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RETHINK YOUR MONEY

5 Myths That Could Be Stalling Your Financial Success

Published on March 4, 2024

John Hagensen
MSFS, CFP®, CFS, CTS, CIS, CES

Join John as he distinguishes fact from fiction and explores what it takes to become a millionaire in today’s world. Is it about luck or the family you’re born into? Or do we all genuinely have control over our own financial destiny? (2:25) Plus, Creative Planning CEO Peter Mallouk joins the show to discuss the historical impact of presidential elections on the market and provide investing tips that can help set your portfolio up for long-term success despite the election’s outcome. (9:26)

Episode Notes:

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, five millionaire myths: money within marriage, social security filing Strategies, as well as whether you should buy or lease your next vehicle. Now, join me as I help you rethink your money.

Even when I have the best of intentions, there are many times where I look back in hindsight and it’s crystal clear that I was wrong about that. Total misconception. We all do it. This happens with money, with investing, but it’s certainly more widespread than that. I have a treadmill and free weights in my garage. I Even have a TV in there that’s literally never been turned on. Because while I noticed that most of my friends who were ripped had these tricked out gym setups at their house, yet looking at it and having the treadmill collect dust and once every six months grabbing a 15 pound dumbbell isn’t quite going to give me the physique that I’m looking for. The misconception is, “Well, if I have the equipment at home, it’s going to be so convenient, and I’m going to use it every day.”

No, let’s be real here. How many Nordic tracks from the ’90s are sitting at Play It Again Sports? How about the misconception that the more apps you have on your iPhone, the more productive you are? My wife gives me a hard time because I sort all of my apps in those little boxes because it’s going to increase efficiency. Yet all that ends up happening is I have to click on the box and then scroll three or four different pages over to attempt to find anything on my phone. Productivity level, zero; distraction level, expert.

And of course, as a parent to seven, all sorts of misconceptions. I’m always going to be in control. I read Parenting with Love and Logic. I’ve got it all figured out. And then you realize, “Oh, each one of these kids is completely different, so no singular playbook is going to work for all of these kids.” The reality is, parenting is about 90% just repeating yourself, and about 10% wondering, “Why did I even bother saying it in the first place?”

There are also a lot of misconceptions surrounding millionaires and those who have had financial success. A fantastic certified financial planner here at Creative Planning, one of my colleagues Dani Johnson, wrote an article for our clients on the Five Millionaire Myths. And I believe there’s a lot we can learn, whether you’re already there or aspiring to get there.

The first myth is that millionaires inherit their wealth. The view that millionaires are trust fund babies and they were just born into this life of luxury simply isn’t true. A recent survey found that 79% of millionaires didn’t receive any type of inheritance whatsoever.

Another myth is that it’s easy to spot a millionaire. Do you envision them in huge houses or driving fancy cars? Vacationing in exotic locations? Some do. But you may be surprised to learn that most millionaires live relatively modest lifecycles. Consider the following data points. The most popular car brands among millionaires are Toyota, Honda, and Ford, with nearly 61% of millionaires driving one of the three. The average American millionaire spends a mere $117 per month on clothes, while the average American across all income levels spends $161 per month on clothes. The average millionaire spends less than $200 per month on restaurants, while the average American spends over $300 per month eating out. The reality is that most millionaires tend to live comfortably within their means and avoid taking on unnecessary debt, and most live a relatively frugal lifestyle which makes them difficult to spot.

The next myth, and this is really pervasive, is that you need a high salary to become a millionaire. In reality, the top five careers held by millionaires include engineer, teacher, accountant, manager, and attorney. Are you surprised to see teachers on that list, given that they’re notoriously underpaid? Their inclusion goes to show that a high salary doesn’t necessarily equate to financial success. In fact, 69% of millionaires averaged less than $100,000 in household income per year, and 33% of millionaires never reached a six figure income throughout their entire career. This reinforces a principle I speak of often, in that it’s not how much you earn, but rather in how much you consistently save that builds long-term wealth.

Did you not graduate from an Ivy League university? Well, neither did most millionaires. In fact, while it’s true that 88% of millionaires hold a bachelor’s degree, 62% of them obtained their degrees from public state universities.

The final millionaire myth is that millionaires are savvy investors who all know how to manage their finances. The truth is that 68% of millionaires work with a financial advisor and most began doing so before they achieved millionaire status.

Another misconception when it comes to investing is that we can achieve better returns by finding the top managers. The most recent example of this is Cathie Wood’s ARK Invest funds, that according to a recent Morningstar analysis, has lost investors and estimated $14.3 billion in wealth over the past decade. Now, I say this not to dunk on Cathie Wood specifically, and not to make any strong opinion about ARK Investments as a whole; but this is simply a modern day example of a truth that has existed for decades in the markets. In 2020, ARK’s flagship innovation, ETF, surged nearly 150%, which of course attracted a surge of inflows, which grew its assets to nearly $30 billion in 2021. Everyone’s getting FOMO seeing these superior returns and wants to pile in. However, the firm suffered significant losses during the 2022 bear market with that flagship fund plummeting 67%. Morningstar’s analysis show that the ARK ETF alone lost $7.1 billion in wealth, while the ARK genomic ETF lost $4.2 billion. ARK Invest’s total wealth destruction over the past decade exceeded that of any other fund family, more than doubling the losses of the next firm on the list according to Morningstar.

Now it hasn’t been as bad since inception. In 2014, the ARK Innovation ETF has generated a total positive return of 121.8%. And so you may think to yourself, “Well, that doesn’t sound too bad.” 10 years, 121% up, but that is significantly lower than the Nasdaq-100 index, which is up over 330% over that same period. And despite these losses, ARK Invest continues to manage over $13 billion in assets across its ETFs, with its top holdings including Coinbase, Tesla, Roku, and Zoom Video, which have all faced their share of challenges in 2024.

Now, again, this isn’t actually about ARK investments. I’m using them as an example because they’re large and the most well-known to illustrate a few takeaways that absolutely apply to you and I. The first is that there are significant risks associated with concentrated bets on high growth companies. During raging bull markets like we saw in 2020 and 2021, it feels like those risks are just anecdotal but not real because you’re making so much money. The next and most obvious that I briefly hit on is that we tend to pile into things at the wrong times. I just mentioned that ARK’s up over 120% the past 10 years. Well, then how has it destroyed $14 billion of wealth according to Morningstar? Because fund flows follow the performance. The huge returns for ARK came in a concentrated period of time, and it wasn’t before that superior performance that tens of billions of dollars piled in; it was after. The reality is that investment returns are not investor returns.

And the final takeaway, as Morgan Housel put it, is that things that aren’t in your control are not repeatable. You see, the idea that an investment manager can overperform consistently in the public markets is one of the great lies of investing. I mean, it makes perfect sense until you actually look at the data. The incredible manager of the decade, the five star mutual fund manager, has no more statistical probability of outperforming its peers over the following decade. It’s simply the law of large numbers. If there are thousands and thousands of mutual fund managers all attempting to beat the market, even if 85% of them will lose over any given 10 year period, what that also means is that 15% will what? They’ll outperform. And when they outperform, they’re touted as being smart, having something figured out that others aren’t aware of, and so we pile all of our money in and then wonder why over the next 10 years they underperform. Well, because statistically they’re about 85% likely to, in fact, underperform their benchmark index.

Well, my special guest today is Creative Planning president Peter Mallouk. And while I could spend the entire segment sharing his bio, I’ll hit on a few of the highlights. Peter is the architect of Creative Planning growing from less than $100 million of assets under management in 2004 when he bought the firm to now Creative Planning and its affiliates managing or advising on a combined $300 billion. He has four undergraduate degrees, a law degree, as well as an MBA, all from the University of Kansas. Peter Mallouk, thank you for joining me.

Peter Mallouk: Great to be with you again, John.

John: Well, it’s that time again. Every four years we have a presidential election, and the surrounding narratives try to break the internet. And some investors even think that it’s going to potentially break their financial plan as well in the scenario where their preferred candidate loses. But you’ve written about this including in your most recent book, Money Simplified, and you’ve been on the record multiple times about this hot button. What does history tell us about presidential elections and our investments?

Peter: Two of the most interesting conversations I’ve had with clients are after President Obama won the election. I had one of the firm’s very large clients wanted to go completely to cash. The advisor called, set up a call between me and that client. Tried to talk the client out of it, and one of the few times I completely failed. And of course that was negative for the client because the market over the next couple of years did very, very well. And then after President Trump won, I had the same situation. I was called in with a different client, he’s going to go to cash. A lot of people thought the world was going to end. In fact, it was the first time the stock market went up every month for 12 months. I can’t remember if it was ever or in 50 years; some tremendous amount of time.

If we look historically, whether it’s a Republican that’s president or a Democrat or president, whether it’s far right, far left, or somewhere near the middle, I’m not sure that last part exists anymore. It doesn’t matter. The stock market probability of being positive over the next year is about 75%, over the entire term of the presidency is around 90%. And it doesn’t matter, not only who’s president, but whether if the House and Senate actually match the party or the opposite party, in all instances the market goes up and to the right. The market is not blue or red, it is very much green. All it cares about is money and future earnings.

If you just take yourself out of politics for a minute and ask yourself, “Are people still going to go to Disney World? Are they still going to fly Southwest Airlines? Are they still going to use Microsoft products? Are they still going to use Google for search? Are they still going to buy iPhones?” The answer to all those things is, “Yes, politics does not matter quite as much as you think it does.”

John: Elections are probably the most noteworthy within the category of things that matter deeply in our lives, but don’t have a big impact on our investments, and those can be difficult to untether.

Peter: Yeah, because we’re very passionate about politics, and politics for many people has become religion. You get so married to this is good and that is bad that if you get the outcome you think is bad, you think it must be universally bad for everything, and that’s definitely not the case when it comes to the economy.

John: Let’s switch gears over to investment strategy. Most advisors have a few model portfolios that all clients are invested into. At Creative Planning, we customize client portfolios. What do you see as the biggest value in a customized portfolio versus a model portfolio?

Peter: Most money is managed with a product. Somebody comes along and says, “Hey, I really think you should use this mutual fund or this hedge fund or this management approach of just value and mid-size companies and so on.” Some of it is done based on age. “Hey, you’re this age, you should go in this portfolio.” And some of it’s done based on risk. “This is your risk tolerance; you should go in this portfolio.”

All of that I very strongly believe is wrong. It’s not optimal. Investments should be based on your goals. What are you actually trying to do? You can have two people that are the same age, they live in the same city, they made the same amount of money, they’re retiring on the same date. They might have very, very different needs. One might be getting an inheritance, the other might not. One might have a loved one they need to care for and there’s an additional cost because of that. One might want to travel the world, the other one might be happy to just watch Netflix at home. They have different needs. And so the advisor or you on your own can figure out, “Well, here’s where I am. Here’s what I’m trying to accomplish. Here’s the money I need and when I need it.”

Now, what investments create the highest probability of me making all of those things happen? Those are the investments you should buy. The investments that will meet your short-term needs are going to be different than your intermediate term needs are going to be different than your long-term needs, but all of them start with the needs. You can’t just say, “What’s the best medicine?” Pick it off a shelf and take it. You got to figure out, “Well, what are you trying to accomplish? What health thing are we trying to solve for?” And then you back into the protocol.

John: Let’s stay on the topic of investments. If someone wants to optimize returns, which we all do of course, and isn’t overly concerned about additional risk, what should they do?

Peter: I think you’ve got to really brace for risk. The way that you get great returns is you avoid being a lender and you focus on being an owner. You avoid bonds and bond-like investments and you start to invest in stocks and stock-like investments. And so when you’re in the owner category, you’re buying publicly traded stocks, you’re buying ETFs that invest in stocks, you might be buying real estate oriented funds, you might buy private real estate or private equity funds that are accessible to a lot of people. You put yourself on the owner’s side of the ledger and you could expect over a very, very long period of time to maybe get that double-digit rate of return. The price you will pay is volatility. You’ll pay the 54% drop in 2008. You’ll pay the 34% drop in a matter of weeks during COVID. And you’ll pay the 45 and 48% drops of 9/11 and the tech bubble.

But those are temporary, and if you don’t have short-term, you don’t need to lean on the portfolio during those periods of time, the market will recover and do what it always does, find its way to new all-time highs. But you’re going to have to really embrace risk, really embrace volatility, and really be sure you’ve got the short-term covered. And then there is a path to beat the market. You’re going to have to be 100% invested as an owner and then start to take risks within that space, like tilting towards companies that have more room to grow and are even more volatile than the S&P 500.

John: You just touched on real estate, Peter, and private investments. Historically, real estate returns have trailed the stock market by a wide margin. Despite that though, the perception, at least in my experience by many, is that real estate is a better investment than stocks. Why do you think that is?

Peter: I think that people confuse the use of leverage from investing. So if you took somebody and just said, “Hey, I’m going to go buy a bunch of stocks and I’m going to own them for 20 years,” or, “I’m going to go buy a bunch of real estate owner for 20 years,” the odds are overwhelming you will make more money with a bunch of stocks. But when someone goes and buys a private real estate property, they have the advantage of leverage and they have the advantage of not perceiving volatility.

Forget about leverage for a second. Let’s say you’ve invested a million in some duplexes in your neighborhood, and a million in S&P 500, we’re going through COVID. S&P 500 is now down. You now have lost over a third of your money. If we’re building a net worth statement for you, I’m going to say, “What are your stocks worth?” You’re going to say, “$630,000, $650,000.” There’s no hiding from it. I’m going to ask what your duplexes are worth, and you know what you’re going to tell me? A million dollars. They never say, “My house is down 30%.” They just go, “Look, it’s just a million dollars,” and they know it’ll come back and so they can ignore the volatility. So that one thing is it feels more real. I can see it, I can touch it, I can ignore the volatility.

The second part is when somebody is buying that million dollars of duplexes, they’re not actually paying a million dollars. They’re paying $200,000 and they’re borrowing the rest. And so if the duplexes go up 10% in value, it’s not a 10% rate of return, it’s a 50% rate of return because you only put $200,000 in, this million dollar property is worth $1,100,000, that $100,000 gain is a 50% profit on your $200,000.

So yeah, leverage magnifies returns and it magnifies losses. You could also use leverage on your stock portfolio. So if you had a million dollar stock portfolio, but instead of just paying a million dollars to own a million of stock, you paid a million dollars to own 2 million of stock, you can do that. Schwab will let you do that. Fidelity will let you do that. It’s risky just like it is with real estate, but people associate real estate as being real. They don’t see the volatility, they don’t appreciate the impact of leverage, and that’s why they think real estate outperforms when in reality tends to lag.

John: Creative Planning president Peter Mallouk is joining me here on Rethink Your Money. Diversification is one of the most familiar words of investing. You can diversify away from a single stock owning an index. You can diversify asset classes, sectors, single country risk by globally diversifying. You can diversify by owning both stocks and bonds. But often that exercise is only done within the publicly traded arena. There’s an entire other world of investing in private companies. What, in your opinion, should investors understand about non-traded investments?

Peter: Yeah, I definitely think in the stock market, I’ve always agreed with your approach, which is diversify across basket, keep your costs low, control your taxes, you’re going to outperform the active manager over a long period of time, and just get the asset class decisions right. What should be in stocks, bonds, big, small and so on. The private world’s the opposite of that. When it comes to private equity, private lending, private real estate, these are still stocks and bonds in real estate. They’re just private companies instead of publicly traded companies. So we’re still just investing in companies with private equity, they’re just companies that are private instead of public, so you can’t go buy their stock on the exchange.

When you invest in, say, a private real estate fund, the manager matters a lot. If you’ve got a manager who’s done really well for 20 years and one who has not done well for 20 years, the one who’s done well for 20 years probably will do better. So the manager selection becomes very, very important. And sometimes the opportunity set, some managers are going to see more companies or more properties than others because of their reputation or their scale or their access or the people on the ground. These things make a difference, their ability to exit, are they sophisticated? It’s private equity; can they take a company public? Can they sell to a strategic firm? Do they have these connections?

At Creative, we’re very, very focused on the private side at finding what we believe to be the very best managers in the world negotiating the very best rates and lowest access points for our clients. Because I see that as a very different world than the public world where it’s almost Seinfeld’s bizzaro world. Everything’s upside down. You have to look at everything completely different.

John: It’s really good advice. All right, I’ve got a lightning round. A few questions for you here before I let you go. You wrote about the five mistakes every investor makes. If you had to narrow it down to one, what’s the biggest mistake that you see investors make?

Peter: Get caught up in the moment. People get caught up in the moment. They can’t zoom out. You’re in the middle of COVID. The video I did for our clients, it was the worst day, the day the market had hit its bottom. I did a video and I just said, “Hey, look, everybody is not going to die. I don’t know if the mortality rate’s really 3% like everyone’s saying or it’s going to turn out to be much less.” Of course it turned out to be much less. But we are going to go back to a world where people buy stuff. We want to be selling bonds and buying stocks now. Zoom out. After 9/11, after the tech bubble, after ’08, ’09, after every single correction in the history of the United States, this is over 100 times, we’ve had the same outcome. Zoom out, and that allows you to take advantage of the situation.

People get caught up in the moment. Going back to where you started, John, whatever the current election is the biggest thing in the world. Zoom out and you’re going to make much, much better decisions.

John: That’s probably good to apply to everything in life; gain a little perspective, broaden it out. What do you think is going to look different in wealth management 10 years from now? Where do you see the industry trending, and how do you think that’s going to benefit investors looking for advice?

Peter: I think artificial intelligence is going to make an enormous difference. I think where people are getting financial planning and people are having to sit and analyze insurance policies and state plans, I think we’re going to see AI really take over a lot of that and really allow people to give advice quicker. Much like you might go to the doctor’s office and take a list of all of your symptoms and AI is going to throw it into a computer and spit out the best protocols in the world for your doctor to examine.

Interestingly though, I think it’s going to be very human on the investment side. And the reason is, investments is very different than medicine or another science in that you have very, very smart people that have very opposing views about how to approach things, and that is not going to change no matter what. The internet didn’t change it. Nothing has changed it. All it does is magnify it. So you’re still going to have the confused consumer. If you have a medical condition, you’re going to become less confused because science is going to tell you, “We’ve now examined everything in the world and here’s a pocket that tells us how to treat this.” We’re not going to get there with investing. And what we found is no matter how much evidence supports one way of doing things, there will always be the counter argument because it creates the drama that feeds the system that people want to have on Fox Business and CNBC and everything else. There’s always going to be that divergence view of opinion. It’s not going to get solved with technology.

John: All right, final question here. You regularly talk with clients who have eight, nine figure net worths, even billionaires. What common traits have you identified that the rest of us can glean from?

Peter: I would say that when I see our billionaire clients or very, very high net worth clients, what I tend to see is one of two things. One, this massive amount of confluence of things that came together that created this perfect storm. I don’t want to call it luck, but a lot of stuff had to happen together. If my parents just stayed in the country they were in instead of coming to America, I am doing something very different, right? There’s luck in everybody’s story, one way or another.

But when I look at successful people in general, I have found that they are persistent and consistent. They are just relentless. They just don’t stop. There’s a million different ways to become successful, but if you really look at the separation, motivation only gets you so far. Motivation is what gets you to go to the gym and get excited or whatever. But what keeps you in shape is the persistence and the consistence, whether it’s lifting or working out or it’s diet or it’s your relationship. I mean, the romance is going to go on for a little bit, but what makes that relationship healthy 20, 50 years from now is the persistence. That’s what I see with successful investors and with successful people in building wealth is they just do it over and over and over again. A lot of people get bored, they hit a certain threshold, they get bored, they want to go do something different, but the really successful people, they just never stop.

John: That’s such great advice. And anyone who has had proximity to you knows that is absolutely an attribute that you possess. Well, I always enjoy our conversations, Peter, and appreciate you joining me.

Peter: Thanks, John.

John: The Wall Street Journal had a recent piece on exactly how much the tooth fairy is leaving children these days. Now, the article included discussions of a hundred dollars bills, Louis Vuitton bracelets, I don’t know if these are all Beverly Hills kids or what’s going on. I, for one, am confused because I thought what we were doing was pretty good. We even sprinkled a little glitter, the pixie dust all over the hanging giant tooth that we throw a little money in and take the gross little tooth out of. A poll last year by Delta Dental, which is a large US provider of benefits, pegged the average payout per lost tooth at a record level now of $6.23, which is up from $5.36 in 2022. I guess inflation’s even impacting the tooth fairy these dates.

But the same poll found that 20% of children now receive both money and something else, often a gift for each lost tooth. And we wonder why we’re getting soft as a society. I mean that is unbelievable. But based upon the data, it’s probably likely that my wife feels differently about this than me because it’s very common in a marriage, husband and wife don’t agree on everything. I know, shocker. And when it comes to money, they don’t spend and save the same way.

Comedian Nate Bargatze had a hilarious bit on marriage and the way different spouses think. Have a listen.

Nate Bargatze: I’m the dreamer of our group. I feel like in a marriage, one of you is a dreamer. Money’s not real. Let’s have fun. Let’s go do fun stuff as much as we can. The other person hates fun, and that’s how you make a marriage. You can’t have two dreamers. You’re going to be homeless in an hour. You need someone that just walks around, “Is fun happening? I’d like to put a stop to that. Y’all having fun? Stop it. Is the air conditioner on? Turn it off.” I married my dad is who I married, my dad who I thought air conditioning cost $100,000 a day to run. When we would be on car rides, I thought if you turned it on your car exploded.

John: I thought it was so funny. I was forwarding this clip on to others and I showed it to my wife, and we had a long funny conversation about how this rings true. One person has the grand ideas, travel, adventure, and the other one keeps the family grounded. I want to encourage you if you don’t always see eye to eye with your spouse, join the club. It’s normal. And in fact, in many cases it provides balance.

I also know that money is the second leading cause of divorce. The first reason is way outside the boundaries and context of this show. I don’t have the little E, the little explicit, on the podcast rating, so we won’t go there. But if you want a healthy marriage and you find this challenging at times, here are a few tips to navigate differences of opinion, many of which are just inherent to how you grew up and how you viewed money and the way that your personalities vary from one another. This can help get you on the same page.

The first is a real obvious one and it applies to pretty much every aspect of life, and that is communication. Have an open dialogue. Actively listen. What are their goals? What are their concerns? Restate some of those things to them so they understand that you’re hearing them. Also identifying shared goals and priorities. What are some common objectives? Yes, we don’t think about everything the same, but what are our aligned values, the things that foundationally we agree on?

Next, give yourself a cushion. If you don’t have an emergency fund and you’re teetering on the edge of financial ruin or running up high credit card balances with 25% interest rates, that creates stress in even the best marriages. If you both know intuitively, “We’re overspending and we’re putting ourselves in a very precarious financial situation,” it’s going to lead to more arguments, more frustration, more finger pointing, which is why financial accountability is key to a healthy marriage when it comes to money.

Clearly define financial responsibilities. Whether you divide tasks or manage finances jointly, accountability ensures that you and your spouse both will actively contribute to your wellbeing. You’ll both have skin in the game. And then do regular check-ins. Let’s look at progress. Are there any changes to our income or expenses? And in light of those, you can make adjustments to your financial plan.

And the last tip, adaptability. Financial situations are going to change. And keep in mind that financial discussions in a marriage require compromise, and that can be hard. I know as a husband, sometimes I want it to be my way or the highway. But have a willingness to work in coordination with your spouse.

Remember, this isn’t just about managing money. Money is a tool for other things in your marriage that are important, building a shared future and navigating life’s journey together as a team. So I want you to rethink this notion that you have to be on the same page with your spouse about money or it’s going to have a negative impact on your marriage. No, you can get on the same page. And you probably won’t always agree; that’s normal.

What I found to be one of the best catalysts to promoting a healthy marriage when it comes to money is having visibility on your situation. That starts with a written document of financial plan. This isn’t all roads lead to Creative Planning, but if you don’t have a written document of financial plan, if you’re not having your taxes reviewed regularly by your CPA, if you can’t see your projections, are you saving enough? Are you behind? What are your goals? Are you on track for those? It can be an uphill battle toward getting on the same page with your spouse.

If you’re not sure where to turn and you’d like our help, you think that would benefit you personally, it’d benefit your relationship, do what thousands of others just like you have already done. Visit CreativePlanning.com/radio to speak with a local fiduciary just like myself. We have over 465 certified financial planners. Why not give your wealth a second look at CreativePlanning.com/radio.

Social security income is a personal finance topic that I find to be one of the most confusing with several misconceptions that we need to rethink. The first is that social security income isn’t subject to taxes. I wish this were true. But if you’re single and have a modified adjusted gross income of at least $34,000 or you’re married filing jointly with a combined gross income of at least $44,000, get this. Up to 85% of your social security benefits are taxable. Now you might be thinking to yourself, “That sounds like double taxation. I was paying into this as a tax out of my paycheck for 20, 30, 40 years. Now I’m being taxed on the income?” Yes you are. And it can be very difficult, in some cases, to get below those thresholds, because they include 50% of your social security income in that calculation. Now to be clear, you’re not paying an 85% tax rate. 85% of the income is taxed at 12% or 22% or 24%, whatever bracket you are in.

Another piece of conventional wisdom that we need to rethink is that your break even age tells you exactly when to claim social security. The break even age is the point when the value of your benefits if you wait to take Social security will surpass the value of taking them early. It’s in your early to mid 80s. Meaning if you delay benefits until age 70, once you’ve lived to around 84 or 85, you have a higher cumulative benefit by having waited until 70 and received that 8% growth rate every year on deferring toward future benefits, versus if you passed away at 78 years old you didn’t have enough time to catch up by delaying benefits.

But by focusing on that measure, you often fail to consider other really important factors and that personal aspect of personal finance, things like how your spouse or dependents may also receive their benefits, or the impact of waiting on their survivor benefit or a spousal benefit. What about how much you have saved for retirement in other areas? Are those monies in tax deferred accounts that will come out fully taxable? Are they in after tax accounts? Are you expecting to inherit money down the road? Do you plan to retire early or late? Are you going to need to care for an aging parent? Those are just scratching the surface of hundreds of inputs that should be considered when making a social security decision.

Here are a few other social security misconceptions to rethink together. I’ve heard people say, “Well, social security benefits aren’t even going to be there when I retire. So if and when I get to that point, if they’re still around, I’m going to take as early as possible at age 62.” And while the solvency of social security is certainly an ongoing topic, most studies show that in around 10 years it would be underfunded and have a slight reduction in benefits. That would be, of course, if nothing changed, which most expect considerable changes rather than a sudden drop of 20% or 25% for social security benefits, as it would have a catastrophic financial impact on retirees in America as well as huge negative political consequences. And let’s face it, oftentimes that’s what’s driving the decisions of lawmakers.

I’ve heard others tell me, “I heard that I can outlive social security.” Now, regardless of when you choose to take benefits, you cannot outlive social security. There is no end date. You’ll receive payments every month until death. And unlike other income streams like private pensions, it has the backing of the federal government and it’s designed to keep up with inflation.

Social security is a huge part of any retirement plan is it represents considerable income with a present value for most couples well over $1 million. It’s not a decision you want to make lightly. It’s one that after 12 months passes is irrevocable. So understanding the nuances within the context of your entire financial situation is important. I recommend you speak with a certified financial planner who can evaluate that decision relative to your overall situation. Of course, if you’d like our help, visit CreativePlanning.com/radio and we’ll help provide clarity around your social security decision or any other financial decision that may be on your mind.

It’s time for this week’s one simple task where each week in 2024, I offer an easy to execute upgrade to your current financial plan so that you end the year in a better situation than you started it in. Today’s one simple task, make it easier to check your accounts, download tax statements, and monitor your situation by bookmarking all of your financial sites. About 10 years ago, my grandmother, who’s now passed away, was looking for something. I was sitting there with her at the dining room table, and she pulled out a laptop that had to be plugged in to even stay on. The second it got unplugged it was gone. No battery life. It was basically a small desktop. She could not find what she was looking for. And I said, “Well, why don’t you just have it on your favorites?” You would’ve thought I was speaking Mandarin. She’s like, “Well, what are favorites?” Now, granted, she was in her early 80s. But favoriting Facebook she was looking for and a couple of things like that. She’s like, “This is a game changer.” You’d have thought I found the fountain of youth or something. It was huge for her.

But in all seriousness, have the key sites that you need to go to easily accessible so that you can get the information you’re looking for in an efficient manner. I told you it’s one simple task. This week’s about as easy as it gets. Bookmark all of your financial sites.

It’s time for listener questions, and as always, one of my producers, Lauren, is here to read those. Hey Lauren, how’s it going? Who do we have up first?

Lauren Newman: Hi, John. First question I have is from Jim in Des Moines, Iowa, and he wrote, “On your show last week, you mentioned tipping, clients being good tippers and bad tippers. And I wanted to ask you what you think is considered a good tip?”

John: I know I had a lot of feedback on my discussion around tipping. I didn’t know it was such a hot button for people. It’s controversial. I just talking about the election, I mean, I don’t know, tipping may be up there with our political affiliations in terms of controversy. Everyone seems to have a strong opinion about it. But it made me feel good. The Wall Street Journal had an article that basically said, “Are you not sure how much to tip? A new study shows you are not alone.”

I mean, what do we do with takeout? I’m just going to vent here for a moment because I consider myself a pretty good tipper. But I’m a little thrown off sometimes when it’s takeout. I’m like, “Do I do the normal tip? Do I tip a little less? Is this really doesn’t warrant a tip because I’m just walking in and grabbing the bag that they’re handing to me? But then does the kitchen staff need to be tipped because they’re still making the food?”

I was at a pet store the other day, a pet store, and it said, “Do you want to leave a tip for 10%, 15%, or 20%, or other?” And I’m like, “Man, a pet store?” I don’t know how their comp structure works. Are they depending upon this tip as a big part of their compensation or if this is just extra. I’m not really sure. Nobody helped me. I just walked down the aisle and grabbed what I needed and brought it up to the front.

I’ll tell you where I do tip really well, DoorDash and Instacart. They’re providing an extremely valuable service. It’s labor-intensive and they’re doing something that I don’t want to do. And by the way, if you’re someone who’s judging me right now, if you’re saying, “John, you use Instacart? The prices are crazy. They’re so expensive. I can’t believe you do that.” Well forget the time savings, but I’m convinced that Instacart actually saves money even though each item is more expensive. You say, “Well, how can that be?” Because you are not making impulse buys walking up and down aisles. On Instacart, you only order exactly what you need because you’re not perusing the ice cream section. Oh yeah, those ice cream sandwiches do look really good. And because you can just hit a reorder button on Instacart, it allows you to continually buy exactly what you need. By the way, they’re not a sponsor of the show. Maybe they should be, but that’s my bit on Instacart.

But tipping in general became a bit of a tipping point during the pandemic because people that were working in service and in hospitality were doing something risky and perceived to be pretty dangerous. And so for a while it was like tipping was combat pay. Thank you so much for being here and working. And, people wanted to help small businesses, so tipping actually increased. People are getting the stimulus money, they’re showing up somewhere. They’re saying, “I want to help you out because you’re working hard right now.” And that was fantastic.

Tipping’s also very generational. The older generation in almost all studies say tipping’s a choice. How was my service? Was it amazing? Then I’ll give a tip. Was it average? Probably no tip or next to no tip. And if it was bad, I’m not giving them anything; that’s not expected. The younger generation see tipping as basically an obligation. Like, it is part of the social contract. If I’m at a restaurant and the service is, nah, I’m still tipping them.

Now the question was, how much do I consider a good tip? Well, regardless of generation, I think 15% to 20% is the standard tip. If you want to be really generous or the service is great, I think around that 25% is great. Maybe this is partly my own bias because I have a 20-year-old son who works in the restaurant industry. Most of what he makes comes from tips, and I see how hard he’s working.

All right, before I get myself in more trouble, Lauren, let’s go to the next question.

Lauren: Next I’ve got Nancy from Virginia asking, “Settle a debate for my husband and I. He likes leasing vehicles and I like purchasing. His reasoning is you get to turn the car in once it starts to need costly repairs. I like owning something at the end of the loan. What do you think is a better investment?”

John: Let’s just talk briefly about the pros and cons of each. Leasing, the pros are you’re generally going to have a lower monthly payment. You’ll have access to newer models. You’ll have lower repair costs. A lot of things are under warranty generally during the lease period. And so most issues are covered. You’re going to have fewer maintenance concerns because it’s just a newer car. And you’ll actually have flexibility at the end of the lease term. You can choose to buy the car, lease a new one, or explore other options.

The cons are mileage restrictions. You can’t do a lease and then drive 40,000 miles in a year. You don’t have any ownership. You have restrictions on customization. If you’re like me, when I was 16, I had my little Toyota pickup with subwoofers that buzzed the entire back of the truck bed because I thought that was really cool with my six disc CD changer. You can’t do that when you’re leasing a car. So if you want some 20 inch rims, you’re probably not putting that on a leased vehicle. And then you also have continuous payments. You don’t ever get out of a lease payment like you can when you pay off a vehicle.

The pros and cons to buying a vehicle are basically the opposite. You have ownership, you can customize, you have no mileage restrictions. The cons are you’re going to have higher payments. You got depreciation, higher upfront costs, and more maintenance costs.

Ultimately, here’s the entire decision, and I’ll tell you what we do in my family. I prefer to purchase a vehicle. I have my Ford F-150. I pay cash for it, and then I just drive it, and I keep it for several years. That’s always going to be the least expensive. If you’re asking me just what’s the best financial decision in a vacuum without anything else considered, you pay cash for a car that you can afford and you drive it for a long time.

But my wife thinks waiting 36 months to get a different car is too long. Can we do a shorter lease term? I like getting a new car. She loves change and she loves the new bells and whistles. It doesn’t have to be a ridiculously expensive car, but she likes having a new vehicle. And frankly, she’s carting our kids around in that car and I like her to be safe. And so we lease for her and she has the light at the end of the tunnel. Every 36 months she gets a new vehicle.

And let’s face it, an iPhone right now seems old if you have it for five years. Think about the technology in cars. Safety features and upgrades are constantly changing, even with the autonomous driving and blind spot awareness and automatic braking and parallel parking itself and all of these different features.

So if you’re someone who doesn’t drive a lot of miles and enjoys getting a new car more frequently, believe it or not, it sounds counterintuitive, but leasing is probably the better route then buying a car and every three years trying to resell it or getting hosed on a trade-in value.

All right, Lauren. Next question.

Lauren: George from St. Paul, Minnesota wrote, “My sister recently passed away and left my wife and I around $500,000. What would you recommend we do with this? We have a sizable retirement nest egg and have sufficient funds for our needs.”

John: Well, first off, I’m sorry for your loss, George. You obviously had a sister who cared about you leaving you a half a million dollars. That’s certainly a blessing. You did indicate that you have sufficient money for retirement. You’re not depending upon this money. So maybe this question’s a little bit harder to answer, but that would be the first step in answering what I recommend you do with the money. And that is, what’s your intention with the money? If it’s not for retirement, is it growth for an inheritance down the road for your children? Do you want to use it for college costs for grandchildren or nieces and nephews? Do you intend to donate it to a charitable organization? If so, do you want to do that all at once now? Do you want to wait until your passing? Do you want to do a combination of the two? And so the first step in how you’re going to invest the money is determining when you’re doing something with it and for what purpose. It has to be built into your financial plan.

Here’s one consideration I found helpful in working through this with my own clients. How is this $500,000 going to be taxed? Is this inheritance coming from brokerage accounts and bank accounts and real estate that’s being sold or a Roth IRA, all of which are going to receive a step-up in basis or be tax-exempt from the beginning? Well, that may dictate a different strategy and use of the monies than if all $500,000 you’re inheriting isn’t in a deferred retirement account that’s never been taxed and therefore is going to come to you at ordinary income rates. And so I feel bad not directly answering the question, but the answer really is put it within your financial plan. Look at it relative to your own goals, your own estate strategies, your own tax strategies, income needs. And from there, that plan will answer how it can most appropriately be invested or given away.

If you have questions just like these listeners, email those to radio@creativeplanning.com

In Toby Keith’s classic song, he famously said, “I ain’t as good as I once was, but I’m as good once as I ever was.” I’ve heard Charles Barkley talk about aging as an NBA superstar, and he said basically the same thing as Toby. He could bring it still occasionally. He could put up a huge game once a week or once every couple weeks, even once he was out of his prime. But the difference from when he was younger is that he just can’t do it every single game. He didn’t have it in him for that consistency. He basically said, “I had to save it and pick my spots for when I was looking to have a big game.”

It got me thinking, what is our prime for making financial decisions? In NFL quarterbacks, around 26, 27 years old is their prime, kind of the Mahomes age, right in that range. What is it as an investor? What are the best years for making smart financial decisions? Well, like everything now, we’ve got research around it and an answer. The prime years according to The Wall Street Journal for making smart financial decisions are on average 53 and 54. Now, I stress on average because for you it might be 49 and for someone else it might be 59, and that’ll make more sense when I explain what factors go into determining your peak performance age. But on average when you’re around 53 or 54, you’ve accumulated knowledge and experience about money, about spending, about saving, but you haven’t began losing key analytic cognitive skills. It’s also roughly around the age when adults make the fewest financial mistakes related to things like credit card use, interest rates, and fees.

Now, I’ve spoken with a lot of 30 year olds and 35 year olds who make mistakes financially due to inexperience. It’s not entirely their fault. They just haven’t lived through that many economic cycles. They haven’t experienced that many bulls and bear markets, and so they make mistakes financially just due to the fact they haven’t seen a lot. They’re inexperienced. The process for negotiating a home, how much to finance versus how much down? How much house should I even buy? Things like trying to time the stock market. Making poor career decisions. Those are the mistakes we make in our 20s and 30s. But 30 year olds typically aren’t way too conservative with their investments. They aren’t unaware of new technology trends. Conversely, many 80 year olds have the exact opposite strengths and weaknesses than that of a 30-year-old. 80 year olds can be stuck in their ways. And again, I’m generalizing, of course. They’ve done it one way for a long time. I don’t want to change how I do it. I’m not that open to new ideas, even those that might help them. But dang, they got a lot of experience.

So here are the two factors that lead to financial strength and why that early to mid-50s tend to be a really good merging of these things: experiential capital and cognitive ability. They intersect at that middle age. So think about fluid intelligence as the ability to think abstractly, reason quickly, and problem solve independently of any previously acquired knowledge, where crystallized intelligence is reflected in a person’s general knowledge, vocabulary, and reasoning based on acquired information. So here’s the takeaway. If your 53 or 54, start making all your important financial decisions because you are at peak levels right now. No, of course, that’s not actually what I’m saying. But generally speaking, you are actually at a pretty good spot to make financial decisions and probably feel pretty good about it.

But people can and do make good financial decisions from their 20s to their 40s as well as their 60s and 70s and even 80s. But self-awareness is the key. If you’re in your 20s, look to those with more experience. And if you’re in your 70s, lean on younger people who have more awareness of current trends and new technology. And most importantly, be aware of your strengths and weaknesses at whatever age when it comes to making financial decisions. Deliberately learn, study, read, get sound information, and seek out help from a reliable source. Because 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.

Disclaimer: The preceding program is furnished by Creative Planning, an SEC registered investment advisory firm. Creative Planning along with its affiliates currently manages or advises on a combined $300 billion in assets as of December 31, 2023. United Capital Financial Advisors is an affiliate of Creative Planning. 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 the 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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