your tax strategies. I know. That’s right. It’s one of the few things within personal finance that you have direct authority over. And so when you think about the election … And it’s understandable. You might be getting anxious about it. What’s going to happen? Will taxes rise? Will the political landscape change? The truth is you don’t know. I don’t know. But here’s what I do know. The tax Cuts and Jobs Act of 2017 that went into effect in 2018 is expiring at the end of next year and unless Congress acts tax rates are going up. They’re going up unless something changes.
That’s just a fact. We’re also staring down the barrel of a $35 trillion national debt. I think it’s reasonable for you to make an educated guess which way taxes will go in the next decade. So what should you do? You should focus on the tax moves you can make before the end of the year. So a couple came to me earlier this year, recently retired. They had done very well for themselves. They saved up. They were well-funded for retirement, but not that unlike most Americans, the vast majority of what they had saved were in tax deferred accounts. Between IRAs and 401Ks. And in reality, taxes weren’t really on their mind because they were in their 60s, hadn’t taken Social Security yet. As I mentioned, they’d retired, so their income was really low and all of their retirement accounts were continuing to defer off of their returns. So they had gone from a high bracket while working to a very low bracket. They were interested in retirement income and figuring out their estate plan and updating that and looking at the risk management and their investment returns and how do they drive income from their portfolio and will they have enough to make it last if they buy a second home? These were the questions. Taxes were probably numbered 15 on their list because in the moment they didn’t seem important.
But in review of their portfolio, the investment review, it was discovered that their asset location where they held investments was completely wrong. Just as I mentioned, they had dividend stocks that they were reinvesting in their non-qualified accounts, which were the smaller part of their portfolio. They had growth oriented mutual funds and ETFs inside of their tax deferred accounts. So one of the things I looked at to reduce their taxes was not changing anything about the constitution overall of the investments. Just shuffling the deck on what was held where. We then unwrapped all of their mutual funds. These antiquated retail mutual funds in that smaller portion of their account. The non-qualified portion and direct indexed. Which means we took their portfolio, removed the wrapper of the mutual funds, bought every individual holding. So now they have over 500 tax lots inside of that account that they can harvest losses moving forward to offset gains. Much more tax efficient and by the way, lowered their costs significantly.
But here was the big thing for these folks. Roth conversions. 80% of their net worth had never been taxed. 80% of their net worth in those retirement accounts between now and the day they die, assuming that they don’t give it away to a 501C3 is going to be taxed at ordinary income. We’re not going to eliminate it so the next question becomes how do I pay the least amount of tax possible on these accounts?
Effectively, they had been asking the IRS for decades if they could pay taxes later on that income. They’re now about 10 years away from required minimum distributions. And that required distribution is basically the IRS saying time to pay the piper. And every year you get older, your life expectancy compresses. Hopefully your accounts invested well and getting larger, meaning what happens to that distribution? That fully taxable at ordinary income distribution? It gets bigger and bigger and bigger. They had never seen a projection of their required minimum distributions when they were in their late 70s into their 80s. It boggled their mind that all of that would be taxed at ordinary income on top of everything else. And here was the beauty. They’re in a really low bracket right now because they were retired and hadn’t started Social security as I just mentioned. So we suggested converting part of that traditional IRA into a Roth IRA to use up lower brackets, which have been expanded greatly due to the Trump tax reform, allowing them to pay taxes on that portion now at a rate that we’re pretty happy with. Then enjoy tax-free growth moving forward and tax-exempt distributions and or passes to the next generation tax-free. And no required minimum distributions doesn’t affect Medicare means testing. Those Roth assets are a ghost moving forward.
Unfortunately, they should have been doing this the last about five years rather than waiting until now. But they have this year and they have next year, and we will see what happens moving forward. Why is that story relevant for you? Because my suspicion is that your advisor and your CPA are not doing this forward-thinking tax planning on your behalf. How confident are you on your asset location and your fees and expenses and have you been Roth converting? Have you been running tax return projections on an annual basis? Do you know what future RMDs will be at hypothetical growth rates? These people were smart. These people were successful. They had more than enough money to have a phenomenal retirement. By all accounts, very intelligent. But had not been given guidance around this.Right now with taxes it’s your opportunity. Your time is now. And there is something incredibly powerful about having your CPA and your financial advisor working together under one roof.
Today I’ve got a special guest with me, Ben Hake. Ben is the director of tax services here at Creative Planning, is a certified public accountant. He leads our tax team with hundreds of CPAs doing 10s of thousands of returns. He has years of experience helping people navigate complex tax strategies, especially when it comes to those year-end decisions that can make or break your situation. So if you want to make sure that you’re not leaving money on the table or getting caught by surprise, Ben’s the guy you want to hear from. Ben, thanks for joining me back here on Rethink Your Money.
Ben Hake: I’m glad to be back. Really hyped me up this week.
John: Oh yeah. Absolutely. Well, let’s kick it off with this. You just wrapped up tax season in terms of extensions, what was the most common mistake now that the dust has settled that you saw people make this year when it came to their taxes?
Ben: One that doesn’t inherently come to mind would be we get a bunch of people who wrap up the returns and they’ve got very low income, 10, 20, $30,000. Awesome. We owed nothing at all. And I see those returns like, man, we could have done a Roth conversion or they got a brokerage account we could sell some gains in at 0%. So I think those years where you’ve got low income hopefully are limited and you don’t have lots of those in the future. So anytime you’ve got that opportunity to maybe realize some income at 10%, 12%, that’s something we should be taking advantage of.
John: It’s counterintuitive because people just think, great, this was an amazing year and they’re sitting there with a $2 million IRA a few years from RMD age. Actually, let’s try to smooth this out a little bit. I think that’s a really good point.
Ben: Correct. The other one we’ve seen increasingly after we got the tax Cuts and Jobs acts in 2018, one of the big things that changed was that $10,000 limit on deductible taxes, so that’s real estate, income taxes. And the states pretty quickly started to work around for that for business owners, which they basically say, “Hey, you can pay this pass-through entity tax and ultimately you get to deduct it as a business expense and totally skirt that $10,000 deduction.” And this is one of those things where generally speaking, these regimes, ultimately your state’s getting the exact dollars, it doesn’t cost you anything out of pocket. But that federal savings could be substantial, especially if you’ve got a small business that is fairly profitable. I’ve got clients who are going to saving 10, 15, 20 $5,000 every single year and to leave that on the table is just a huge miss.
John: Let’s flip that around. What’s one or two tax strategies that you saw applied this year that really saved people some big dollars?
Ben: So I would say there were two that I’ve seen with some regularity. One is we get a lot of self-employed people who maybe start off slow and ’23 was really the year that it ramped up and they became really successful. And so for those clients, a lot of it’s going to be structural changes. So I got a realtor who really turned it up and so this year generally if you’re just a sole proprietor, you pay self-employment taxes on everything. So for this one, we created an LLC, made an S corporation election, and because of the way that all interacts, there’s ability to save a pretty decent amount of payroll taxes. But because she now had a business, she was also able to elect into that pass-through entity tax I mentioned. And so she was double dipping on some payroll tax savings, some federal tax savings on the state taxes, and all of a sudden she saved $20,000 and that wasn’t a one-time sugar rush. We did something structural and she should be able to benefit from that for years going forward.
John: I think that gets missed because it’s not something related to filing your return at the end of the year. That was entity structuring and things that you really need to look at in a proactive manner. You said you had two. What’s the other one?
Ben: The other one that we’ve got is the people on the other end of the spectrum. So that’s somebody who’s in the small business side. We’ve also got a lot of retirees who I get into the return and it looks like they’ve got a $31,000 itemized deduction of which 21 grand is charitable, which I say that’s awesome. Except for they’ve also got RMDs. So if they had done that qualified charitable distribution, they give the same 21 grand to their charity of choice, but they still get to claim the $30,000 standard deduction. So you put those two things together, all the same money is flowing out of their accounts, but because they get the $21,000 exclusion from the QCD and the $30,000 standard deduction, they effectively got $51,000 of deductions versus the way they had ended up reporting it themselves. So again, I’m always looking at how can we spend the same amount of dollars or donate the same amount of dollars and get a drastically better tax result?
John: Absolutely. Yeah. That’s brilliant. Let me shift gears here to the election. I don’t know if you knew that. There’s actually a presidential election about to take place.
Ben: Wait, what now?
John: Yeah, I know. Weird, right? We know that a big part of the debates and the campaigning deals with tax policy and economic policy. A common question I get then as a wealth manager, Hey, I’ve heard one candidate say this or that, should I be doing something preemptively in light of that? What do you think? Is there a scenario where people should start planning now based on what candidates are talking about on the campaign trail?
Ben: I would say no. Generally speaking, a lot of the things that are sound bites that you’ll hear on TV or the radio tend to be the things that are a little bombastic but maybe don’t have a high likelihood. So I don’t think we’re all going to be switching to being tipped so that we get to avoid taxation on that. But I think the things we should focus on are the things we know are eventually going to happen. So the big one’s going to be that Tax Cuts and Jobs Acts set to sunset at the end of 2025. So for that, we’re looking with a lot of our clients where we know, hey, the standard deduction is going to be dropping down. So we’ve got a lot of clients who are doing the opposite of what you would generally think of, which is they want to defer deductions out of 25 into 26 because they think they’re going to get more bang for their buck. And similarly, we’ve got some small business owners who are starting to plan should we be pulling money into 2025 or 2024 even to be able to get those lower rates and those benefits?
So some of the other larger items like the taxation of unrealized gains, I think that’s going to be a tough pill to swallow and the implementation of that would be even more difficult. So I would say if that’s something that’s going to happen, that’s going to be a, Hey, we got a lot of runway, they’re going to talk about it a lot. Congress is going to go back and forth. So I don’t think there’s anything to do immediately, but if that does happen, that’s definitely something that we would start to evaluate as the likelihood increases that it would actually happen.
John: Yeah. I hear what you’re saying. Don’t act preemptively on necessarily campaign soundbites, but do focus on things that as of now we know to be true, even though we know that those can change as well. All right, Ben, let’s keep this rolling. A lot of people think they just need their CPA when tax season arrives. This is a common thing you and I talk about, and as wealth managers we’re trying to communicate this to our clients. What do you think they’re missing when a typical person comes to you … Or maybe this doesn’t happen hopefully as often at Creative Planning, but this is very common where they haven’t brought their financial advisor into the tax conversation. What do you think that they’re missing?
Ben: I don’t want to bemoan the profession, but I do think there’s a little bit of a tendency to focus on the immediate year and how are we reducing taxes today for the 2024 tax year? And so I think there’s a lot of that when you look at it in a vacuum, maybe that’s the best decision, very short-sightedly. But when we look at it for a long-term … And that’s really where I rely on the wealth managers and financial planners to say, “Hey, this is the client’s goals. This is what they want to spend when they start to do things, this is how much they want to leave to their kids, this is their charitable intention.” And a lot of that doesn’t come up even during the planning process necessarily. So it’s good to have that whole team picture.
And actually, I was just working with a client who they’ve worked for a long time. They just recently retired and they want to do a six-month excursion across Europe. And one of the things they were saying is it’s going to be expensive, like a hundred grand. And so the original plan … Again, I wasn’t really thinking and the wealth manager is like, “Well, given that’s in January, should we just wait to do that?” And I was like, “Well, let’s think about it. Your income’s low right now, so what if we split it over a couple of … December of ’24, we take out half.”
John: Straddle the year. Yeah, I like that.
Ben: Exactly. Straddle the year, and instead of having it that next 50 grand get bumped up into the 22, 24% bracket, it was all across the lower bracket so we ended up saving about 10 grand by having that conversation with everyone in the room.
John: Yeah. That’s fantastic. Those are those proactive forward-thinking shifts that can make a really big difference. We know tax law’s complex. Shoot, it makes the Bible look like a children’s novel if you try to go through the code. It’s just unbelievable. What’s the scenario in your opinion where someone should finally say, “Okay. I’m not going to do my own taxes anymore. It’s time to hire a CPA.”? What is that pivot point?
Ben: We get a couple of clients who’s just convenience, they don’t have the time to do it anymore, but the point where it’s has the complexity tipped over, I always say if you start to have activity that isn’t just being reported by a third party … If you get your W2 and your 1099 from the bank for your interest, that’s pretty straightforward. But if you’re like, “Hey, I’m self-employed now and I know how much I got paid, but I don’t really know my expenses,” or, “I’ve got a rental property, and again, I know a couple of the items,” that’s where the CPA can get involved and do … Part of it’s just education. Hey, these are the things you should be tracking, and we want to do that on the front end because combing through months of receipts and bank statements isn’t easy. And then the other I would say is related to those items, but if you ever become a partner or an owner in a business, again, that’s where the tax code opens up quite a bit, allows a lot more opportunity compared to being an employee. So the value and the ability to act on some of those things you might not be aware of, that’s where it really occurs.
John: Well, no one wants to pay more in taxes than legally required. How can someone make sure that that’s actually the case? How can someone be certain Ben, that they’re paying the least amount possible while obviously staying within the rules and not committing fraud or tax evasion?
Ben: Yeah. So I would say number one is if you’re working with a CPA, you should really be talking with them outside of that January to April 15th time period. Reactive tax planning is almost impossible to do. But if you sit with your CPA sometime in the summer or those winter time periods and really walk through, Hey, these are my income sources, what should I do for this? And for our highly comped employees, it’s really looking at are we taking advantage of every benefit under the sun that our employer offers? So there’s the easy ones like 401k health insurance. Increasingly as people have kids, we want to make sure we’re taking or taking advantage of dependent care accounts. We have an increasingly large number of employers who are offering that backdoor mega backdoor Roth through the 401k plan, which again, not an immediate tax savings, but generationally gets a lot of money into the Roth accounts.
John: Yeah. You’re basically transitioning money from after tax non-qualified money in a capital gains environment into a Roth environment. And so you’re right, that’s one that doesn’t show up immediately, but 10, 15, 20 years down the road, it could save you a lot.
Ben: Exactly. And so that’s for our employees … For our self-employed individuals I literally like to go through and just walk through their financial statements and look at all their expenses. And part of that is, hey, do we have any personal items in there just to be careful. But a lot of this is, Hey, I see what you’re doing. I’ve got four or five other clients who do something similar and they’ve got a bunch of these other items that allows them to run their business and our legitimate costs, so let’s make sure we’re doing that. So it’s one of those things that I think the easiest thing to do is look at it proactively and before we get to year-end. Because again, sometimes we got to tweak some things, sometimes we got to change, and the earlier we do that in the year, the less drastic that course correction will look on your day-to-day life.
John: Well, Ben, this has been awesome. Thanks for sharing your expertise with us today. I know taxes aren’t always the most exciting topic for everyone, but they’re important obviously, and they’re one of the few things you can actually control. And you’ve made it clear how important it is to get ahead of these decisions before year-end. There are a couple of months still left, so be proactive. Thanks again for coming on the show.
Ben: Thank you, John.
John: Let’s jump into this week’s common financial wisdom to rethink together. And I’ve got a doozy to kick us off. How about the idea that I have one of the do-it-yourself tax software programs, so I don’t need a CPA or a financial advisor’s help. The software has improved and it’s become very user-friendly and I think for some people it’s great. Makes doing your own taxes much easier. If you’re young, if you’re single and have no major investments, using a tax software is probably fine. It’s like letting my kids use a calculator for basic math. When the equation is simple, they’ll get the right answer, but the moment life becomes a bit more complex, so does your tax situation. And that’s where a do-it-yourself approach might not be enough, and frankly, it may cost you a lot more money even though in a vacuum you think you’re saving money.
Say you had a major life event this year. You got married, you had a child, you moved to a new state, you sold a home, you had adjustments to your investments, you started a business, you sold a business, you had a death in the family. Name a hundred other examples. All of these events impact your taxes in a way that tax software might not fully capture. And while software can plug in the numbers, it’s not going to ask you the nuanced questions where you need a human being to be interacting with you who knows your situation and understands the bigger picture.For example, a CPA might help you realize that moving to a different state could open up new tax deductions or that your home sale qualifies for an exemption that reduces your capital gains tax. I think the broader consideration though, we’re talking about reporting after you already move states. Where that tax software is absolutely not going to help you is in having a discussion around the pros and cons of moving states prior to doing so. Not looking backward through the rear view mirror, looking out the windshield and making proactive strategic future decisions.
It reminds me of that TurboTax ad. This was somewhat controversial. That suggested taxpayers could drop their CPA and just use software. You might imagine the ad made waves in the tax world because it really undermined the expertise that a professional CPA can bring to complex scenarios. It’s like thinking you can play a piano solo at Carnegie Hall because you watched a few YouTube tutorials or can play chopsticks. Yeah. Little different. You might be able to hit a few notes, but you’re missing the skill only a seasoned pro brings to the table. I’ve asked this question about DIY investing, but you file your own taxes. Would any of your friends say, “Can you do my taxes for me?” If the answer is an emphatic no, why are you essentially hiring yourself to do your own taxes?
And let me be clear, I’m not advocating that someone who’s 21 years old has a W2 job and nothing else going on … Yeah. That person can probably pay the 50 or a hundred bucks and quickly file the return. It may not be as impactful. But if you have assets and more going on with your situation, a CPA in many cases can add significant value. And that doesn’t even include the other layer to consider, which is efficiency. For high net worth individuals, they use advisors not only for the complexity of tax strategies, but for their time. Your time has value too, whether you have a $30 million net worth or not.
Common wisdom number two, I’ve already invested a lot so I can’t back out now. The sunk cost fallacy is something we all fall victim to, and it doesn’t just apply to finances. It happens in all areas of life. You’ve invested time, money, or effort into something, and then even when you realize it might be the wrong path, you just keep going because you’ve already put in so much. This is a classic mistake with investments. Maybe you’ve been holding onto a stock that’s underperformed for years, but you tell yourself, I’ve already put so much money into this, I’ve already underperformed for so many years, I can’t give up now because that would be realizing the impact of that mistake. It would be putting it to bed finalizing, yep, I messed up.
Take the Cleveland Browns. They are the perfect example of this. Even before Deshaun Watson went down with his achilles. To land him from the Texans, they offered a deal that had never been offered in the past. Fully guaranteed over $200 million because he didn’t plan on going to Cleveland. They had to do it to entice him. And all season long they have forced their coach who’s in the past been a pretty darn good one even having won NFL Coach of the year to play this terrible quarterback who is a shell of his past Pro Bowl self. Looks lost out there. Well, why? Because ownership didn’t want to admit the mistake that by trading away draft picks and paying him at the time the biggest guaranteed contract ever was a gargantuan mistake. We all already know that. Anyone who’s ever watched a football game knows that. By continuing to play him and continue to lose, it does not negate change or improve the atrocious trade and the obscene guaranteed contract. That’s already happened.
But just like in sports, sticking with an investment or strategy that isn’t working doesn’t mean you’ll recover your losses. It usually just means you’ll fall further behind. Imagine your entire net worth was piled on your kitchen counter like stacks of a hundred dollars bills falling off like the World Series of Poker when it finally gets down to heads up with a final two players and they bring out the winnings and set it on the table where they’re playing. That’s what I want you to do with your net worth. Now, imagine you began allocating and strategizing and investing it per your goals, per your desires per current tax laws as of today. Would you invest it in the same fashion as it currently is constituted or would you invest differently? This is an extremely helpful exercise to guard against sunk cost. Maybe you have an over-concentrated company stock position that’s Intel or something that’s performed poorly over a long period of time and maybe that represents half of your portfolio. By the way, I’ve seen this before.
When I ask that person, if you just had all this money piled on your kitchen table, would you put half of it in Intel stock right now? Of course their answer is, well, that would be crazy. No. Overly concentrated, risky, underperforming, additional anti-diversification because I work there and so my salary and my livelihood is also tied to the success of that company. I answer, that’s what you’re choosing to do by remaining with half of your portfolio in Intel stock. Now obviously there may be some tax implications, there may be some other factors to consider, but that is how sunk costs can rear its ugly head if you are not careful. And speaking of sunk cost, you may have worked with a CPA for years, you may have worked with a financial advisor for decades, but if you were to have freshly moved to your town and needed to hire a brand new CPA and a brand new financial advisor, would you rehire them?
Well, our last piece of common wisdom is that your tax preparer is liable for mistakes on your tax return. Is that true? What do you think? After all, they signed your tax. You know who else signs your tax return? You. And that’s what makes this one a little bit tricky because it’s easy to assume that if a professional makes an error, they’re the ones on the hook. But when it comes to taxes, it’s not the case. No matter who prepares your return, the IRS holds you responsible for what is reported. In fact, the IRS doesn’t care if you hire the most expensive CPA in town. If there’s a mistake, you are the one who gets the audit, not them. Let’s say you lend your car to a friend and they park in a no parking zone. Who gets the ticket? You do because it’s your car and you name is on the registration. Now let’s be honest, you’re going to go to your friend, Hey, Venmo me some money. You owe me. But ultimately, the government’s coming after you, not your friend to pay that ticket. And that’s why it really is crucial to choose your tax preparer carefully.
CPAs are not all created equal. Some are really good, some are really bad, and a lot are in the middle. But here’s how you can tell if you have a great CPA. They’re not just plugging in the numbers. They’re about understanding your situation and actively strategizing and planning for the future. And hopefully that not only leads to an efficient tax environment for you, but it minimizes your risk of errors and audits.
It’s time for this week’s one simple task where we break down a manageable action step you can take to improve your financial life. This week’s simple task is to calculate your effective tax rate. Your effective tax rate is essentially the percentage of your income that you pay in taxes. That’s it. It’s calculated by taking your total tax paid and dividing it by your total income. So if you paid $20,000 in federal income taxes and you had an income of $100,000, your effective tax rate would be 20%. Now, let’s distinguish between your marginal tax rate and your effective tax rate because this can be a little bit confusing. Your marginal tax rate is the rate you pay on your last dollar of income. So if you’re in the 22% bracket … These are the brackets that you see listed by the way. Only the portion of your income that falls into that bracket is taxed at 22%. It’s not like once you go over that threshold, everything retroactively is taxed at 22%, it’s graduated. Most of your income in that scenario is likely taxed at much lower rates. In other words, your effective tax rate will generally be much lower, often about half of your highest marginal bracket. So again, this doesn’t need to be confusing. Just figure out what you paid total in tax and divide it by your total income.
You can find all of our weekly one simple tasks on the radio page of the website, so if you missed any prior weeks, they’re all there to help you make consistent progress. All right. It’s time to dive into one of my favorite parts of the show. It’s your questions. And to help me out, I’ve got one of my producers, Britt here. Britt, who’s up first?
Britt Von Roden: Hey John. Up first. Today we have Steve out of Washington and he wants to know, why does it feel like we’re always in a secular bull market?
John: Great question, Steve. It can certainly feel that way, especially if you’ve been invested in the market over the long term. And by the way, this is a good thing that you feel that way. It’s a whole lot better than you saying feel like we’re always in a bear market because then I have some real questions for you. A secular bull market is a period where the stock market is generally rising for an extended stretch. Sometimes decades. But within these long-term trends, we do experience short-term bear markets corrections, which are drops of 10% or more, and other moments of volatility certainly. To give you some context on this, the average bull market lasts around five to 10 years, while the average bear market tends to last only about 18 months. In fact, we have a chart here at Creative Planning that I’ve shown to clients and I will post that to the radio page of our website that shows the history of bull and bear markets. It’s a phenomenal visual to give you a sense of really how much the odds are stacked in your favor, how often these secular bull markets do in fact exist. So if you’d like to view that, you can check that out on the radio page of our website.
Bull markets have historically lasted much longer and brought far greater gains than the losses incurred during short bear markets. For example, if you look at the S&P 500 since 1928, you’ll notice that while we’ve had numerous bear markets, they happen about every five years, sometimes more often than that, sometimes a little less often. The overall trajectory has been positive. It’s a reminder that while downturns are inevitable, the trend over time has always favored the patient investor. It’s like rooting for your favorite sports team. Sure, they’re going to have a few bad seasons. Like if you’re the White Sox, horrible season. If you’re the Jets, sorry, another one. Even though you have Rogers, I know disappointing, I’m sure. But if you are a loyal fan, you know that sticking with them through the ups and downs makes the championship years that much sweeter. Appreciate that question. Let’s go to Luke over in Brooklyn.
Britt: Yeah. Of course. Luke is wondering how quickly and efficiently our process is to meet with the CPA and get a second look. Like most folks, Luke shared that they are busy people who don’t want to feel like this is a bunch of extra work.
John: All right, Luke, you are speaking my language here. You hear about second opinions and you’re wondering, what does this require of me? I totally get it. You’re busy, everyone’s busy, and frankly, the last thing you need is a process that adds more stress. So here at Creative Planning, our goal is to make this as seamless as possible. You can come into one of our offices and we have them all across the country. You can meet with us virtually not even need to leave your home if that’s more convenient because we value your time. From the initial contact, we have a straightforward … I would call it client first approach. It starts with a brief conversation about your needs and your goals and ultimately why you’re reaching out, what’s going on in your life, what’s going on with your finances, and what questions can we help answer that are most important for your situation? From there, we’ll review your current tax situation, identify opportunities for improvement, and provide you with a game plan all without you needing to gather a mountain of paperwork. Doesn’t require you to commit to having us manage all of your assets. I want this to be the most valuable time you spend with a professional all year. The goal is that you have peace of mind that you feel like you’re not missing anything. All right, Britt, let’s go over to Leslie.
Britt: Okay. So John Leslie wants to know how often she should be evaluating her net worth and if there’s an easy way to do it.
John: Great question Leslie. Monitoring your net worth is a key component of financial health, but it’s something many people overlook. I recommend evaluating your net worth at least once per year. Ideally during a specific time you’ll remember either the end of the year when you’re already gathering your financial documents, maybe it’s a tax time, maybe it’s to reset for the beginning of the year and establish some objectives for the new year. Maybe in that case it would be January. But beyond just tracking progress of evaluating your net worth can give you insights. It’s your personal balance sheet, so into your debt and the types of debt that you have. And then you can evaluate that within the context of the assets on the other side of the ledger. Are you holding high interest credit card debt or is it primarily in a low interest fixed rate mortgage? These types of evaluations can help you make adjustments in part based on current interest rates along with your objectives.
Additionally, if you’re thinking about retirement, it’s helpful to distinguish on that net worth statement, your liquid and non-liquid assets. What of my net worth is available to use in retirement? And if you’re wondering … Because this is a common question that I get. I know it wasn’t yours, but it’s one I’m asked often. Can I retire? Do I have enough? A rough rule of thumb to answer that, just take your liquid net worth, the assets on that net worth statement that you’re going to be able to use and consume for retirement that are available, I guess I should say for retirement, and apply a four or a 5% withdrawal rate. If you have a million dollars of investible assets, that could provide around 40 to $50,000 per year of retirement income. Now, this isn’t promissory, this isn’t a substitute for a detailed financial plan, but it’s a broad starting point.
If you need $150,000 a year of income from the portfolio and you have that million dollar portfolio, the value of this rule is to say you’re not close. You need about $3 million if that’s the case and you have a million. So it’s helpful to see if you’re even in the ballpark relative to your objectives and your time horizons. Now, if you want to figure out, well, I’m 10 years away from retirement and what will that be in 10 years, and how will that be impacted by inflation, and how should my investments be invested in light of that, and which types of accounts should be more aggressive, and which ones will I pull from first, and when should I take social security, and what would the tax implications of that be? All of those types of things … Am I saving enough? That’s done within the context of a written, documented, detailed financial plan, and there really isn’t a great substitute for that.
If you work with a company like us at Creative Planning, we’re updating your balance sheet in real time regularly, consistently. We’re looking at that within the context of everything that I just shared. But if you’re doing this on your own, Excel, Personal Capital, mint.com, there’s a lot of automated tools that you can plug in your balance sheet and see where you stand. And speaking of planning and interest rates, let’s move on to our final question, which comes from Jamie in Texas.
Britt: Our last question today, John, is from Jamie in Texas and Jamie is wondering how much interest rates need to drop before they should refinance into a new mortgage loan?
John: Well, in the past, people used to say you needed about a 2% drop in interest rates for refinancing to make sense. Most recently, it’s been 1% because at one point mortgages were 3.5%. They weren’t going to go down another 2% because once they were down in the fours or even high threes, it was so unlikely that you’d see a 2% drop that people pulled that back to 1%. And now in some cases … I’ve even seen mortgage brokers recommend a half or a quarter of point drop might make it worthwhile. But the whole key here is not to look in generalities, but to really run the numbers for your specific situation. So look at your current rate, your loan balance, what you’d save with a lower rate, and then factor in the closing cost for refinancing. If savings outweigh the costs and you plan to stay in your home long enough to recoup the upfront costs, then refinancing might actually be a good idea. But again, it’s not just about the rate.
Using an extreme example, if you were going to stay in your house six more months, why would you refinance? If you were going to stay in your house 25 more years, you could justify refinancing at a much smaller difference because you’re going to make up that break even of the upfront costs, which are very important to understand before you go to refinance. So speak with a good certified financial planner. We can help you here if you have questions about that to ensure that you are arriving at a decision that is best for you.
Thank you so much for those questions today. And if you have questions just as these listeners and you’d prefer to submit those for me to answer on the air or directly email those to [email protected]. Why not give your wealth a second hook?
Before I wrap up today’s show, I want to take a moment to consider what all of this really means. Nelson Mandela once said, “Money won’t create success. The freedom to make it will.” That’s what taxes are about. The topic for today’s show. They’re about freedom. Yes, we all want to pay the least amount of taxes legally possible. Of course we do. And that’s one of the big things a good financial advisor will help you strategize. A good CPA. But I think it’s important that we also acknowledge that paying taxes means that you’ve had the freedom to earn money, to build a life, to create opportunities for yourself and for your family. Paying taxes can feel like a burden, an annoying obligation you’d rather do without. And sometimes parenting is really hard and it feels inconvenient and it feels stressful. And when your kids are screaming at you or misbehaving and you’re wondering like I do sometimes I’m terrible at this, I need to read more parenting books, you remind yourself that it’s also a blessing.
Parents understand this. The messes kids make the hours you spend cleaning up toys and wiping down sticky countertops. Just walked in our front door the other day and I’m like, “Why is my hand stuck to our front doorknob? Oh, there’s some sort of food dried on it.” And then of course, I thought to myself, well, of course there is. Seven kids. They go in and out of the store all day long with melted popsicles all over their hands. Yeah, this is perfect. And there’s endless loads of laundry and you’re shuttling them to and from practices. And sometimes when you lose perspective, at least for me, it’s easy to get frustrated with the chaos. But the reason you’re picking up toys and you’re cleaning up messes is because you have kids or maybe they’re your grandkids. Kids that you love who fill your home with joy and fill your home with laughter and life and a curiosity for the future. And they say things that are hilarious and sometimes don’t even make sense. But the very thing that can feel like a burden is in reality, a reflection of the blessing that you’ve been given.
And the same goes for taxes. The fact that you’re paying taxes means that you’re doing something right. You’ve been able to earn, you’ve been able to invest, you’ve been able to provide for your family. And you know what? The bigger your tax bill, the more income you made. It’s a reflection of the opportunities you’ve had and the choices you’ve made. Taxes are a part of living in a society that despite its flaws, and there are many offers, incredible opportunities for growth and for prosperity. The value of your money isn’t just in the number on the bank statement. It’s in what the money allows you to do. It’s the freedom to make choices that align with your priorities and with your values.
It’s the ability to spend time with the people you care about, to invest in experiences rather than just accumulating things and to contribute to causes that matter most to you. Paying taxes is part of living in an incredible country. Yes, it’s easy to get bogged down in the frustrations of the political climate or to grumble about how the tax system works or how the federal government spends money. But at the end of the day, paying taxes means that you’re participating in a system that provides you freedom. Do not take that for granted. Compared to other countries around the world, we have a high level of financial freedom that’s really unparalleled. And our tax system, while far from perfect, enables you to build wealth, support your family, and create a meaningful legacy. And remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter.
Announcer: Thank you for listening to Rethink Your Money, presented by Creative Planning. To hear past episodes or learn more about the topics and articles discussed on the show, go to creativeplanning.com/radio. And to make sure you never miss an episode. You can subscribe to Rethink Your Money wherever you get your podcast.
Disclaimer:
The proceeding program is furnished by Creative Planning, an SEC registered investment advisory firm. Creative Planning, along with its affiliate, United Capital Financial Advisors currently manages or advises on combined $300 billion in assets as of December 31st 2023. John Hagensen works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not necessarily represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment, tax or legal advice. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on the show, will be profitable or equal any historical performance levels. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed. If you would like our help request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.
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