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A Simple Wealth Strategy for a Complex World

Published on March 11, 2024

John Hagensen

With each new generation comes more complex financial challenges to deal with. Yet savvy investors understand how to create a solid wealth plan to handle these changes — and potentially even use them to their advantage. Follow along with John as he breaks down how you, too, can navigate these complexities. (2:20) Plus, the reliability of annuities for guaranteed income. (14:24)

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 Higginson. And ahead on today’s show, taxes, taxes, and more taxes, how to pay no more than legally required by finding efficiencies, is this a stock market bubble, and strategies to simplify your financial life? Now, join me as I help you Rethink Your Money.

We’re in March now, so the data says that most of us aren’t probably doing very well on our New Year’s resolutions. Actually, I’m going to brag on myself here for a moment. I have my 2024 streak still going on my Duolingo app. I’m learning Spanish. I’m pretty pumped about that. No, I still can’t converse with anyone in a meaningful way, and by the way, I’ve stuck to it because it’s the very first thing I do every day. Well, the second thing, after I get some coffee. I grab my phone, I do my Spanish lesson before anything else.

But that’s the key to sticking with anything, isn’t it? Creating little hacks, removing friction. We all have some objectives, maybe New Year’s resolutions, whether it be health or wealth, relationships, spiritual growth. The classic one for Christians is reading through the Bible in a year. I don’t know if other religions do this sort of thing as well, but all I know is most people get into Leviticus. Maybe they make it to Numbers. And after about the 12th genealogy, about February 1st, they’re done.

They quit. It’s tough to read it all, and in part because there are 783,000 words in the Bible. It’s huge. The Torah, 80,000 words. The Quran has 77,000 words. Book of Mormon, 270,000 words. And these are fundamental beliefs like religions that shape the way people live their lives, so they’re inherently very important. And a lot of followers of those religions haven’t probably even read every single word because there are tens or hundreds of thousands of them. The US Constitution is a lot shorter than those.

But with all of its 27 amendments, yes, 7,591 words. Do you remember the specifics from junior year of high school when you studied US history? Well, let me remind you, one of those amendments, the 16th, began with only 30 words that allowed the federal government to levy income tax without apportioning that tax to each state based upon population. Now, the US tax code, it’s a little longer than 30 words. With all the supporting rulings and case law and documentations, there are now an estimated 10 million words.

Now, we don’t know a lot of the most important holy books of our religions inside and out and their magnitudes more important and significantly smaller than the US tax code, which would take you literally years to read even if you were able to get through 25 to 50 pages a day before falling asleep. So if you aren’t as knowledgeable or proactive on your taxes as you wish you were, join the club. Just accept it. The information’s enormous and regularly changing as it’s set to do again here at the end of next year.

So taxes are confusing, but the most relevant tax related topic beyond that from a planning standpoint is that they’re going up. Taxes are going to increase not just due to the sun setting at the end of 2025, but long-term, they’re going up. No rational person thinks that we can spend $6.6 trillion per year and bring in $4.6 trillion, unless we suddenly decide to slash spending by $2 trillion, which you and I both know ain’t happening, then we’re going to need at some point to increase revenue by increasing taxes.

And we’ve already done this. In 1913, the top tax bracket was 7%. By the time World War 2 rolled around, that top bracket was over 90%, and that wasn’t just due to wartime spending because it stayed at no less than 70% for four decades until Reagan cut taxes dramatically. So if there’s any thought that taxes couldn’t really go up, could they? The answer is yes, because actually the current tax rates are the anomaly, how low they are both based on our own US tax rate history and by comparison to other developed nations around the world.

Belgium comes in at just under 80% as the top tax bracket. Finland, 67%. Portugal, 64. The UK, 63. Switzerland 60. You want to move to Aruba? It looks beautiful. You’re going to pay 58.95% if you’re in the highest marginal rate there. And you know what? I had my bags packed for Estonia, but I just learned that their top tax bracket is 58%, so I guess I won’t move after all. Denmark, Japan, Austria, all over 55%. So you combine all of that knowledge in terms of where we sit relative to other countries with our national debt.

We are currently at $34 trillion and counting, far more than double the next closest. Well, let’s take our national debt as a percentage of GDP. Japan is in by far the worst situation, 255%. Number two is Greece, 168%. Singapore, 168%. Italy, 144%. And then the US, we clock in at number five with our national debt representing 123% of our GDP. How bad is that really? I don’t know. I mean, do we want to be identified with Greece and Japan, a market that just hit a new high for the first time in 30 years?

Let’s just look at this internally within the United States. In 1980, that ratio was 34%. It was 59% in the year 2000. Again, it’s now at 123%. So while our GDP is an astounding $28 trillion, which is just nuts, the next closest is China at 17 trillion. Third is Germany. Japan, and India, they’re all around 4 trillion. We’re at 28 trillion. California, which is the largest state GDP in our nation, they’re at 4 trillion. So California as a state is essentially tied for third in the world behind the US and China as far as GDP is concerned.

You hear about countries like Spain, their GDP is half the size of California. My brother’s a Kiwi from New Zealand. A lot of Americans say, “I’ve been to New Zealand. That is an amazing quality of life. I love that country.” By the way, it is. But when we try to compare policies maybe like how we should do it in the United States relative to a place like New Zealand, their GDP is $250 billion. It’s 7% the size of California, not the United States, California alone, and their population is 5 million people, instead of 333 million in the US.

We have an unprecedented amount of national debt. Even as big as our GDP is relative to our national debt, it’s out of control. That’s parlaying with us in the lowest tax rate environment we’ve seen in decades. Something has to give. I mean, if you think about the next 10, 20, 30 years of your life, do you expect taxes to go down? Of course not. When I speak publicly to large groups, I ask the group to raise their hand if they think taxes are going to go down or up. Almost every time, 100% of the people in the room raise their hand that they think taxes are going up.

If you agree with that assessment, the follow-up question has to be, well then, what should I be doing today in light of that? What are the opportunities that exist today in a historically low tax rate environment that is set to increase? And with the federal tax code evolving from 30 words to over 10 million, it’s reasonable that you’d want help.

And if your financial advisor is not a CPA or you’re not meeting regularly with your CPA and your financial advisor together in coordination to discuss your strategies, not for filing your taxes this time of year, but for what you can be doing so that when you file your taxes in the future, you’ve made proactive strategic moves in light of your personalized situation and your objectives. I want you to ask yourself one simple question. This isn’t rhetorical. Think this through. When is the last time that your financial advisor reviewed your tax return?

And then hopefully if they have, did they offer helpful strategic solutions to reduce your taxes? If you don’t like the answer to that question, if you intuitively know that you’re not getting the breadth of advice that you wish you were, what might you be missing? Visit creativeplanning.com/radio now. Why not give your wealth a second look? In preparation for the fast approaching tax deadline, my special guest today is certified public accountant and Creative Planning senior tax director Candace Varner. Candace, thank you for joining me on Rethink Your Money.

Candace Varner: Thanks for having me back.

John: No one wants to pay more in taxes than legally required. Deductions seem to be the first order of business for most when they’re looking at ways to reduce taxes, but there are impactful ways, as you know, to reduce taxes that are less obvious, Candace. Things like which types of investments do you own and which accounts do you own them in? For example, can sizably reduce your taxes in the current year as well as over the long run?

And one of those investment vehicles are exchange-traded funds. In 2023, ETFs gathered just under $600 billion in net inflows, while mutual funds saw the opposite. They shed a total of $512 billion according to Morningstar. ETFs, Candace, have a lot of momentum and that trend doesn’t seem to be going anywhere. Why do ETFs tend to be more tax efficient than mutual funds?

Candace: ETFs and mutual funds are similar. ETFs are usually just more passive. So within the fund itself, I like to think of it, and maybe it’s just my tax brain, as like a company in and of itself, the ETF is a company, the mutual fund is a company. It’s not, but that’s how my brain works. The mutual fund is going to have a lot more active trades. Things are going to be bought and sold all throughout the year. Now, they do try to harvest losses in there to offset the gains. That doesn’t always happen.

And just in general, the gains realized are more because of the activity. The problem with mutual funds I run into with tax planning is that it’s a surprise at the end of the year how much you’re going to get. It really wreaks havoc on all of your planning throughout the year. There’s also a key difference in how investors get in and out of the funds. To you it looks the same when you get in and out, but a mutual fund, if someone wants to sell their portion of it, the fund itself is actually going to sell some positions to raise cash and buy that person out.

That generates a gain that then is allocated out to all of the current owners. In an ETF, it doesn’t work that way, so you’re not affected by what other people are doing. In my mind, it’s tax efficiency, but it’s also control. The ETF offers us a lot more control and visibility into what’s going to happen, which just makes all of the tax planning easier.

John: Yeah, absolutely. I remember early on about 15 years ago when I was more of a broker and ETFs just were not as popular. I mean, they were around, but they weren’t as popular. And a lot of my clients had mutual funds. And I remember the first time a client bought a mutual fund, I want to say it was about September or October of a year. The mutual fund lost about 10% during the close of that year because it was a down market, and they received a 1099 in January or February saying they owed gains and they were just completely dumbfounded.

I bought this thing in September. I never sold it. It lost money and I’m paying capital gains? And I had to explain to them, well, the manager bought I want to say it was Apple. It was a large cap growth fund. It was like, hey, this manager had held Apple for 12 years. It had a whole bunch of unrealized gains embedded inside of the mutual fund. That manager chose to unload that position triggering a lot of realized gains.

Sorry that you never actually experienced personally any of the growth or benefit from holding Apple, but you have to share in that capital gain with all the rest of these mutual fund holders because you don’t have individual tax lots. And I think that’s something that really throws people off. They’re used to owning the stock, and that’s one of the big benefits to an ETF, right? You have a little bit more control over that.

Candace: Yeah, I would say everything you’re describing, if I’m the client in that situation, that feels counterintuitive. And even if I could get over, yes, that’s factored into the price, I like this, et cetera, et cetera, it’s going to feel awful and just not knowing when that’s coming or how much it is is just a tax problem in general.

John: Let’s shift gears over to municipal bonds. So you’ve got Treasuries, you can lend money to corporations and corporate bonds, and then you have municipal bonds. Can you walk through some of the tax advantages from municipal bonds and who that might work well for?

Candace: Yeah, so municipal bonds in general, these are going to be bonds, state and local, governments, not the federal government. You don’t pay federal tax on that interest income. If it’s your home state, you won’t pay tax to that state either. So I’m in the lovely state of Kansas. If I bought a Kansas bond, I won’t owe Kansas income tax on that bond interest income either. Now, if I bought a different state, say Missouri, then I will. So keep that in mind when you’re picking which bonds.

But in general, this is going to be for taxpayers who are in a higher tax bracket. We want to hold something, we want this type of investment, we want this exposure, but we want to be cognizant of how much income tax we’re paying. You often have a lower interest rate on these bonds because of that. But when you’re in a higher tax bracket, the net return is still better for you. So always looking at not just what does this fund or bond or stock or whatever it is say it’s going to be, but what does that actually mean to me personally after I pay taxes, which is different for everyone.

John: A good certified financial planner or CPA like yourself can run those calculations to figure out the taxable equivalent yield is really what they’re looking for. But I think you make a great point. I’ve had retirees that I’m working with because they used to be high income earners while they worked and they loved having municipal bonds, now they’re in a 12% bracket.

They’re a retiree. They’ve got this portfolio because they don’t want a lot of risk in tax-free municipal bonds, and I’m going, just pay the 12% tax on a corporate bond that’s similar and you’re going to net a whole percentage point higher on… Oh no, I love munis. Well, okay, let’s rethink this. All right, Candace, let’s jump to an investment vehicle less familiar to most people and that’s tax-exempt mutual funds. What are they and how do they work?

Candace: So muni bonds are going to be similar to any other asset where we can get a basket of them if we look at the mutual funds or ETF. So if we get a tax-exempt for mutual funds, it’s going to be what we were talking about before where it’s a basket of them and someone is managing, buying and selling throughout the year. So you get that diversification of all those different types of bonds, but you’re not having to pick them.

John: How about when it comes to private real estate? There are tax advantages whether someone owns a rental property, an individual rental property, or decides to buy a real estate investment trust. What are some of the tax benefits with those types of investments?

Candace: Let’s look at the individual rental property. Let’s say I’m going to go buy a house and I’m going to rent it out. Typically, the tax benefit of this is that the property income and expenses that I’m paying in cash is going to cashflow to me. So every month I end up net better off cash wise. But the original purchase of the property I get to depreciate over 27 and a half years or 39 years, let’s say that.

John: Can I ask you something, Candace? Because this has never conceptually made sense to me because real estate is an appreciating asset, right? And I know you’re going to get into the recapture here in a moment, but I’ve never understood why do we get to depreciate an asset that we know historically has gone up by about three or 4% a year?

You finally sell it and go, well, it was worth way more than we said as we were depreciating it this whole time, and then you have to pay… If you don’t do a 1031 exchange, you have to pay the recapture and pay some with the capital gains. So do you understand why are we able to depreciate properties?

Candace: So I would say the reason we’re able to depreciate and why it doesn’t make sense tax-wise is the same for everything that we depreciate. The depreciable life of any asset, even if it’s a piece of equipment, if it’s a piece of real estate, whatever it is, it’s essentially totally unrelated in my mind to what’s happening with that asset.

So this is instead think of it as a cost recovery and because this is how we’ve decided to write the tax code is kind of the… But I mean, I get that a lot for equipment too, where it’s like, well, we’ll write it off in one year, or we’ll write it off over 15 years. Well, it was actually going to last three. Basically totally unrelated because we’re going to make the tax laws whatever we want in that particular congressional session.

John: I guess my point is I understand when people do it with a motor home or equipment because they depreciate. It makes sense, right? But on this, they don’t depreciate typically real estate.

Candace: Typically, but if I’m going to get a house and then rent it out and assuming I make no improvements to it, the tenants are having wear and tear to that asset. So overall, yes, real estate I guess goes up, but in general, I’m accounting for the fact that it’s being used. It’s probably in worse condition year after year.

John: Okay, I’ll go with that. So anyway, sorry, I cut you off.

Candace: Think of the building itself as opposed to the land. Well, the land part is not depreciated. We know that’s going to go up. It’s not experiencing anywhere and tear, whereas the building is.

John: Okay, so you have rent coming in. I’ll catch you back up to where we were. So you have rent coming in. You’re depreciating the property. Let’s go from there.

Candace: Let’s say we bought it for $100,000 and we’re going to write that off over time. So that deduction every year, for simple math, let’s just say we get $10,000 a year. Every year I own that property, okay, well, now I have a $10,000 deduction every year against my rental income, but I’m not paying $10,000 in cash. So again, cashflow month by month, I’m better off. I’m probably using that cashflow to pay down debt on the property from when I bought it so that I’m better off when I’m done.

But when I get to the tax return, it looks like I’ve either lost money or I’m net zero. So I don’t pay any income tax on that cashflow. So that’s why it’s good. And assuming that the property does increase in value, like you said, then all of these things will pay off. But I don’t want to be a landlord. I don’t want to deal with that, but I want exposure to that market and that’s where I’m going to go back into the real estate investments that you were talking about where again, I don’t want to pick it individually or I don’t want to be that involved.

I want to get into a diversified fund of this, but I don’t want to be that picky about it, which does fit me personally. I have no interest in being a landlord, but it can still be a good investment, and those same tax properties hold true within that basket of assets too.

John: Yeah, absolutely. I mean, that’s what I’ve personally done with all of our children and the busyness of work. I want exposure to real estate and I want it to be private real estate. Fortunately, in Creative Planning, we have, in my opinion, some of the best historical investment options within that space. But again, you’re not getting called at 2:00 in the morning because the dishwasher is leaking, right? So that can be a fantastic benefit as well.

Candace: I think big picture, the point of this is just to not forget about the tax piece of it when they’re picking their investments. So asset location, where do we want it to be, in which types of accounts? And then also considering the after-tax return. So much of the strategy, and really the bigger impact you can have is by picking these investments, putting them in the right accounts before we even get to your tax return. So yes, it’s tax planning but not in the way that people think about it.

John: And that’s why if your advisor’s not a CPA or your advisor’s not working in coordination with your CPA, and I’m not talking about in April two days before the filing deadline to make sure that all the forms are in and they’re scrambling to call the office. “Could you upload all my forms? My CPA needs to do them.” You can’t relate at all, I’m sure, Candace.

Candace: Nope, that never happens.

John: This time of year not looking at for filing from last year, but really looking at 2024 and 2025 and even what’s this going to look like in 2028. Can we run some projections? The easiest way to do a little test on this in terms of am I getting the value that I probably should be is when’s the last time that your advisor reviewed your tax return?

When’s the last time that you sat down with your CPA and your advisor in some sort of coordinated fashion to not talk about what already happened and be a good historian and account for what you already did, but actually say, what can we be doing moving forward?

Your CPA is not typically going to make investment recommendations and say, “Hey, you should be switching all of your asset allocation from this to this,” but that’s something that could be a great dialogue between your CPA and your advisor to arrive at what really works best for the client.

Candace: Absolutely, and you were listing the later years. As a CPA, I see their tax return. I don’t often have visibility into how many more years are they going to work, what are their required minimum distributions in the future, so looking at it time-wise too. Because if we determine we need to switch to a different type of investment, well, we probably have to sell some stuff and generate gains to get into those other investments.

So it’s important to think of it years ahead of time too to have a plan for when are we going to do this. And like you said, I get a snapshot in time of one thing and historical. I’m not going to be talking to them now about stuff. I’m living in 2023 for another six months probably for tax season. But when we’re doing the tax turn, it’s a good catalyst to start that conversation and start thinking, did this turn out the way we want it and how do we want to change it for 2024 and long-term?

John: I think that it’s one of those things that you cannot do financial planning without tax planning. It’s not like tax planning is sort of this important part of it. It would be getting out the cereal and milk for my kids in the morning before school and it’s, “Uh, dad, where’s the spoon in the bowl?” Oh, you don’t need a bowl. You have the cereal and the milk. They’re like, “No, it’s kind of important to actually eating this to having it.”

I mean, that’s how, in my opinion, how central tax planning is, and I think it’s the easiest spot for investors to pick up better returns after tax and have just a much more efficient and optimized financial plan. If you’re not sure where to turn, you’d like to speak with us, you can visit creditplaning.com/radio. Candace, thank you for joining me here on Rethink Your Money.

Candace: Thanks for having me.

John: Well, there’s a lot of talk about us being in an AI bubble, and I think it’s reasonable. Nvidia hit $2 trillion of market cap. Billionaire Marc Rowan’s asset manager, Apollo, one of their chief economists said, “This AI bubble, it’s even worse than the dot com era.” Pretty bold claim. Well, let’s look at where we stand right now. We did just see on February 22nd Nvidia have the largest day of market cap growth by a wide margin in the history of the stock market.

There was a ticker counting down Nvidia’s earnings call on some of the financial networks, and people were like, “Why are they doing this? It’s kind of weird.” But it turned out to be pretty accurate. It was a huge deal. Nvidia’s market cap increased by $277 billion in one day, which was 80 billion more than any other in history. So it’s logical with that type of explosive growth to ask, can this keep up? Are these valuations crazy? Is this no longer a good buy? Is the bottom going to fall out of this thing?

It’s just a matter of time. Fortune had a great piece on this, brought up a lot of good points. If you follow the markets pretty closely, you can probably name the first half dozen of the top 10 without much effort, maybe even in order. They’re all the biggest tech companies, Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta. The remaining four are probably a little tougher to name Berkshire Hathaway, Eli Lilly, Tesla, Broadcom. I know, that was the tricky one, Broadcom.

But all told, their market cap stands combined at 15.1 trillion. And over the past four fiscal quarters, they booked 468 billion of net profits, which means their combined price to earnings ratio is 32.3, which is really high. And if you take the median, it’s at 40. Or if you look at it another way, extract the one stock that’s reasonably priced from historic perspective, Berkshire Hathaway, and your price to earnings ratio is 36. A price to earnings ratio simply measures a company’s share price relative to its earnings per share.

This is no different than if you were buying a private business. You’d look at, what were your profits? What do I expect those to be in the future? How many years worth of your profits am I willing to pay that I’m determining as the value of this business? Right now when you look at the big dogs, you’re paying 32 times their earnings, which is extremely expensive when you look at the history of the markets. Now, does that mean you should run to cash, you should sell everything, the market’s over bought?

No, because you should be a long-term investor when investing in the stock market and you shouldn’t just own these expensive stocks. They should simply be a portion of your overall asset allocation and hopefully you also own stocks that are trading at much more attractive valuations.

The problem though by getting out of all of these types of stocks and into emerging markets or value or international developed markets because they’re less expensive, and I’m putting up air quotes, is that you can have a 14-year period like we’ve seen where the most expensive stocks continue to perform the best, and if you’re out of those asset classes, you lose a ton of the returns. So you stay broadly diversified, understanding that I don’t know when this thing will turn. If it will, 10 years from now, 20 years from now, one month from now, but I’m going to rebalance.

As my asset classes deviate, sell off some of my winners, buy more of the things that are undervalued, maintain the risk profile that’s appropriate to accomplish long-term goals. And so while I think it’s reasonable for smart people to be questioning whether or not we’re currently in an AI or a tech bubble based upon valuations, I’ve been hearing people say that very thing for the last five plus years. And if you listen to them, you lost the majority of your returns. So are we currently in an AI and tech bubble that is similar to the dot com bubble?

Valuations look pretty similar. More importantly, remember what it means for you. Stay disciplined, diversify, rebalance, because that ensures that you capture any future growth if this run continues, but that you’ll also be invested across other segments of the market that are currently at much more attractive prices. It also more importantly means that if this bubble is in fact one that bursts, it won’t burst your entire financial plan. When you think about your asset allocation, do you recognize that you have a model portfolio?

Maybe you work with an advisor and you’re moderately aggressive and they put you into a one size fits all investment strategy where you sit alongside hundreds or thousands of other investors who own the exact same portfolio. Maybe it’s aligned with a risk tolerance questionnaire or some other quick measurement. I think that’s something you should rethink being in a portfolio that looks just like everyone else’s even though your situation is almost certainly unique. Last week I spoke with Creative Planning president Peter Mallouk on this very topic. Here’s what he had to say.

Peter Mallouk: 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 midsize 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 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.

John: Again, that was Creative Planning President Peter Mallouk. And if your advisor built a portfolio based on only your age and your risk tolerance, that’s simply not good enough. We don’t use model portfolios here at Creative Planning. Your needs and circumstances are unique and your portfolio should be too. What’s right for one person isn’t often right for another. A client came in this past week, had a whole bunch of annuities, weren’t happy at all, had total buyer’s remorse. And I said, “Why did you buy these in the first place and why did you put so much of your portfolio into these annuities?”

They said, “Well, I was sold them as guaranteed income and guaranteed returns and they’ll protect my retirement. And all of that sounded really good.” This is now the third situation I’ve run across in just the last couple of weeks. I had another person who purchased an annuity, it locked up their money with surrender penalties for 14 years, and there was a feature within the contract that allowed the carrier to change crediting strategies and caps and spreads.

And basically the way that their interest was calculated, those clients the last four years have gotten 1% per year in returns and have huge penalties if they want to relinquish the contract. Of course, the first year or two they made really good money until all of those adjustments took place, which was in the fine print of the contract. Had another client who came to us whose parent had passed away.

They had 14 different annuity contracts that had been sold by the same insurance agent, taking withdrawals from one, buying new annuities, and the logistics of trying to unwind all of these and understand each of the contracts, it was just a complete commission grab. For the insurance agent saying, “Oh, your money’s going to be safe. It’s protected. You don’t have to worry about that stinking market. How nice would that be?” So I think it’s time we rethink that idea that annuities are guaranteed.

They’re great. Now, what I’m also not saying is that annuities are a four letter word. They’re the worst thing in the world for every person. No, there are use cases in very rare instances where I think they can be viable. But I find that these are almost always sold, rarely bought, and even less understood in detail. So if your only alternative is have the money sitting in cash or under the mattress or in a bank CD, they’re comparable to those sorts of vehicles. But remember, you have very limited liquidity, a long lockup period.

They pay high commissions to the person selling them. Your rate of return is almost always going to dramatically underperform other options from an investment standpoint. The insurance company is going to control all the variables along the way as I just mentioned. And so I think so often the story of annuities is really different than the reality than what people experience, which is why annuities do have a bad reputation.

If you’re being pitched an annuity, you’re considering an annuity, or you currently have an annuity that you want evaluated, don’t go to the person who made a $50,000 commission. And yeah, that’s the truth. Half a million dollars into an annuity, that commission’s 35 to $50,000 in many cases, plus vacations, other bonuses. We’re all humans. Doesn’t mean that salesperson’s a bad person. It means they’re human, and they follow incentives just like we all inherently do. Take away the giant commissions and I am convinced insurance sales would drop by about 95%.

That’s the reality. Don’t go to that person for a review of your current insurance policy. Because do you think they’re going to tell you, “You know what? This thing stinks, but I made a big commission?” No. Go see an independent fee-based fiduciary that’s not looking to sell you insurance. It is time for this week’s one simple task, and there is now a link on the radio page of our website at creativeplanning.com/radio. If you’ve missed a task or you want additional information or articles related to tasks that you hear me speak of, this will help you stay on top of it for the entire rest of the year.

And as a reminder, throughout 2024, I’m offering 52 simple tips, easy to execute improvements to your financial plan so that you’re in a better spot come December 31st than you were as we kicked off this new year. Today’s simple task, review your W-4. Let’s be real with ourselves here. How often do we actually do this? Here are factors to consider when completing your W-4. Claiming credits such as the child tax credit or other dependent credits is going to decrease the amount of your withholding.

Adjust for more withholding if you have additional income like a second job or investments that are spitting off a lot of income. Remember to adjust for less withholding if you’re expecting to claim itemized deductions rather than the standard. And then notate any additional income tax you’d like withheld from each paycheck. Let’s jump into listener questions. One of my producers, Lauren, is here to read those for us. As always, hey, Lauren, how’s it going? Who do we have up first?

Lauren Newman: Hi, John. First question I have comes from Sarah in South Carolina and she writes, “10 years ago, I opened a 529 account for my son in anticipation of him going to college, but he doesn’t need all the money I put aside. Is there anything we can do with this, or is it just stuck?”

John: Well, Sarah, your women’s college basketball team is looking pretty dominant down there at the University of South Carolina right now. We’ll see how things shape up in the tourney, but you’re in a situation very similar to many others, where you open a 529, you’re diligent about funding it, and then your child is an entrepreneur or gets a scholarship or goes into the military and then has the G.I. Bill or whatever it might be. But fortunately, starting here this year in 2024, you can roll the balance into a Roth IRA on behalf of your child subject to a $35,000 lifetime limit for the beneficiary.

A maximum $7,000 can be rolled over annually in 2024, 8,000 for recipients ages 50 and up, meaning it can take several years to transfer a large balance, but you are able to get it out, which is the important thing. Keep in mind also that some states might tax these rollovers. I’m not sure off the top of my head on South Carolina, so check with a CPA if you need help with that. One of our 200 plus CPAs here at Creative Planning can help you answer that as well.

And in addition to the rules cited above, the 529 account is only eligible if it’s been established at least 15 years before the rollover takes place. But it’s great news because there is now a fantastic option for at least $35,000 of it. Remember, if you have questions like Sarah, you can email those to radio@creativeplanning.com. All right, Lauren, who’s next?

Lauren: I have Jay from Cedar Creek, Texas and he writes, “Took your advice and my wife and I sat down to talk about money goals. We are about 10 years out from retirement and have 800,000 saved between all accounts and a $600,000 house that we owe approximately 250,000 on at 3.5% interest. We outline three goals for the year. First, double paying our mortgage payment. Second, increasing our savings to 10,000 a year in each 401(k).

We are only saving 5,000 a year right now, which fulfills the match. And third, building up a larger balance in non-retirement accounts as the current 800,000 saved is all in 401(k)s, other than about 10,000 in savings. What is the best way to tackle these and what priority would you put on each if we can’t maximize all three? For context, we have about 3,000 extra each month beyond our expenses.

John: Well, Jay, I love the goals. Let’s unpack these one by one. So your goal of double paying on the mortgage payment, I’m not trying to burst your bubble, personal finance is a lot more personal than finance, but you told me your interest rate’s at 3.5%. I would be paying the least amount possible. Wouldn’t pay one penny above the minimum. And the reason for that is just math. So if you take the emotional component out of this, as long as you earn more than 3.5% interest on wherever that money goes, you end up better off.

But I really like the idea of the other two, and by not double paying on your mortgage, you’re going to even have… Let’s say your mortgage is 1,500 a month. You’re going to have an extra 1,500 to dedicate to increasing your savings on the 401(k)s, as well as building up a larger balance in those after tax accounts, which is probably where I would focus first. Because I’ve seen scenarios like yours where you have over $1 million net worth but actual liquidity, which is why, by the way, another reason why I wouldn’t double pay on my mortgage, is that you only have really access to about $10,000.

The rest is sitting in the sheetrock of your house by way of home equity and in retirement accounts that you’re penalized before 59 and a half for accessing and, by the way, are fully taxed ordinary income when you start taking distributions, so you’re not going to have a lot of tax diversification in the event that tax rates increase. I would continue saving up to the match because that’s free money, 100% return on your investment. And then for now, take everything else and invest it in after tax account so that you have more flexibility and liquidity.

Once that number is built up to what you believe is adequate, I don’t know if that’s $25,000, $50,000, $250,000, whatever you think from a broad financial planning standpoint that needs to be, then I would go back and increase some of your savings into retirement accounts. And also with tax rates sun setting at the end of 2025, you didn’t share with me your income, but I would look at considering the Roth side of that retirement plan with those contributions and that’s something you can do from the first dollar.

It doesn’t impact your company match at all. So don’t double pay on your mortgage and get more than what right now is less than 1% of your net worth in assets you actually have access to. All right, Lauren, last question.

Lauren: Next, I’ve got Lynn from Boise, Idaho. She says, “We are in the starter home we purchased six years ago, but now have two kids and a third on the way and have outgrown the house. Our current mortgage payment is low due to refinancing near the bottom. We have a lot of equity in the home. My two questions are, should I roll all my current equity into the down payment of a new larger house? If not, how much do you recommend down? And my second question is, should I wait for rates to come down before pulling the trigger on moving?”

John: Lynn, you’re like a lot of people right now. You do not want to give up a pretty valuable low interest rate mortgage. But remember, your primary residence, in my opinion, is not an investment. Now, do you want to make smart decisions with it? Of course. Is it one of the bigger assets on your balance sheet? Yes, it is, but it’s also your home. It’s where you create your family. It’s where you make memories. And if your current starter home is just too small and you’re busting at the seams, I would look to move now.

And the reason for that is because when rates do fall, generally house prices jump. And with the frozen housing market and a lot of pent-up demand with so many sitting on the sidelines, that may even be accelerated. When we see mortgage rates get below 5.5 or even below 5%, I think you’ll see a significant increase in housing prices, which is important to remind yourself, because you marry the home price, you’re only dating the interest rate. You buy today, the rate’s not as low as you’d like.

Two or three years from now the rate falls, you refinance. As for rolling your current equity into the new home purchase, I generally advise 20% down to avoid mortgage insurance and invest the rest. I remember a few years back I was in this bar and restaurant and there was a giant sign behind the bartender that said “free beer tomorrow.” I don’t know why it stood out to me, but I just chuckled and found it humorous, like so good. It’s never tomorrow. Every time you’re in there it says “free beer tomorrow.”

It never is tomorrow. Well, I was reminded of that when I saw this Nike ad, and Nike has some of the best advertising. It’s a giant sign that said “yesterday you said tomorrow.” Profound in its simplicity, in its directness. My kids, remind me of this. Tomorrow I’ll throw you batting practice. Tomorrow we’ll read two stories instead of one at bedtime. My wife reminds me of this. Hey, you said you were going to clean out the garage tomorrow, John, which by the way, last weekend I cleaned out the garage, spent a half a day doing it.

I was covered in dust after doing all the blowing of leaves and dirt. And I cannot wait until two weeks from now when my kids dump their bikes on the ground, they spill concentrated car wash all over the garage floor, and they scatter their rollerblades behind my car where I’m accidentally running over them, wondering what just happened. When I reflect on this though, I do unfortunately have a lot of tomorrow I’ll do blank. And then tomorrow comes and goes. What did you say tomorrow to yesterday?

What is that for you? What do you know you need to get done that you’ve put off? Is it estate planning, titling your assets, getting your beneficiaries in place, making sure your powers of attorney are in order? Is it reviewing your fees and expenses on your investments? Is it looking at your overall retirement plan? Are you on track? Are you saving enough? What sort of income could you drive in retirement? Is it more specific to your investments, your taxes, having a proactive tax plan? I need to get on that.

And then tomorrow comes and goes. You’ve listened to the show. You’ve thought about calling. Maybe a second opinion would be helpful. Yeah, I’ll worry about that tomorrow. No. As the Nike ad says, yesterday you said tomorrow. Don’t put it off. Get the answers you need by visiting creativeplanning.com/radio to request to meet with a wealth manager just like myself. 2025 will come and the only thing you can control is the action you take with the information that you have right now. 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 affiliates, currently manages or advises on a combined $300 billion in assets as of December 31st, 2023. United Capital Financial Advisors is an affiliate of Creative Planning. John Higginson 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. It 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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