We’re talking about one of the most important topics in personal finance: advice. This week’s episode also includes a highlight reel of insights from some of our favorite interviews. You’ll hear playbacks from special guests Peter Mallouk, Charlie Bilello, Dan Pallesen, Candace Varner and others, covering behavioral finance, investing, retirement and more!
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 your host, John Higginson. On this week’s Thanksgiving episode, I’m talking about one of the most important topics in personal finance, advice. Consider this week’s show a highlight reel of insights from some of my favorite interviews. Everything from behavioral finance, investing, retirement, taxes, and my conversation with Creative Planning President Peter Mallouk. These are insights you won’t want to miss. Now, join me as I help you rethink your money.
There’s a lot of different financial advice out there, and in 2024, you’re not suffering from an inability to obtain information. If anything, there’s information overload and that can be overwhelming and it can be demotivating, and you may suffer occasionally from the proverbial paralysis by analysis. Take it in a lot of info, some of it’s conflicting, trying to figure out what’s right, but to be successful in improving your financial situation, you’ll need to sift through that to find useful information for yourself.
Let me rattle off some of the basics that really apply to us all. Number one, live on less than you make. Number two, avoid credit card and consumer debt. Automate your savings and your giving. Start investing while you’re young. Invest 10 to 20% of everything you make and that applies to your giving. Increase your lifestyle only half of whatever raises you receive, and always maintain an adequate emergency fund.
Let’s jump into the first interview Dr. Dan Pallesen. He’s a certified financial planner, Doctor of Psychology, a frequent guest of the show who really focuses on the intersection of psychology and finance. How does your behavior impact your financial success? Dr. Dan joined me for a fascinating conversation about how to craft a wealth plan that not only grows, but lasts your lifetime. Here’s a key insight from that conversation on the importance of aligning your financial wisdom with your ultimate purpose. Have a listen.
Dan Pallesen: Yeah, so scheduling and automating is the best thing. As a psychologist, I have a few other tips and ideas. Shout out to Simon Sinek and I don’t know his background, I don’t think he’s a psychologist, but-
John: Start with the why.
Dan The start with why guy, and that’s huge. I mean, I think of some of these studies that have been conducted of how to be better savers and one of them is basically connect a why to how. We’re talking about the how, you automate it, you schedule it, but why? Why are you saving? They’ve done a study where someone has brought in a meaningful picture of their childhood or something in their background and then talk about that picture. And then from there decide how much they’re going to be saving in their accounts relative to a control group. And those people that are connecting to something in their past have shown to be better savers over the long run.
They stick with their savings goals better than those that just have said how much they want to save. There’s something about connecting our saving behavior to why we’re doing it, helps to motivate it. We’ve joked about visualizing the future. I think it’s important. I think it’s good to have a good vision of what’s possible for you. John, you’re a Northwest guy. I mean, you probably tell the story better than I do, but what’s the example of the initial guy with Nike that broke the four-minute mile? [inaudible 00:03:33], is that his name?
John: Yeah, and then how multiple people thereafter continue to break it.
Dan Yes, once you see it, you believe it, you know it’s possible for you. There’s something about taking action on things that you’ve seen done before you. So those are just some tips I have to be better savers.
John: And beyond just having a higher balance when you actually do get to retirement or you reach that goal in the future that you had to save for. Beyond that, you need some sort of win and reward in the moment, and so if you’re really saving just to save, you could also argue not only are you going to be less motivated to in fact save, but what’s the point? If you’re just saving without any purpose, why are you saving? I mean, maybe you shouldn’t even be saving. So I think some people get caught up in, I want better investment returns. I got 8% last year, man, I really wish I had gotten 10. Well, what would the impact be? Obviously you’d rather get 10 than 8, but what’s the impact?
Dan Yeah.
John: Well, I don’t know. I just want to get 10. Sounds better than eight. Well, you’re going to die with $4 million instead of 4.2 million. Now if somebody identifies, well, yeah, that extra 200 grand difference, this is exactly the organization I’d be giving it to, this is what I’m passionate about. Well, then they have a justification for saying, I really want to maximize returns. But just to maximize returns for the sake of maximizing returns or saving just for the sake of saving without any sort of end goal is not very motivating or very fulfilling.
Dan I couldn’t agree more. I can’t tell you the amount of conversations that I’ve had. John, I know you’ve had them over the years too with that typical late life worker who just can’t quite pull the trigger on full retirement. They’re well beyond a financial independent state for them, it’s not going to move the needle at all. But there’s just something about we can’t step into this next phase because they haven’t envisioned what that would look like. It’s just this drive to constantly work harder, earn more, invest more, whatever it may be, but when there’s no end goal in sight, it’s hard to know when you’re at the finish line.
John: Again, that was private wealth manager certified financial Planner, Dr. Dan Pallesen. Let’s transition over to tax planning, which we know is crucial and also that no two situations are alike. So you understanding your goals, making tax strategies that fit your specific circumstances could be one of the most important financial moves you make and taxes are one of the few things within your control. That’s exactly what I discussed with Creative Planning partner and senior tax director Candace Varner when she joined me on the show for the eight non-negotiable money moves in 2024. Here are her insights on how strategic tax planning can set you up for success.
What do you see as the biggest changes here in these last couple of years for taxpayers?
Candace Varner: Well, I think for any individual taxpayer, the thing I see they apply most universally would be the standard deduction changes.
John: Sure.
Candace: The standard deduction used to be significantly smaller. Right now I think it’s 25,000 almost if you’re married. And at 25,000, when you combine that with the limitation on the state and local income tax deduction, it creates a situation where from year to year you may or may not itemize and it presents a lot of opportunities, but creates a lot of confusion for taxpayers as well. A lot of people think taking the standard deduction is a bad thing if I say that, but if we think about it, it’s free deductions. You didn’t have to spend that money to get it. I think the standard deduction changes is probably the biggest one combined with if we all think back to pre-2018, there were also these things called personal exemptions, which haven’t existed since. Those kind of things linger in people’s minds and cause confusion.
John: A lot of folks used to itemize, they’d give 5,000 to their church or Habitat for Humanity and they love their church, but they also liked getting the tax benefit and all of a sudden they’re way below the standard. They’re getting no tax benefit to make that donation. Do you have any tips or strategies in these last couple of years while the standard deduction is as high as it is?
Candace: So the biggest thing we’ve been doing with clients since this has been in place and we still have the opportunity for a couple more years, is to just bunch your deductions. And again, this is going to depend on their particular situation, but if we take for granted you have 10,000 of the deduction for state and local taxes, which most people get over that you may or may not have a mortgage interest deduction. And then we add on that charitable, what we want to do is say, okay, if in a normal year you get right around the standard deduction, well let’s double up how much you’re donating this year or push it to next year. Just double up in one year so that you get over the standard deduction and get the full benefit for all the donations you’re making.
And then in the other year, take the standard deduction, which like I said is a free deduction. You’re getting to deduct stuff without having to spend the cash. You end up in the same place as far as what you’re donating is just a timing difference, but it can make a really big difference in your overall tax liability.
John: Essentially when you’re taking the standard, you want to be as low as possible below the standard, and then when you’re starting in the years where you itemize, you’d rather be way over the standard. What other changes do you think are going to surprise people when this expires at the end of 2025 that there’s still time to make some proactive moves on?
Candace: There’s a lot of things I think will surprise people. I think planning for the standard deduction is the biggest piece. And then the other one that you can do a lot of planning around would be the estate tax exemption change. Which at the moment is almost 13 million per taxpayer and it will revert to 5 million. So that’s a huge difference. And even if you aren’t someone who is worth $5 million, it’s still important to do planning and have an idea of what that’s going to be and it would still make sense to utilize more of that exemption now that might not exist in the future.
A lot of these things are unknown. Okay, so I guess we didn’t start by explaining this, but if congress does nothing, so no action, which is sort of their jam, this will all change at the end of 2025, so December 31st, 2025. So going into 2026 taxes, that’s when you’ll see a bunch of changes. Between now and then, we’ve got a presidential election, so a lot of this is going to be unknown. I think the key is knowing what are your goals? What is the charitable you want to do? What is the estate tax things we want to gift in our lifetime and things like that. Knowing what our goals are will make it a lot easier to react quickly when we do finally have these.
John: Well, and while tax policy is unpredictable and it’s certainly a political yo-yo that’ll be used and it impacts specific people’s situation differently as to how it changes. Do you think it’s reasonable from a broad assumption to say it’s more likely over the next 10 or 20 years with $35 trillion in national debt and currently in a very low tax environment relative to history, that people can operate under the assumption that likely rates won’t be a lot lower than they are now? Likely the estate exemption probably won’t be way higher than it is at $13 million per person? Do you think that’s reasonable for people to make assumptions knowing that they could be wrong, but saying let’s plan sort of assuming that 2024 here and 2025 are probably going to be some of the better years over the next foreseeable future for us to make some tax moves?
Candace: Yeah, I think that’s totally fair. And if we’re wrong and it’s lower later, it’s still a win.
John: Yeah, absolutely.
Candace: If we can be conservative and think these are some years of opportunity, what can we do to take advantage of it? And over 10 years or in the long term, that rates will be higher. Again, looking at your individual situation because when we look at things like the child tax credit or the mortgage interest limitation or things like that, they’re very specific to how that’s going to affect you. But overall, when you’re thinking about decisions, if we’re thinking on a long horizon, especially if you’re compared now to when you’re going to be retired or things like that, I think it’s a very safe assumption to say, yeah, we should assume rates are going to go up.
John: One of the ways that I see people, maybe failing is the wrong word, but not being quite as proactive as I would like them to be is blindly contributing to deferred retirement accounts. Even though they’re not in a high tax bracket right now, but we’ve been trained to say, you’re going to get the match, which by the way, totally correct, it’s free money, 100% return on your money, you should do that. But it’s amazing to think about that a married filing jointly couple right now is still in the 24% bracket all the way up to $360,000 of income.
So you may have a physician saying, well, I’ve always maxed out my SEP IRA, I’m a doctor, I make all kinds of money. And you’re like, yeah, but you’re in the 24% tax bracket right now, which if you go back to the Bush tax cut years, the 25% bracket started at about $76,000. And so you’re going to have to make a lot less money to get under 24 in the future, but I think that’s very counterintuitive because you can earn a lot of money these last couple of years and still not be in a high marginal tax bracket.
Candace: I saw that even when it changed in 2018, it’s just really hard to compare one to the other because it’s a different rate. It’s over a different income bracket, and again, all their deductions might have changed. AMT effectively went away for most people.
John: Yeah, it did.
Candace: But the impact of that or the possibility of that affecting a lot more people will be back. So there’s a lot of those things, but what you’re describing is the psychology of taxes, which is really hard to get over for people and I think in all things money related where you’re thinking, I want the deduction now, I want my money now, I want all of that now you are not wrong, and that’s really hard to overcome. But again, like you were saying, if we think rates are going to go up, then the deduction now is not that great. Maybe we contribute to a Roth instead or something like that because I’d rather pay tax today at 24% than in the future at 37% or 39.6 or whatever it’s going to be. But I also have to mentally get over the hump of I want to pay taxes right now, which is-
John: Candace, you’re telling me to voluntarily, proactively make a decision that is going to increase my taxes that I have to pay when I file these. It is very counterintuitive. I think the confusing thing for people related to retirement accounts is you’re not saving those tax dollars. It’s the wrong terminology and I think that’s throwing people off. You are deferring and we use those two words interchangeably, but they’re not the same. Theoretically, if your rate never changed and you deferred in a 24% bracket and then down the road in retirement 30 years later you took out that money and you paid 24% taxes because somehow magically your rate had never changed, it wouldn’t have mattered if you did a Roth or a traditional, it would’ve been identical. So all you’re asking yourself is do I think today’s rate is higher or lower than what I think it will be down the road?
Which obviously isn’t unknown and there are a lot of variables. But that’s where you just play the game of saying, well, if I’m in 32, and for me I look at that from 24% to 32 as the jump for a lot of people. Once you’re in 32 or higher, you go, you know what? It’s probably reasonable to think in retirement we can get this out at less than 32. We might not be able to, but that’s probably worth deferring. At 24 or 22 or certainly 12, I mean, I see people deferring into a retirement account in a 12% bracket. I’m like, when are you taking this out in retirement at less than 12%? When is that ever going to happen? Put it in the Roth, take your medicine today, and you’re going to almost certainly be better off down the road. But do you think that 24 to 32% jump is at least a nice general rule for listeners to plan for?
Candace: Yeah, absolutely. I would be in the same, and I think it’s… What is there? A 22% as well? The way the brackets fall right now where rates are, that 24% to me as a mental cliff to me of just this is very different than 32% and-
John: I agree.
Candace: Just a much higher spread on what you can probably get. And like you said, it’s not just what do we think rates are going to be in the future, but what’s my income going to be in the future? Because when I’m in retirement, the rates might be way higher, but my income is going to be a lot lower. Assuming you’re accounting for what your required distributions are going to be and you have a lot more wiggle room to make your rate lower even if the overall tax rates are higher.
John: To be very clear too, if your employer offers a match, that will still be granted even if you’re contributing to the raw side of your 401(k), sometimes that throws people off thinking, well, I want the match. No, you’ll still get the match.
Candace: You’ll still get the…
John: Regardless.
Candace: And you should definitely take all of that. Yes, that’s first line of defense, make sure we’re getting all the free money we can get. But then what buckets do we want it to end up in is the bigger piece.
John: That was Candace Varner, and if you want to hear these interviews in their entirety, you can find each show on the radio page of our website at creativeplanning.com/radio. Okay. Well, investing in the stock market is always top of mind as you work to achieve your financial goals and with technology companies at the center of it all, the big question is what should you be doing with your investment strategies right now? How do you modernize your portfolio? How do you know you’re keeping up with the times?
And to help you decode what’s been going on in the markets and how you can react, I welcome Senior Portfolio Manager, Kenny Gatliff, he’s a chartered financial analyst to the show. And here’s his take on how the market responds to news events and what ultimately that means for your portfolio.
We’re not advocates of trying to go find those needles in the haystack, but what do you think investors should do? How do you think they should react? Obviously there’s going to continue to be game changing technologies that are going to lead to extraordinary stock returns, and in hindsight we’ll look at it and say, that was so obvious that Nvidia was going to go up 200% or whatever the next Nvidia is. What do you feel like history’s taught us about these types of moments?
Kenny Gatliff: I think history’s been very informative. There have been a lot of different events that have been a new technology. Now obviously AI and ChatGPT, these are the newest version of this, but it’s not like we haven’t seen new revolutionary technology. I have a couple data points on this. So there’s a study out of Arizona State University back in 2015 and they looked at every stock return from 1926 forward. It’s a crazy stat. 4% of all companies were responsible for the entire gain of the stock market, the other 96% combined to make nothing. If you’re able to pick one of those 4%, certainly you do better, but what we advocate in investing is just make sure you don’t miss one of those 4%. The other fallacy that we’ve seen historically is this idea of getting on the bandwagon late in the game. We have many examples of this. To cite a couple in the late nineties, early 2000s, the Nasdaq rose 300% before dropping 80%.
And at that time we were talking about Nvidia. This isn’t the first time it’s been involved in something like this. It ran up quite a bit during the tech boom of the ’90s, but it crashed over 90% in the tech crash. And then more recently, Zoom and Peloton both are down 90% from their extraordinary highs in 2020. And to that point, these aren’t duds or losers. These are still companies and indices that have done very well over time. It’s just a matter of if you got in at the wrong time, you may as well have picked the wrong company to invest in because you lost just the same as those that chose incorrect from the beginning.
John: Right company, potentially just the wrong timing of that company. To your point, that ASU study goes all the way back to 1926, so it’s not a short period of time. That’s 100 years of data showing that 4%. And I think it’s the ultimate temptation. Because if you know that 4% are going to account for every bit of the growth, you say, man, if I could just find one of those four in advance, think about the outsized returns and overperformance that I would have. It’d be massive because it wouldn’t have those 96% in the portfolio that weren’t earning anything. Of course, difficult to find Apple 1983 before everybody else knows that it’s Apple. Let’s look at the other side of that coin, Kenny. If investors shouldn’t be euphoric, pump the brakes, stay disciplined, be diversified, don’t get over your skis. Should they be concerned about those run-ups we’ve already seen? Should they be wary of being invested in the market at all right now?
Kenny: In terms of what you’re saying, we’ve seen this big run up, and so I say, yeah, I’d be a little wary to be all in on this tech sector on one of these few companies that has already run up. Based on what the data I just shared in that if you get into the top of something that happens to have bubbled up, you have the potential to lose quite a bit. My advice here would be wary of being concentrated, and that’s good advice all the time. And we look at history as our example here, from 2000 to 2002 when that bubble popped, a lot of people said, oh, it would’ve been great to be out of the market during that time. You would’ve missed that. But if you were diversified during that same time, small value stocks were up 25%.
I talked about Zoom and Peloton being down 90% since their highs in 2020. But again, over that same time period from 2020 through today, small value stocks are up about 55%. So the key is to be wary of being concentrated or taking on more risk than your portfolio can afford, be diversified so that if that risk hits one segment of the market, fortunately you’re not all in on that. You’re also invested in these other parts of the market that probably aren’t going to do as poor and may be able to lift you up out of that completely.
John: And while risk and return are correlated, taking on more risk doesn’t guarantee higher returns. Last question for you, Kenny. Given some of the meteoric rises of these companies, could it be worth taking a gamble on them? If I’m listening saying, I get it, I should be diversified, but times are different. Look at these companies, consider AI Kenny. I mean, what do you think about me just taking a bit of a gamble, think about all the wealth that I could accumulate and buying private jets and all that. I mean, I just got to buy Nvidia at the right time, Kenny, and you want me to be diversified. What would you say to that person?
Kenny: And that’s a valid question, and I think our intuition would-
John: Of course it is. Everybody wants that. Everybody wants to get super rich in a short amount of time without having to put in a lot of work, Kenny.
Kenny: Yeah, and that’s the natural response when I say like, oh, look at Zoom and Peloton or the Nasdaq in the two 2000s. Yeah, but if you got in before even with that loss, you still did very well, and that’s absolutely true. And so if you get lucky, if you time it right, certainly you can make a lot of money. But I think the part of here that is not intuitive is that risk is very asymmetric and it’s so much easier to lose that big gain than it is to recover from a big loss. And this is where statistics sometimes for even those that are very inclined in math and numbers-
John: I know where you’re going with this. I know you’re going-
Kenny: Don’t make a lot of sense. And so just to give you a couple examples here. So if you lose 10% on an investment, it only takes 11% to get back to even. So it’s like, okay, that’s pretty symmetrical. If you lose 20, it takes 25%, so it takes a little bit more, but still very manageable. But once you start piling on these losses, it gets much more difficult to recover. And so if you lose 50%, well now all of a sudden you need 100% return just to get back to even, that’s starting to become pretty intimidating. And if you lose 90% like we’ve seen in some of these other examples, well then you need a 900% return just to get back to even. And I think that’s something that most people truly don’t realize. And if they did, that risk of a 50, 60, 90% loss would seem a lot more dramatic and they probably shy away from taking on that kind of risk.
John: Creative Planning’s Jameson Moulder, he’s a partner and the director of Medicare advisors. His insights impact a big milestone in your life, and that is retirement. Making sense of the Medicare system, the world of drug coverage, supplements, advantage plans, and there are a lot of changes on the horizon, hear what he had to say when it comes to Medicare and your retirement planning. Let’s start with the basics. What is Medicare?
Jameson Moulder: So Medicare is insurance that’s provided by the federal government. It’s for primarily individuals that are 65 or older. There are a few situations where someone can get Medicare before 65, whether they have a really tough illness or they’re on disability for a certain period of time. But in a nutshell, its individual coverage provided by the government, 65 years or older.
John: So let’s say someone’s now in their early 60s, when do you recommend someone starts planning for Medicare? What are some of the enrollment timelines that we should be aware of?
Jameson: We try to focus on meeting with clients around six months before their 65th birthday month. Okay, it’s easy to find that runway because it’s based on date of birth. The reason we target six months is during that six month period, those individuals are the most targeted demographic for solicitations and advertisement of anyone. I think the statistic is over 10,000 people per day, turn 65. So these insurance companies see opportunity, not only do they see opportunity, there’s a natural timeline of when these individuals need to make decisions. So six months is what we recommend because you can’t even move forward with step one of enrolling into Medicare until you’re three months out.
So about six months out, meet with someone that’s in this field that’s a professional that can walk you through the different enrollment timelines, the processes, start figuring out what coverages make sense for your situation so that way once you’re within that three-month window, you’re smoothly executing a game plan. But you don’t have to go onto Medicare at 65. If you have group insurance through yourself or a spouse who’s actively working, you can defer Medicare and you can defer that for as long as you continuously have group coverage. So that six-month period, even if you are working, is a good touch point, just to make sure I understand those rules.
John: Well, so how do you make sure that you’re not penalized if you’d like to defer? Obviously I have a lot of clients who are still working, have good health insurance. They choose not to go on Medicare obviously at 65, what they need to be aware of in terms of ensuring that they don’t have any negative consequences.
Jameson: Right, in terms of a late enrollment penalty aspect, it’s really just down to do you have group coverage through yourself or a spouse and they have to be actively working. So retiree coverage would not be applicable. That would be a risk of being penalized for late enrollment. But then does the company that’s providing the group coverage have 20 or more employees? That’s a huge question that needs to be addressed because if it’s more than 20, then it makes sense to defer Medicare. Now let’s say it’s under 20. Well, if you keep group coverage and enroll into Medicare, the Medicare becomes primary group coverage becomes secondary.
So if you don’t enroll into Medicare and it’s under 20 employees, it’s not a penalty risk. It’s a coverage structure compromise risk, because let’s play out a scenario. Let’s say you don’t enroll into Medicare and you have less than 20 employees keep group coverage. Let’s say there’s a large claim. Well, any private insurance company’s going to do some due diligence, if they’re about to pay out a large claim. They will see, well, your company has less than 20 people. Medicare should be a primary, and they could potentially not pick up all the costs. So that would be a huge compromise.
John: My guess is people are listening and their heads spinning a little bit going, whoa, there’s a lot to understand here. And you can see just in a few minutes of our conversation, primary, secondary, should I defer? So I want to pause for a moment and just say, if you are confused, if you’re listening going, whoa, this is a lot. I’m 64 and I need to figure this out, go to creativeplanning.com/radio. You can contact us, we’ll help walk you through this or find a team like us that can help. Because there’s a lot of nuance and you don’t want to wake up one day and say, wait, I got penalized because I didn’t even realize what was going on here. I mean, even the differences between supplements and advantage, which we’ll talk about here in a little bit, that I’ve seen can be very confusing and people in some cases receive bad advice and then they’re not able to qualify after the fact because they went advantage first. So continuing on with this topic, let’s talk a little bit about what IRMAA is and then how income levels affect Medicare premiums.
Jameson: So what IRMAA stands for, it’s an acronym, it’s income related monthly adjustment amount, and I’ll address that here in a moment. But to start, Medicare Part A is for hospital insurance. Most individuals do not pay for Part A. If they paid in a social security tax for 10 years or more, that’s covered. Part B is the medical portion of Medicare, and there is a standard premium of $164.90. That’s what most people pay there on Medicare. But then there’s the IRMAA dynamic. This is reassessed every calendar year. It’s based on a two year ago look back. So anyone that’s on Medicare in 2023, they’re reviewing your IRS tax return, from 2021.
John: They’re going to pull it from 2021, to be clear.
Jameson: Correct, you look back at 2021 currently in the year of 2023, and there’s a couple thresholds. If you file single, it’s 97,000 or less. You don’t have to worry about IRMAA. If you’re above 97,000 on your adjusted gross income, there’s brackets you could fall into. And if you file jointly, that threshold is 194,000. So for a lot of Creative Planning clients, that’s very applicable. We need to explain, Hey, you’re going to be paying additional surcharges on your Medicare and here’s why. And a lot of times it can be thousands of dollars more per year based on how high your income is.
John: It’s why you need to do tax planning along with your investment planning. I’ve seen people do a Roth conversion, which makes all sorts of sense because the market’s down in value and they’re in a low tax bracket temporarily, and they haven’t turned on social security. I mean, shoot, we don’t even remember often what we ate for breakfast two days ago. And then two years later, you get your first social security check if you’re on it and more is deducted because this IRMAA took effect, or you just get a bill for more money for your Medicare and you’re go, what happened? It’s like, oh, two years ago you did a Roth conversion that accelerated your income above these limits and in some cases you hope this isn’t the case. But the advisor never really looked at that. They just in a vacuum said, this conversion makes sense. So it doesn’t mean you shouldn’t convert and you should never means test yourself, but you want to run the math and really identify some of the peripheral impacts of anytime you’re accelerating income because it will increase the cost of some of these things.
Jameson: Right. And just to piggyback off that, John, a big differentiator at Creative Planning on having an in-house team that handles Medicare is a lot of times I’ll meet with clients and they either have a family friend or a broker they’ve used in the past. Most of those individuals aren’t aware of IRMAA, don’t know how to navigate it, don’t even bring it up. So if someone was meeting with someone that didn’t have the financial planning arena around them, they would not address the IRMAA and there’s appeal opportunities. So IRMAA, on its own, it’s going to self calibrate over time.
Every new calendar year, it’s looking two years ago at a different tax year, so it could go down over time. But if you’ve had a life-changing event, the most common or either work stoppage or work reductions or retirement or maybe a lesser role, if that results in a lower adjusted gross income enough to lower you down a tax bracket or two or remove it, well versus waiting two more years for it to self calibrate, there’s a process in the form that we walk clients through where we can get this thing appealed immediately. And there’s been some examples where that’s some significant thousands of dollars of less premium that that individual would’ve been paying unless they appealed it.
John: Oh, I’m sure. To your point, it speaks to the comprehensive component. None of these, whether it be taxes, Medicare, your risk management, your investments, your income planning, social security, they all impact one another and need to be looked at comprehensively. I think that’s a great point. Let’s transition Jameson over to supplements versus advantage plans because that’s one of the first things people are confronted with. Can you speak to the differences, pros and cons of each?
Jameson: Very common conversation we have with all clients, anyone getting ready to be on Medicare needs to go over both options because they’re very different. If someone has Medicare supplement, that’s working as a secondary to Medicare. So Medicare becomes primary private insurance, which is supplement becomes secondary, so that’s a different coverage structure versus Medicare Advantage, you still pay for Medicare, but now private insurance, the Medicare Advantage plan becomes primary. So this really changes the structure of your coverage. So why do people look at Medicare Advantage plans? What are the benefits? It’s all in one, so it replaces everything you need for Medicare. So you’ve got your medical, you’ve got your hospital, you’ve got your prescription drug coverage, that throws in things like dental vision that does make things easy, having it all in one coverage.
John: And you don’t have to pay anything on a monthly basis, right?
Jameson: Correct. Most advantage plans, there’s not an additional premium to their Medicare. Now that does come with a few catches in terms of the out-of-pocket liability, but from a fixed cost monthly premium standpoint, yeah, there isn’t an additional premium usually.
John: How does that contrast with the Medicare supplement plan?
Jameson: Far different with the supplement. So we primarily for clients recommend the supplement. It’s not that the advantage plan is bad coverage by any means because it isn’t. It’s just there’s limitations attached to it. With supplements, there’s a lot of certainty and predictability. So what are the benefits of supplement? Well, number one, it travels all over the United States. So any client that has multiple houses travels a lot, they don’t have to worry about those network restrictions attached to the Medicare.
John: Yeah, that’s pretty much like a, Hey, I’ve got two houses in different states. Okay, forget the advantage plan.
Jameson: Correct. Because yeah, let’s say someone lives in Florida and lives in Arizona. Well, they might find an Advantage plan that really cooperates with their doctors in Florida, but that other half of the year when they’re in Arizona, it doesn’t work as well. So the Medicare and the supplement removes that dynamic. You also don’t need referrals. Yes, there’s an additional premium for the supplement, but you are protecting and removing almost all out of pocket liability. So to me, yes, I would rather have no premium than an additional premium, but I want things to be predictable.
And anytime you’re planning for retirement, no one likes surprises. I want predictable cost and with supplement, very, very predictable because of the out-of-pocket protection and those coverages don’t change from year to year. You can keep the same supplement plan if you wish your entire time on Medicare. One of the great unknowns with those advantage plans is they’re subject to change every year. So every open enrollment, I got to remake decisions, make sure this is the best plan. I’m still in the best networks. That’s all removed with supplement, just makes life much easier for that retirement insurance.
John: Time for this week’s one simple task, which is to do a progress check on all of 2024s past one simple tasks. So I want you to go back through each week, you can find this on the radio page of our website and identify which of the tasks have you not completed. Which ones have you completed? Are you seeing results? Have they been helpful? Did you miss one that you might be able to get to this week or the following week? Maybe you’ve missed four. And you say, all right, I’m going to double up the final four weeks of the year so I’m able to complete them all. Again, those can be found on the radio page of our website. And this week’s one simple task is to do a one simple progress check.
Now it’s time for insights from Creative Planning Chief Market Strategist Charlie Bilello, where on a recent show I asked him, is it now time to finally diversify?
Have a listen.
Charlie Bilello: There’s an old saying in investing, buy what you know. And a lot of people take that to heart. And when you look at the S&P 500 index and you say Apple’s the number one holding, Microsoft number two, Google number three, and Amazon number four, I know these companies, I use their products. I feel good about it and it’s therefore easier for me to buy a portfolio that includes these stocks, much easier than some international brand that you’ve never heard of, even forgetting about the returns. Now, adding on top of that, the fact that we’ve had this pretty much record differential over the last decade, US stocks, as you said S&P 500 has done about 11% per year. So trouncing internationals about 2% per year over the last decade. And we have small caps a little bit in between at 6%. And if we zero in even further than that, if we look at the Nasdaq 100, which is dominated by those big tech names, that’s up 17% a year over the last decade.
Now here’s the reason why you should consider not only investing in the US and not only large caps but other things as well. And that reason is there’s this cycle to everything. And it might seem like today that there won’t ever be a cycle where the US and large cap and tech stops are outperforming again, but people thought something similar back in early 2000. And they then had to learn the hard way the next 10 years when all that stuff did the worst and international and small caps outperformed. So people will then ask, well, is today the same as 2000? No, it’s not the same. Every time is different, but there’s that possibility of something like that happening again. And if it does, you have to protect yourself in advance. You can’t wait until after it occurs, which is another way of saying the best time to diversify is when it’s most painful to do so.
And it’s extremely painful to think about doing it today because small caps have been underperforming for over a decade, international over a decade, and you can’t envision that ever-changing because it’s been so long. But that’s precisely the best time to do it because now you have a valuation tailwind in your favor. There’s two real big reasons why you should invest outside just one particular area, and number one is humility. So having the humility to say, I don’t know what’s going to happen in the next decade and therefore I can’t concentrate in just one area. I have to spread my bets. And number two is simply risk management, right? We know concentration is the fastest way to build wealth, but it’s also the fastest way to destroy it. And if you’ve worked hard to amass savings and portfolio, you want to put the highest probability outcome in your favor. So it’s humility first and then risk management is the reasons why you would think about investing in something other than just the S&P 500.
John: Always great to hear from Charlie. The historical and data backed perspective is certainly a compelling one, and if you’ve made it this far, you’ve gotten to my favorite interview and guest. I don’t just say that because he signs my paychecks. He is one of the luminaries of the wealth management industry. It’s Creative Planning President, Peter Mallouk. Here are his thoughts, have a listen.
Peter Mallouk: What’s interesting about gratitude is if you think about the business of financial planning, it’s really about achieving goals. Here’s where I am, here’s what I’m trying to do and how do I help somebody get there? And what’s interesting is sort of the definition of happiness is are you content? And the level of disconnect is the gap between where you are and where you want to be. And what gratitude does is it reminds you that sometimes you are where you hoped to be a few years ago, and we just forget it. As humans, we just keep resetting the bar, we keep resetting the bar, we keep resetting the bar. Whether you look at the Harvard health business studies, you look at the top 10 things mentally people can do to improve their health, gratitude is number one on the list. And you look at people achieving their goals when they’re working with us on financial planning, you want them to have that feeling of contentment.
And what’s great about gratitude is gratitude has to be intentional. You have to think about, here’s what I have and I’m grateful for it, and here’s why I had hope to have five years ago or 10 years ago, and maybe I’ve moved the benchmark, but let me be grateful for the things that I have. And so I think it’s just a natural part of people that know anything about happiness know it’s not the destination, it’s the journey. And if you make it about the destination, you can never be happy because as humans, we’re all going somewhere. And when you and I are doing financial planning with clients, we are always going somewhere. We’re always saying, okay, let’s reset the starting line. Let’s reset what you want.
So we’re constantly changing things. I love sitting with a client and pausing. I was just doing this this morning before this show with a client just saying, look, where you are is so far beyond where you wanted to be and let’s just take a moment and really appreciate it all. And she said, you know what? You’re right. I had totally forgotten about this is everything I had hoped I wanted at one point and more. And so I think gratitude’s a very natural part of planning, very natural part of life. Certainly if you want to be happy while you’re doing it.
John: Speaking of gratitude, I’m grateful that the election is over. My whole neighborhood can now get rid of about 80,000 signs, local and national elections. Obviously emotions are still high. How do you help clients separate their political views from making smart money decisions?
Peter: Well, first I have to say I was in Arizona for a day a few weeks ago because my daughter dances for her college and she was dancing at the football game there. It’s not just the number of signs, I understand, Arizona’s a swing state. It’s the only state I’ve ever been in where every size is quadruple the normal size. There has to be a reason. Every other state the signs are smaller. I don’t know if there’s laws that keep them smaller or if other states are windier, and so they have to be smaller. If there’s a lot of older people in Arizona or whatever it is that can only see the big signs, but it was-
John: That’s hilarious.
Peter: Crazy to see not just the number of signs, but just how billboard like all of them were. So fascinating. Now, when it comes to politics and money, the stock market is not blue or red, it’s green.
All it cares about is money. And there are lots of things that make the market go up. One of them is this powerful force called inflation. Sometimes inflation is high, sometimes inflation is low, but 99% of the time we have inflation instead of deflation, which means prices are going up. So no matter who’s the president, if four years later you think it’s going to cost more to go to Disney World, it’s going to cost more to go to McDonald’s, it’s going to cost more to fly Southwest Airlines, then you can probably count, not always, but usually the market to follow. And it’s very hard for a president to get in the way of that. They can have policies that make the market go up even faster because they’re inflationary, like deficit spending and things like that. But I think people overestimate the impact a president has on the actual economy.
I’m just going to give you one example of even policy wise. People talk about, well, the Democrats and the Republicans on taxes. Well, from Bush to Obama to Trump to Biden over 20 years, capital gains tax has not changed 1%, hasn’t changed at all. Income tax has changed less than 3% over that entire time period. So even this big policy that’s spent all this time talking about at the end of the day, don’t do a lot very differently from one another. I know that surprises people. Socially, yes, they’re different, but when it comes to economics, you can ignore what they say, watch what they do, and they’re very, very similar.
John: I saw you tweet a Charlie Munger quote about avoiding stupidity as being more important than being a genius when it comes to investing. How do you see that playing out practically?
Peter: People try to be a genius. It means you’re trying to outsmart the market, it’s very hard. And 7% of the time that happens. But it’s a dangerous game. Right now, if you try to go to the sidelines, if you do something stupid, it’s very easy to lose very, very, very big. So for example, if the day after President Biden won, you went to cash, thought you’d wait things out a little bit, well, that was very stupid, and you can never recover from it because the market soared after that. If under Trump’s first administration the first day you went to cash because he is volatile and you’re just going to wait things out, well, that was very, very stupid because the market soared from there.
And in both cases, the market never went back to the levels. They’ll allow you to get back in at that entry point created a very large permanent loss. The person who’s just not being stupid, just, Hey, I’m just going to leave my stuff alone. Maybe we’re not trying to optimize everything and tax harvest everything. We’re not doing every single thing we can do to improve things, but you’re at least leaving it alone. That person’s much better off. Munger’s spot on. If you look at, you can do incrementally better by being brilliant, but really the disasters are avoided by just not doing that one crazy thing.
John: This Thanksgiving weekend really reminds me that time is fleeting. You’re a parent, you’re a grandparent. You know what I’m talking about. You seemingly blink and your child has grown a foot. Where has the time gone? It makes me sad actually sometimes when I think about how much I want to freeze time, because I already have a 23-year-old and a 21-year-old, and I know how quickly it goes. And now my 13-year-old, I’m thinking about the fact that I only have five more summers with Cruz in the house. Sure, well, I’ll have a relationship, but where I actually get to pour into him and enjoy him living in the home with us and doing everything with mom and dad, those days are numbered and tomorrow’s not guaranteed for any of us. So I hope that you’ve been able to enjoy this holiday weekend and make memories with those whom you love while they’re here, while you’re here.
As a parent to seven kids, I don’t want to wish these days away. Sometimes it’s crazy and chaotic and overwhelming, but I’m pretty sure that I’ll look back on these days when I’m 60 or when I’m 70, wishing that I could turn back time. Remembering this beautiful season, raising these tiny humans and the humbling process that it is, the convicting process, that it is. The challenges that it creates as my shortcomings are exposed. It’s a call to action. It’s a reminder for you and I, make each moment count. Well, what does that have to do with our money? Well, because within this grand tapestry of life, money serves a far greater purpose than simply accumulating wealth. Growing a number on a piece of paper, that is meaningless. And I want you to understand the reason I do this show, I’m all about personal finances in a sense that could be superficial if we don’t connect the dots.
And that connection is that money is the great tool to advance causes that you care deeply about. Not everything of importance or value in your life requires money, certainly not. In fact, you could argue some of the most valuable things in life do not. But money when used in alignment with things you care about can enhance many of those relationships. Reflect this weekend as we enter the end of the year on how during this final month, you can proactively seek opportunities to use your money in the most impactful way possible. I’m grateful that you join me here on Rethink Your Money. I’m thankful for the opportunity to hopefully have just a small positive impact on your financial journey. 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.
Disclaimer:
The preceding program is furnished by Creative Planning, an SEC registered Investment Advisory Firm. Creative Planning, along with its affiliate, United Capital Financial Advisors currently manages or advises on a combined $300 billion in assets as of December 31st, 2023. John Higginson works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not necessarily represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment, tax or legal advice. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on the show, will be profitable or equal any historical performance levels. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.
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