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3 Essential Questions to Drive Your Financial Success

Published on September 18, 2023

John Hagensen

Whether you’re facing a career shift, family changes or a spurt of personal growth, make sure your financial plan can adapt accordingly by asking these three crucial questions. (00:41) Plus, how can we rethink our reactions to market volatility? (26:50)

Episode Description

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!

John Hagensen:  Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m John Hagensen, and ahead on today’s show, how you can keep up with the inevitable changes when it comes to your finances. How to neutralize market volatility, and whether your 401K is for sure your best option when it comes to retirement savings. Now, join me as I help you rethink your money. Louis L’Amour said, “The only thing that never changes is that everything changes.” How true is that? In fact, on average, people experience 36 major life changes or disorder of events just during their adult life. That’s one major life change every 18 months. Things like career change, unemployment, marriage, divorce, death, moves. These major transitions in life are so frequent and they’re so regular, they’re really not special. Derek Thompson of The Ringer had an entire podcast dedicated to this idea of change. These changes feel special and we treat them like they’re this big thing.

And at the time they may feel like that, but in the course of life, these are ordinary events. And as Thompson went on to say, the lie we tell ourselves is these are disruptions. But in reality, if your life has not changed in the last 18 months, that’s what’s unusual. Think about the last 10 years of your life. How many changes have occurred? Here was my quick hitter list. Went from two kids to seven, so five additional kids. Pretty much just stop there, right? Okay, that’s enough change for a decade. We moved three times, including living on the beautiful island of Maui. Shout out to all my friends who are going through absolute devastation. My heart breaks for you. My wife was an amazing wedding photographer. She flew all over the country shooting weddings. She stopped doing that, so our family relied entirely on my income. That was a change. We had a couple of divorces in our family, not with obviously my wife, Brittany and I, but in our extended family and really fractured our family unit.

Had a family member diagnosed with Alzheimer’s, had another kid who’s in Japan right now serving our country through active duty with the army. Really proud of him. And if we zero in more specifically on the financial aspect of our lives, we’ll see the same sort of changes occurring with regularity. Meeting with thousands of families over the years I hear a lot of, well, this year was different. A lot changed. Our air conditioners went out, so that was an unexpected expense. We had to re roof the house. It was our 30th wedding anniversary, so we took a big vacation with the whole family. We’ve got to pay for a kid in college now. We had this health event happen that was kind of expensive. We lost a job. We were promoted at a job. My point is, you better plan for changes to occur, for the abnormal to happen because change is constant. I’m not suggesting you become a hyperactive day trader. Of course not. But the broad financial plan needs to change because your life is constantly changing.

And frankly, that’s why I believe most people, not every person, but most people should hire a financial advisor because if you’re honest with yourself, it’s really difficult in the context of a busy life to make the proactive changes that are consistently required to have a great financial plan. If that resonates with you, but maybe you’ve never known where to take the first step, or you’ve been with your advisor a long time and haven’t had a second opinion recently, why not give your wealth a second look by speaking with a certified financial planner just like myself at creativeplanning.com/radio. Before I share with you the three important questions you need to answer regularly in a changing environment, let me go through the reasons you should not make changes to your plan. You think or you heard or you read that something’s going to happen? Basically, do not change your plan based upon forecasts. Because while even a broken clock tells the right time twice per day, most forecasts, almost all of them are worthless.

Here are a few hilarious ones from the past. Fannie Mae in the summer of 2004 said, “The subprime assets are so riskless that their capital for holding them should be under 2%.” Subprimes riskless. And to be fair, Steve Ballmer, now Los Angeles Clippers owner and then CEO of Microsoft may have just been being competitive, but he stated there’s no chance that the iPhone is going to get any significant market share. No chance. That didn’t age well. And last, Jim Kramer. Man, he’s fun to watch, isn’t he? How about when he answered the caller’s question, “Should I be worried about Bear Stearns?” On March 11th, 2008 just before its crash Kramer emphatically replied, “No, no, no. Bear Stearns is fine. Don’t move your money from Bear, that’s just being silly.” Okay, so hopefully I made my point. Forecasts are not reasons to change your plan. A new president in the White House that you don’t like, that’s not a reason to change your plan. Or maybe one that you do like and you’re going to get more aggressive. No, don’t do that.

Well, it’s a midterm election year. I’m going to change things, try to time the market. I’m going to try to chase this hot new investment. No, all terrible reasons to change your planning. Instead, here are the three most important questions that you need to answer regularly because they do necessitate potential changes. Number one, what has changed in my life? Number two, what law or policy has changed around me? And number three, what progress have I made toward my goals? I’ll briefly unpack each. So let’s start with what has changed in your life. I had clients recently, the husband was making about 150 grand a year. Wife was working three days per week as a nurse making 70 grand per year. They have two kids. Had their plan dialed in. They said, “John, we’ve got great news. We’re pregnant with our third child.” And they said, “But we need to get in and strategize.” Because Amy, the wife, wanted to now stay home entirely, and they wanted to see how that would impact their plan.

Now, fortunately, Tim, the husband had just received a pretty big promotion that was going to take his pay from 150 to 190 grand. He’s going to have to travel a little bit more, so had to work that in there. That’s not ideal. But they also currently own a three bedroom home. They want a four bedroom home now. These are the types of changes in your life and your surroundings that require adjustments to your financial plan. So here are the financial planning considerations for them. Their income’s going to drop by $2,500 a month when she stops at six months of pregnancy, even factoring in his raise. Well, due to where rates are at, their mortgage payment until they can refinance, is going to increase by what we’re estimating about two grand a month, which is significant. Plus there will be an extra child that’s going to increase their expenses, diapers, formula, baby clothes, high chairs, strollers, yeah, probably need a double now, guys.

So we plan for an extra $500 a month of expenses due to a third child. So right there, even with his $40,000 raise, they’re going down five grand a month, which is a ton relative to their annual income. But here’s what’s cool. They only lived before on about a hundred grand per year. Those were their expenses. They were saving the rest, both maxing out their 401Ks, maxing out on HSA, putting extra money into a non-qualified account. So yes, their income’s going to go down in their expenses will go up about $3,000, taking them to about 136,000 per year of expenses. But his 190 even net of taxes will easily cover it because there are more variables and some of their after tax dollars are now going to be needed for a down payment on a new home and furnishing that home and doing a few upgrades to that home.

I’m having him drop his 401K contribution to 5% so he gets the full 4% company match. We’ll push the seven grand a year into the family HSA. After paying taxes it still leaves them with 15 to 20,000, which we’ll keep for now in 5% treasuries for shorter and intermediate term needs. We’re also going to update their estate plan for adding an additional child. They decided, you know what? Our parents are a little bit too old, especially now with having a brand new baby. We’re going to change our guardian to a family friend who’s closer to our age. We also boosted their emergency fund to six months from three because he’s now the sole income earner. There’s higher risk without the second income. We increased his disability insurance slightly and increased their term life insurance to cover the 22-year cost of another child.

By the way, I’m just scratching the surface of what a great financial planner does. If you’ve always envisioned a financial advisor in a three-piece suit pitching a bunch of investment products, drinking scotch next to their desk, yeah, they’re still out there and pardon my French, they suck. They’re awful. Don’t go see one of those people. But here’s what’s great. There are so many fantastic fiduciary advisors that don’t just help with your investments. They do this sort of planning, and this is why financial planning is dynamic and must change. These are the reasons your plan needs to be written, documented, measurable. You might be thinking, well now they’re not going to save as much, John. I mean their plan isn’t going to be as good now that you’ve reduced their retirement savings. Well, six years from now, she plans to go back to work. 9:00 to 4:00 at a clinic 40 hours a week while her kids are in school, and they’ll both go back to maxing out their 401Ks and they’ll likely have around a hundred thousand dollars per year surplus to save.

We’ve built that into the plan too. So when things change in your life, it’s a great reason to adjust your plan. Secondly, when laws and policies change, you need to adjust your plan. So I have an example of this. Have clients who are both 62 years old and they’re planning to retire in the next 12 months. Then President Trump passed his tax cuts and jobs act, which went into effect in 2018, significantly lowering tax rates and more importantly, expanding the income allowed within each bracket. This couple had about 3 million saved, done a fantastic job saving. 2 million of the 3 million had never been taxed because it was in retirement accounts. The other million was after tax dollars. And here’s what we did. We decided to wait for both spouses on social security, which slammed their income to nearly zero, then take withdrawals from the 1 million of after tax dollars for their living expenses because they didn’t have any income coming in.

Needed something to live on. And you may be thinking, well, okay, so they stayed in the 10% tax bracket. That’s kind of nice. That makes a lot of sense. But no, in general, especially when you have that much money that’s going to be taxed between now and the day you die in those retirement accounts and they’re not charitably inclined, all the money is going to individuals. You very rarely would want your income to be zero. Instead, you want income smoothing. You’re trying to avoid big spikes in income down the road, especially with over $30 trillion of national debt and the expectation that tax rates are going to increase over the coming decades. So here’s what we did in the first year, a Roth conversion to fully fill up the 24% bracket. That allowed them to move $330,000 from their tax deferred accounts to a Roth and pay a tax rate that historically and per their plan looks pretty good, but in year two, they were now within the lookback period of Medicare.

And if you make too much money, you have to pay more for your Medicare. You get means tested and the government says you make a lot of money. You’re a high income earner, we’re going to charge you more for Medicare Part B and D. And so the next four years we stayed underneath those limits and did Roth conversions of about 170,000 to stay in the 22% bracket and under. Well, they’re now turning on social security at age 67, thought about going to 70, but they had a minor health item and we just decided let’s turn it on. During the past five years though, we were able to convert about a million dollars into their Roth IRAs that are now tax-exempt moving forward. And because we don’t plan to take income from that Roth anytime soon, that account has been invested much more aggressively than their other accounts.

It’s grown a lot. And so even with over 500,000 in withdrawals from their after-tax accounts, they have way more money than they started with, and a lot of it now will never be taxed. Again at the end of 2025 these tax cuts sunset. I’m going to ask you a pointy question. What have you been doing since 2018 to take advantage of it? Does your advisor talk with your CPA? Does your advisor review your tax return? When’s the last time they did that? Have they been implementing customized strategies to help you potentially reduce your lifetime tax bill? If not, contact us at creativeplanning.com/radio to meet with a wealth manager just like myself, who will do for you exactly what I just outlined, because that’s what my colleagues and I do each and every day here at Creative Planning. And lastly, what progress have I made toward my goals?

The entire reason you are investing is to accomplish something. Maybe it’s freedom to not work anymore, paying for college, passing money to heirs, getting out of debt, buying a home. Goals, we use that word. It’s kind of whimsical, oh, my goals. But at the end of the day, the only reason you’re saving money is for some future need. So often we haven’t clearly identified that. We’re saving to save because we’re supposed to, but your progress toward your goals dictates adjustments to your plan. This was a fun one from a month ago. Client is in her early fifties. She’s single. She has essentially crushed her retirement goals, but she’s still maxing out everything. She’s got no kids, doesn’t expect to have to pay for an aging parent. But she does have some really close friends, one of which is her sister and she loves Sedona.

She loves hiking, mountain biking. You know what I told her to do? Save up to the match because it’s free money because I know it’ll bug you if you don’t, because it’ll feel like you’re leaving money on the table. Go buy a second home in Sedona because you have the financial means to retire anytime between now and your plan date of 65 years old. And so with that knowledge that she really didn’t need to work anymore, she went to her boss and said, “I’d like to work remote part of the year from Sedona.” And if she couldn’t, she understood, but she would be retiring. Her boss didn’t bat an eye. You can work from wherever you want. We want to keep you on board. Where you work isn’t a concern of ours. You see, when you understand where you’re at relative to your goals, you are able to make changes that align with not what you desired eight years ago or 12 years ago, but right now because far too much has changed during that time period.

So what’s the takeaway in all of this? It’s simple. Have a dynamic financial plan. You can listen to this show and a million other financial podcasts. You can read articles. You can read every book on investing and finance yet none of it matters if you do not have a financial plan, like a real one that takes into account your estate planning and your taxes, your retirement and other objectives. And you’ve only got one shot to get it right, and it’s probably your first time ever going through it. This is why I’m an advocate. It doesn’t need to be Creative Planning, but for hiring a guide, a coach, someone who has experience going through this time and time again,

Well, I’ve got a little pet peeve I’d like to share. It annoys me when I ask someone how they’re doing and they say, “Busy. Man, John, I’m so busy. Life’s crazy. Just been so busy.” You know what I’m talking about though, in America, it’s strange how kind of a sign of success like you’re winning. Oh, that’s great. Yeah, it’s crazy. You’re just overextended, over committed running your kids everywhere. I mean, ah, good for you. But if you’re someone who says that, by the way, I still love you. I’ve said it before too. You’re not alone. In fact, if you look at the statistics from the American Time Use Survey, we are pretty busy as Americans, but in some cases we’re busy with fillers. We spend about two and a half hours per day on average, taking care of household activities like housework, cooking, lawn care, household management, paying bills.

Men spend on average 5.6 hours per day on leisure. Women, if you think you work a little bit harder, you’re probably right. You only spend about 4.8 hours per day on leisure. And of that time, it’d be great if we said, oh yeah, it’s just working out, jogging, reading books to grow in my knowledge of various subjects. But of course, that’s not the case. Nearly three hours of that leisure time is spent on screens, TV and cell phones, and I don’t know, that may even be low. Here’s the one I love, though. I totally relate. Adults with children under six years old spend 2.1 hours per day providing primary childcare for their kids. Now, I do not know how they factor this. If you multiply it by a million, because I can tell you two hours, that is a massive undershoot. We are potty training our youngest right now.

I feel like I sit for two hours per day just on the little footstool in that bathroom waiting for her to possibly just maybe, come on, you can do it, Luna. Little tinkle. I know you’re like, “Did he just say tinkle?” I apologize. But needless to say, we are busy. So how do you grow in your awareness of where you are spending your time? Because it is in fact our most precious and valuable commodity. And because this is a show on personal finance, how does the way we spend our time impact our financial health? To join me in discussing this very topic is psychologist, certified financial planner and creative planning wealth manager, Dr. Dan Pallesen. Dan, thank you for joining me here on Rethink Your Money.

Dr. Dan Pallesen: Thanks for having me back, John.

John: Well, for many it feels like life is speeding up every day, certainly not slowing down. Is the answer to automate as much as possible.

Dr. Dan: Yeah, I think so. With how fast the world moves, we have to make so many decisions throughout the day. Some researchers have come up with numbers of north of 30,000 decisions per day. And so if we were present in every single decision, it would paralyze us. We wouldn’t be able to get through the day. So this autopilot feature that we have wired into our brains can be really helpful to get us through the day. But there are some areas, I would say, with our financial plan where it’s not helpful. But you’re right, there’s some areas where it is helpful, like not actively trading, not trying to time the market. Research after research studies shows that not trying to time the market and being active correlates with better results in your financial plan and in your investment accounts. But there are certainly some areas where it helps to bring some attention and intention into your financial plan. I even have a personal experience that I’d be happy to share.

John: You’ve piqued my interest. Okay, what’s your personal story where this has applied for you?

Dr. Dan: I’m passionate about this. I’ve shared this on podcast interviews and from the stage, I am someone who cost my future self about a half a million dollars.

John: Oh, wow.

Dr. Dan: And here’s how this happened. Rewind to young Dan, I’m fresh out of graduate school, really excited to make an impact in the world as a therapist and as a psychologist. And one of my first jobs out of grad school was with the Federal Bureau of Prisons. And I remember onboarding at the Federal Bureau of Prisons with the head of our HR department, and I’m filling out this paperwork, and keep in mind, I studied really, really hard in my teens and twenties to go through college and grad school, but I did not study finance.

There was no financial planning component to your work as a psychologist. And so I really was pretty green when it came to the world of investing. And so we’re setting up the 401K or when you’re a federal employee, it’s called a TSP, and I ask our HR director, I go, well, how much should I be contributing to this TSP? It’s the first time I’ve been invested. And he says, well, I can’t give you advice, but if you contribute 3%, then the federal government will match 3% and I said okay.

John: Sounds pretty good.

Dr. Dan: Yeah.

John: A hundred percent return on your money.

Dr. Dan: Exactly. So he goes, it’s kind of a no-brainer. So I go, okay, 3%. And then he goes, and then there’s more, like an infomercial. If you contribute another 2%, so 5% total, then the government will match up to 50% of that. So that’s also kind of a no-brainer. So my conclusion was, hey, I’m going to contribute 5% to this TSP, I’m good to go. I felt pretty good about it. Now, there’s two things that were working to my disadvantage at the time. Number one, I was in my twenties. I had no family. I could have easily contributed much higher percentage of my salary into my TSP and not thought twice and not taken a hit on my lifestyle. I could have contributed more. But number two, John is the default investment option when you sign up, was the most conservative fund out there.

John: G Fund.

Dr. Dan: The G fund.

John: Oh, no.

Dr. Dan: Yes, the G fund. So I went into this, excited about my job, excited about this new career, but I really didn’t know what I didn’t know. But when I became more interested in finance and understood more about investing, I looked back. And so I looked back and did some calculations. What if I doubled my investment? What if I contributed 10% of my salary, which I could have? And what if I was not in the G fund? What if I was actually invested well, diversified in different markets?

And then I carry this forward to what if I continue to allow this money to grow moderately over time until I’m about 65? I had to redo the calculation like four or five different times. This can’t be right. There’s no way this is right. But certainly I cost my future self almost $500,000 because of some mistakes that I made early on that just came from lack of knowledge and thinking that by setting and forgetting that it was the right thing. So I do advocate setting and forgetting in most areas of your financial life, but there’s certainly some areas that you want to be mindful of and bring some intention into.

John: I’m speaking with Doctor of Psychology and certified financial planner, Dan Pallesen. Well, I think it’s an example of you need to maybe put in some of the work on the front end before you go into autopilot mode. The devil can be in the details. You can do most things right and have great intentions, but if you miss one of the pieces. In your case, we look back and go, dang, that cost me a half a million dollars. And to be clear, this was long before you were a certified financial planner. So if any of Dan’s clients are listening now, they’re like, this wasn’t Dan a year ago. This was young Dan, babyface Dan when he was a psychologist before he made a career change a long time ago. So I just want to be clear that you’re not telling your clients to go into the G Fund as a 22-year-old, something like that. What do you think, Dan, you’ve learned through that experience that is a good takeaway for listeners?

Dr. Dan: As the world feels faster and faster intentionality can feel like a luxury, but it’s intentionality that can make the world slow back down. And so knowing where to be in intentional, where to focus your attention is really key. And so some of these areas, like I already mentioned, how much are you contributing for those of you that are still working or if you’re retired, as you’re giving guidance to your kids and your grandkids in their careers, how much are you contributing? Some people don’t even know what that number is.

But knowing what that is and knowing what you’re invested in, you do not have to make changes every single month, every single quarter, but just knowing that you have the right allocation for you, these are really important. There’s some estate planning takeaways from this too, knowing who your beneficiaries are, making sure that these are up-to-date because your life may have changed over the last 10 years when you set your beneficiary. So that’s another thing that you don’t have to check this every day, but just checking it from time to time. So it’s these little things that over time can really add up and compound problems or compound success.

John: Hey, I appreciate you being vulnerable, sharing some of your mistakes. I haven’t made any, so sorry, I’m not going to be able to contribute to that. I’ve made zero financial mistakes in my life just as everybody listening, we’re all laughing at you right now because we’re all perfect. In all seriousness, I really appreciate you being willing to share that. Thanks for joining me here again on Rethink Your Money, Dan.

Dr. Dan: Yeah, thanks for having me back, John.

John: We are three weeks into the college football season, two weeks into the NFL, and I’ve learned in observation that yes, I will loosely tie into personal finance. You see one of the biggest differences between NCAA football and the NFL, in the NFL coaching matters. Not that it doesn’t matter in college, certainly for recruiting in particular, but if you are Georgia and you’re playing Northeastern Wyoming State, Cheyenne campus, I could coach that Georgia team and we’d win by five touchdowns, probably more. See, the talent gap in the NFL is so much closer that adjustments and coaching make a huge difference in the outcome of the game, and your investments are much more akin to the NFL than college football unless you’ve got excess. A portfolio with $500 million. And that’s why when financial advisors, over 300,000 of them in America are just sort of lumped together there’s no differentiation between duly registered, sometimes fiduciaries, sometimes brokers or brokers, and true fiduciaries, between firms that manage a hundred million dollars and have a little experience versus firm like Creative Planning that’s been around for 40 years and that’s 60,000 plus clients.

There is a difference between Mike Singletary and Kyle Shanahan. Singletary was amazing linebacker, but kind of a disaster as a coach. Let me put it this way. You will move in the direction of your strongest thoughts. So who’s your coach? Who do you receive advice and guidance and those much needed adjustments from? Because just as a football coach does, that’s what guides the strategy and ultimately leads to the desired results. And so I’d like to offer a bit of encouragement. If you don’t manage your life savings, if you use a third party, a professional firm to help you with your wealth management, make sure you have a hundred percent confidence that they are in fact the best. That you’ve done your due diligence and you believe wholeheartedly, if I had 10 times as much money, I’d have no hesitation to go here.

If my best friend who’s been really successful asked me, I would’ve no hesitation recommending them because the stakes with your life savings are too high to just shrug and say, well, I got a coach and an advisor. Because independence and experience in your financial advisor, it means something. If you would like a fiduciary who is not looking to sell you something, to provide an independent second opinion on your life savings, do what thousands have done before then visit creative planning.com/radio now. Well our first piece of common wisdom I’d like to rethink together is whether or not buying stocks for the long run is in fact a good strategy. Stocks have been bouncing around going nowhere for a couple of years. Bonds that weren’t short in duration got clobbered in 2022. I mean, sure, ’23 is coming back some, but I don’t even know are stocks even a good investment anymore for the long haul?

Let me answer that by posing a question. Over the last 20 years, how many years do you think the S and P 500 has been up at the end of the year on December 31st verse down. This isn’t rhetorical. Think about what your guess is. How many up years have occurred in the S and P 500 over the last 20 years? The answer, it’s been up 17 out of the 20 years. 85% of the time it’s ended up with gains for the calendar year. Does that seem off to you? It kind of did to me at first when my researcher, CFA Kenny Gatliff put this together for the show. Like, wait, really? I know we’ve had a good market, Kenny, but that seems crazy. I think it may feel off because there were a lot of times during the last 20 years where the market was down intra year.

It’s called volatility. We’re all familiar with it. In fact, in the last 20 years, 19 of those have had a drawdown of at least 5% and 12 of the 20 years had a drawdown of at least 10% during the year. It’s a great reminder. The short term when it comes to the stock market is so unpredictable. Most people think that when we are in correction territory, which is a drop of 10% or more, this is a really bad thing. This is bad for my portfolio. I hate when the market goes down. But remember, volatility is just volatility. It’s not a permanent loss. Wherever you’re listening from, you may have a warm autumn, sunnier than normal, not as much rain, by the way, unless you’re a farmer you’re like, yeah, this sounds amazing. But that doesn’t make you wonder if it’s going to still be colder at Christmas time.

You know it’s still going to be cold. December and January will probably be colder than September because while there are short term moves when it comes to the weather or the markets, the long-term trends persist. There are seasons. So here’s some of the takeaways for you. August wasn’t a great month in the market. September, if that makes you worried about owning stocks this is just a garden variety drop. This is normal. This has happened all throughout the last 100 years and all throughout those last 20 years where 17 of them still ended positive. You know when volatility matters? The only time it matters when you need the money. So if you’re retired and you’re taking withdrawals from your portfolio, it’s likely why you wouldn’t allocate all of your portfolio to stocks because 12 of the 20 years, as I mentioned, the market dropped more than 10%.

If you need to sell investments during that time, you cannibalize the portfolio because you have to even get rid of more shares to produce the same amount of income, which means even when the market does inevitably recover, as it always has, you don’t own as many shares. That’s a way to run out of money in retirement. So if you need money soon in the next five years, seven years, maybe if you’re really conservative 10 years, you want to be conscientious of the reality that that volatility does exist. But if you’re 45 years old and it’s your 401K, that volatility is meaningless. All you care about is maximizing long-term growth and the way to invest for the highest probability of achieving that return is in the stock market. It’s not bonds. It’s not cash, it’s not even real estate. It’s a stock market. So when we rethink this idea of buying stocks for the long run, we come to the conclusion that’s right on. My next piece of common wisdom is that a 401K is your best option for retirement.

Let’s rethink this together by starting with the benefits of a 401K. The most obvious, oftentimes, you receive a company match which provides a 100% rate of return on your money the day you put it in. Even Tesla, Apple, Microsoft, Nvidia, you can’t promise that. So that’s the first benefit. The second is that it’s tax-deductible and the growth is tax deferred. And so those tax incentives that were put in place by the government, were there to encourage people to save for retirement for a lot of reasons. It puts far less strain on our social programs, our healthcare system when people independently have saved money. But be very careful about saving all your money for retirement inside of retirement accounts because there are two types of people that I run into frequently who wished they hadn’t saved as much into their 401K. The first is someone retiring early, and the second is someone who for tax purposes, basically deferred everything. Everything they saved for retirement, they said, I’ll pay taxes later. I’ll pay taxes later. I’ll pay taxes later.

Remember, you’re not eliminating taxes by contributing to a 401K. You’re just deferring. So in my opinion, the biggest drawback to a 401K is the lack of liquidity without penalties. You can’t get to it before 55 years old or 59 and a half depending upon the plan and some other provisions that I’ll go through here in a moment without a 10% penalty. It’s designed for a traditional retirement at retirement age, but not good if things in your life change. And so while there are often penalties attached for taking early withdrawals from retirement accounts, there are a couple exceptions. The first is known as the rule of 55, and it can allow you to take distributions from your 401K or a 403B without having to pay a penalty. To use this rule of 55, you’ll need to be at least age 55 or older. Have a 401K or a 403B plan in particular that allows rule of 55 withdrawals. You have to have left your employer voluntarily or involuntarily in the year you turn 55 or later and you’ve got to leave your funds in an active 401K or 403B plan to accomplish it.

Here’s an example of someone doing this wrong, and by the way, it was due to terrible coaching. They got advice from the wrong person. This client was 57, they retired. The first thing the financial advisor did when they went to their office was sell them a terrible, expensive variable annuity as a way to protect their retirement savings. They rolled the money out of that 401K plan into an IRA where they bought the annuity, which made the insurance agent who was masquerading as a financial advisor, I’m sure, a big fat commission and totally messed up this client’s plan because they could have taken withdrawals if they had left the money in there without any penalties, but by moving it to an IRA now they can’t get to it without a penalty prior to age 59 and a half. Remember they were 57. But you know what? If they had left those dollars in the 401K, how much money would that insurance agent have made? Ding, ding, ding, ding, ding, you guessed it. Zero.

So they did what any terrible commission-based financial advisor would do. They just told them to roll it into something where they can make a bunch of money. So be very careful before rolling money out of a company plan, especially if you’re between 55 and 59 and a half. But here’s another example of ways to get around the lack of liquidity. Had a client who was 52, retired early, had a little over a million saved, all of it was already sitting within an IRA. We used what’s called a 72(t), which is also known as a distribution of substantially equal periodic payments. It’s basically a provision in the US tax code that allows individuals to withdraw funds from IRAs without incurring that 10% penalty. It can get you out of that early withdrawal penalty and provide you an income stream, but it’s incredibly rigid. You’ve got limited access to the funds. Of course, it’s all taxable because it’s deferred, but that wouldn’t change whether it was the 72(t) or not.

And more importantly, it’s complex. Calculating and adhering to the rules of the 72(t) aren’t simple. If you make a mistake, it results in penalties and additional taxes that they will apply retroactively. They’ll go back to your first withdrawal and start charging penalties because you most likely unintentionally broke part of the agreement. Very, very rigid. I would try to figure out if there are any better options, but again, that lack of liquidity and rules is why I don’t agree that the 401K is the best option for all of your retirement dollars. 401K is a great option. You should always fund it up to the match. That’s a no-brainer, but I would encourage you to work with a great financial planner to build a plan that ensures you have diversification from a liquidity and tax standpoint, not just when it comes to your investment allocation. It’s time for listener questions and to read those as always, one of my producers, Lauren, is here to join us. Hey, Lauren. Who do we have first?

Lauren Newman: Hi John. Our first question today is from Laverne in Kansas City. She writes, “I’m interested in your thoughts about older people moving into continuous care retirement communities. Does such a move make good financial sense? What should be considered in terms of care options and the financial commitment?”

John: It’s a great question because these are popping up all over the country right now. Continuing care retirement communities are also known as a life plan community, and it’s the type of retirement community where there is a continuum of aging care needs. So you may start there and just be independent living. It’s like a 55 and over. You’re playing pickle ball every day and then happy hour, and then eating dinner at 3:30 or four o’clock in the afternoon. But then you start declining a bit and you go into assisted living. You get a little bit of services for what some of your needs are, but then maybe you need help bathing or getting dressed in the morning. You may need some skilled nursing care. All of those can be met within the community, and here’s what’s pretty cool. Most of them you’ve already paid for upfront. So you make the investment when you move into this continuous care retirement community, which allows you to not get nickled and dimmed along the way.

Now, I’m sure every place is a little bit different, but the few that I’ve had experience with pertaining to specific clients of mine, this is the way that it worked. Now, everyone would do it if that was the whole story. Here are the cons. They’re high costs. They can be very expensive because you’re paying upfront for the benefit of all of these services you may or may not need. Entrance fees can range in the tens of thousands all the way up to well over a million dollars depending upon the location, how nice the facilities are, and monthly service fees can also be significant and vary widely. You have limited financial flexibility. The upfront entrance fee and monthly fees can strain your cashflow if you’re tight. You’ve got contract complexity. A lot of times it can be really hard to get out once you’ve committed, and then many have initial health requirements for admission. If you need memory care and you’ve got advanced Alzheimer’s, your children can’t put you in one of these places because you have to be relatively healthy for admission. All right, Lauren, who’s next?

Lauren: Our next question is from Nancy. She says, “I’m moving to Des Moines, Iowa. How will this affect my Medicare?”

John: Oh, Medicare, these government programs that are complicated. Thankfully here at Creative Planning, we have an entire Medicare team dedicated to helping you make sense of this. And in fact, I asked Jameson Moulder, who was my guest last week on the program, and here is what Jameson and I discussed. If someone has a Medicare supplement plan and a Medicare Part D prescription drug plan, there typically aren’t many action items needed when you move. Since Medicare is working as your primary insurance and the supplement is secondary, you can continue to go to any provider that accepts Medicare nationwide, which is over 90% of providers.

Furthermore, since your Medicare supplement plans are guaranteed renewable, the coverage and benefits stay in place regardless of where you live within the United States. That’s a key thing. He did say Des Moines, Iowa, not Sydney, Australia. In some cases, your new area won’t offer the exact same drug coverage on the Medicare Part D prescription drug plan, which may require you to enroll in a new Medicare Part D prescription drug plan using a special enrollment period, but, and this is why I’m not a big fan of Medicare Advantage plans, there are often changes required. Since many Advantage plans only offer service to localized areas, it’s common for your new address not to support your current plan. All right, Lauren, who’s next?

Lauren: I’ve got a question here from Andrew and he writes, “I recently encountered a practitioner of the infinite banking concept that current financial planning is a failure and everyone should be buying dividend paying whole life policies to truly build wealth. What are your thoughts specifically on the infinite banking concept that’s gained a lot of attention lately?”

John: Well, thanks for that question, Andrew. In short, not a fan. Let’s back up a little bit. What is the infinite banking, which is just a term that they’ve nicknamed this concept? What even is it? It is essentially where you own whole life insurance and policy owners become their own quote unquote, banker because you’re going to borrow against it from yourself. There are a few pros if you squint and look really hard. Built in tax sheltering, you do have some life insurance benefit, maybe some disability, maybe some predator protection potentially. You get some continuous compounding of your cash value even while you’re borrowing. There may be an arbitrage between that interest rate and what you’re earning. Maybe not, but there could be, and then we could go for the next three hours on all the cons, but I’ll give you a few. The vast majority of whole life insurance policies are surrendered before death.

Most people get rid of these things even though they’re designed to be permanent. You’ve got to save a lot of money in the whole life insurance policy before you can take a loan. And by the way, you can’t take loans early on. These policies are extremely illiquid and front loaded. You pay interest on your loan even though you’re borrowing your own money and if something happens to you, you don’t get the cash value and the death benefit, you just get the death benefit. They’re life insurance. They have a cost of insurance that is eating away at your growth potential like little termites. You’ve got mandatory annual payments. You’ve got to qualify from a health standpoint to even get decent rates, and they don’t grow very well. It’s life insurance. While these life insurance agents do a great job over-hyping the benefits and completely underselling the reasons why it’s not good, just know that I am not a fan. Here at Creative Planning as a whole we are not a fan.

And to put a bow on this, if whole life insurance agents just charged a 1% advisory fee, like there were no commissions, and this is just my opinion, so take it for what it’s worth, I believe 99% of these policies would stop being sold. I think the massive commission incentive is what drives the sale of these policies. Invest the money efficiently, have flexibility, have liquidity. There’s no guarantee certainly, but the markets have made eight to 12% a year for a hundred years and government bonds, they’re paying 5% right now. And yeah, you need insurance. Risk management is critical, but term life insurance is really inexpensive and you can acquire the death benefit needed for those that you love in the event that something happens to you. In short, life insurance is not an investment, it’s insurance.

Well, last weekend here at Creative Planning, we had our Connect23 annual conference at the Overland Park, Kansas Convention Center. It was fantastic to interact with colleagues and clients. In fact, we had 5,618 registered for our Saturday event. We had attendees from all over the nation, including some clients from Jamaica. It was really cool, and it just reminded me of how incredible the team is that I’m surrounded by here at Creative Planning. In 2022, we had seven Barron’s top 100 independent advisors. You’d think that them being at the top one 100th of 1% of all financial advisors would make them arrogant. They kind of walk around an event like that like I’m a big deal. No, they’re humble, they’re genuine. They’re eager to help other advisors to share what they’ve learned, to make everyone better. We’ve got a guy named Justin Bogart. He runs our alternative investment team.

He’ll be doing training with a class, and at the same time, he’s emailing back other people in the company and doing both of them really well. In his ability to multitask he’s so intelligent, the guy’s like an alien. I can’t believe it. We’ve got an advanced planning tax team that are some of the smartest people that I’ve interacted with. I’ve been in situations with clients that are incredibly complex and a lot of big dollars and their specific knowledge pertaining to those sorts of complex strategies, incredible. I chatted with a young financial planner at the firm that came up and introduced herself. Her name’s Abby Kate, and as we’re talking, you know when you have those interactions with people, it’s like, oh, you’ve got it. You’re going places. And I started thinking about how immature I was when I was in my twenties. Man, we’ve got some incredible people here at Creative Planning and the best part for our clients, we are all moving in the same direction.

How do we most effectively help you grow, protect, and transfer your wealth? How do we get you the advice you need when you need it for your most important financial questions? If you’re interested in finding out what you might be missing, what may be incomplete in your plan, visit creative planning.com/radio now to speak with a certified financial planner just like myself here at Creative Planning. Well, one of our speakers at that event had an incredible journey, and his talk was on Living a Life Inspired. His name was John O’Leary, if you’d like to look him up. And I had this thought while listening to him, and that was that you don’t get a mulligan on life. Yeah, when I go play golf with my 12 year old, he likes to take a lot of mulligans. I tell him, “Cruz, you can’t do that when we’re playing with other groups or there’s people behind us.” He hits a bad shot and he just drops another ball. He actually gets mad at me when I tell him, no, you’re playing your first shot.

Let’s go. People are waiting on us. Kid always wants to take a mulligan. So many of the most important aspects of our money, but more importantly, our life we don’t get do-overs. We’ve got 18 years with our children and they’re gone. We’ve got a small window with grandkids where they’re not too busy to hang out with us, where they want to go spend the night over at grandma and grandpa’s. It’s a really short window, and one of our estate planning attorneys, he works specifically with our special needs families, just incredible guy. His name is Jerry Bell. He’s been a guest on the show before. He sent me an email of encouragement coming out of this conference knowing that I’m a father, that I’m smack dab right in the middle of raising kids. He’s through that stage now as kids are older. He said our oldest, Nicole, played softball at a high level. I’ll never regret taking time with her because those coast to coast exposure tournaments, they were so much fun. From Huntington Beach to New Jersey to Miami and plenty of Colorado, Dallas and Chicago.

You just don’t get a mulligan on raising your kids. I sat on many a bucket with soft toss, and as a former catcher I felt the pain of that darn drop ball against the shin a few times. We even converted Nicole to a lefty so that she could slap during that time. So she and I spent our share of time at the indoor facility with plenty of soft toss. Great, great years. I hope you get the joy of catching your kids too. It’s the best. I appreciated that encouragement so much from Jerry I wanted to share it with you too because my guess is you’re in the middle of a season right now, maybe raising kids. It may be nearing retirement, maybe in retirement. It might be a unique time in your marriage or in friendships, but I encourage you to remember this too shall pass. Make every day count, and if there’s ever a way to use your money to buy yourself more time, what a worthwhile trade off that is. 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 podcasts.

John: For more information on disclosures, visit creative planning.com.

Disclaimer: The proceeding program is furnished by Creative Planning, an SEC registered investment advisory firm that manages or advises on a combined $245 billion in assets as of July 1st, 2023. John Hagensen works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning or this station. This commentary is provided for general information purposes only. Should not be construed as investment, tax or legal advice and does not constitute an attorney-client relationship. Past performance of any market results is no assurance of future performance. 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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