Labor Day reminds us of the American dream and the ultimate goal of retirement. Whether you’re already retired or have five years, ten years or longer to go, we have plenty of tips in store for you on this week’s episode. We’re also joined by tax guru Ben Hake for a discussion on tax advantages when it comes to your retirement plan.
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 Hagenson, and on this week’s episode, I have a special offer for those of you who’d like to connect and get your personal questions answered. I’ll also explore why playing it safe with your finances might actually be riskier, the unexpected way to supercharge your financial discipline, and a tax move that could save you big. Now, join me as I help you rethink your money.
Labor Day marks the unofficial end of summer, and before you know it, the fall’s going to be in full swing. After that, we’ve got Thanksgiving and all the rest of the holidays rolling right into New Year’s. Kids are back in school. And let’s not forget, it is election season. I know you probably needed me to remind you, which will no doubt bring its own set of distractions and uncertainties.
Life gets busy. I can attest to that with seven children, and I don’t want you sitting in January wondering where the time went and that’s why now, today, right this moment, is the perfect time for you to take action on your financial future. At Creative Planning, we are offering a special free retirement review to help you make sure you’re on track.
Now whether you’re 20 years from retirement, you’re five years from retirement, or maybe you’ve even already retired, this review will provide a thorough look at your financial plan. We’ll assess whether your risk profile and rate of return are aligned with your goals, whether your portfolio is tax optimized, and if your withdrawal strategy is set up to maximize your income.
And as an added bonus, we are offering a second look at your financial plan. Now, that assumes you have a written documented financial plan for us to review. If you don’t, that right there should be a trigger. And if you want to have one, we can show you how to ensure that all aspects of your life savings are working toward your goals. But here’s the catch. This offer ends on Friday, September 6th at midnight. So don’t wait. Go to CreativePlanting.com/podcast to take advantage of this limited time opportunity before it’s gone.
Labor Day is all about celebrating the American worker. Folks like you and me, we’ve put in a lot of hours, dedication and sweat to build hopefully something meaningful, hopefully worked with people we enjoy collaborating with for a greater good, to use our talents and our gifts to help others and advance our company’s missions.
It’s also a great moment to think about what in the heck comes after all of this hard work? Yeah, that’s called retirement. But here’s the thing. If you ask someone in your life already retired or if you are in fact retired, it’s not about just reaching a certain age. It’s about preparing for the next phase of life where your freedom of time and having optionality is the biggest gift that you can give yourself and your family removing that stress, those obligations. It doesn’t mean you have to sit and do nothing. In fact, a lot of people find that to be pretty unfulfilling. But wouldn’t it be nice to not be at someone else’s beck and call?
And speaking of making the most of things, I’m going to share some real life retirement scenarios, things that I’ve seen so that you can see the difference between good planning, some missed opportunities, and what can happen if you just do not have a solid strategy in place, because just like in football, NFL’s fast approaching here, only a week out, I cannot wait, the outcome of your retirement depends on the playbook that you’re following. Who’s your coach? Who are your teammates? And what’s the game plan?
Let’s start with the good because who doesn’t love a feel good story? Meet Dave and Karen, a couple in their early 60s who spent their lives planning for this moment. Now, Dave, he’s the kind of guy who’s meticulous about everything. He’s been saving receipts since, well, probably since they invented receipts.
Karen, on the other hand, is all about living life to the fullest. Tends to work really well in a relationship, balance each other out. My wife and I do the same. She’s the planner when it comes to vacations and birthdays and holidays and she knows how to throw a good party, right? He’s the planner when it comes to itemizing receipts.
Now, they started this joint approach way back in their late 30s and they didn’t just save, they strategized. Every year, they sat down with their advisor, they reviewed their plan, they made adjustments and ensured that they were on track. Fast-forward to today as they’ve just entered retirement, they’re in a phenomenal spot. They did things like saving it in their Roth instead of deferring everything. They kept a growth-minded approach and were well-diversified. They rebalanced. They didn’t panic in down markets. A couple times they wanted to. Their advisors stopped them. Hey, these are longer-term monies. I know it’s scary during ’08. I know it’s scary during COVID, but let’s rebalance and buy more. Let’s make tax trades.
And now Dave’s finally got to restore that ’67 Mustang and Karen actually launched a little online business on Etsy. Their investments are providing a steady stream of income, covering their needs. They had a good plan for healthcare and they’re taking dream trips to Europe as well as smaller domestic travel. They’re spending winters down here in Arizona, summers in the Northeast, and they’re not just surviving, they’re thriving. They’re living their best lives, and they weren’t making a half million dollars a year. They made good money and they had a plan. They didn’t do anything magical. But as Benjamin Franklin said, an investment in knowledge pays the best interest. They invested in knowledge and planning and professional advice, and now they’re reaping the rewards.
Now let’s talk about the bad because if you’re like me, even sometimes when you have the best intentions, things go sideways. We all have those stories in our lives. And this is Tom’s story. By the way, all these names, not their actual names, but Tom was diligent about saving, no doubt about that. Every paycheck he put a little more into his 401k. And by the time he hit retirement, he had a decent sized nest egg.
But here’s where things took a turn. Tom was so focused on saving and not losing money that he forgot about growth. He was the ultra safe… I wouldn’t even call him an investor, more like saver really is the better word. Bonds, CDs, money markets, a little cash. Didn’t revisit his portfolio regularly to ensure that he was keeping up with inflation. So in other words, while his money was sitting safe, it was also losing purchasing power. It was being eaten away by little termites called inflation, basically sitting in a car that’s idling but not going anywhere. Certainly better than not saving, but man, did he miss some opportunities. When Tom retired, he had to face the realization that his conservative approach, that overly conservative approach, didn’t go as far as he thought it would.
I’ve been contacted twice in the last two weeks by people who are now ready to invest, both of which, similar to Tom, had been out of the market for over the last decade, right around ’08, ’09, were scared out of the market and are just now 15 years later after the market’s earned over 10% per year, actually nearly 15% per year, starting in 2009, been on the sidelines. For much of that time, you weren’t earning 4 or 5% in bonds and money markets. You were earning maybe 1 or 2% or even less in some of those years.
It’s normal, especially as you approach retirement, to be concerned with drops in the stock market, with risk, with losing what you’ve worked hard to save because you don’t want to have to go back to work. That’s logical. But Warren Buffett once said, “The most important quality for investor is temperament, not intellect.” And that is so true because Tom was smart, but his fear, that extreme loss aversion, led him to play it way too safe and that decision did not serve him well in the long run. So he’s making it work, but he’s not living the lifestyle he could have had he just been properly invested for his goals and for his time horizon.
And that’s why it’s so important to not just set it and forget it. You’ve got to be proactive about your retirement plan. And here’s the good news. There is still time to make sure your retirement plan is on track, and that’s where our free retirement review comes in. You’ll meet with a local fiduciary just like myself, and we’ll take you through a look at your financial plan. We’ll help you make adjustments where needed, whether it’s your investments. Are they growing in the right direction? Are you optimizing your taxes? Are you ensuring that your withdrawal strategy is set up to last? Could your income be increased? Whatever’s on your mind, we are here to help as we’ve been doing for over 40 years. And remember, the offer ends on Friday at midnight. Visit CreativePlanning.com/podcast to schedule your review and make sure you are prepared for whatever comes next.
Now, brace yourself for the ugly because this one’s a doozy. Sadly, I had to work through my mental Rolodex of which example to use. I don’t say that to beat people up or make you feel bad if you’re maybe not totally confident. That’s why we’re offering that review so you can get help. But I just see crazy stuff which I think would surprise you if you’re pretty organized and dialed in, just some of the things people do.
Now, I’m going to use Susan as the name here. Meet Susan, a successful entrepreneur who figured that she could handle all of this on her own. Classic overconfidence bias. She wasn’t a certified financial planner. She wasn’t an attorney. She wasn’t a CPA. She had very little financial background. She didn’t have really the right disposition or attitude to be managing her own money, but she was wildly successful with everything else that she had done. So it’s logical, “Why would I pay someone else to do this? I’m going to have more time in retirement, so I think I’m good.”
And by the way, this happens often to those who were high income earners because that high income covered up a multitude of financial sins, so to speak, because even if things weren’t growing efficiently or the investment move was wrong or it wasn’t as tax efficient, you had a bunch more money coming in two weeks later, so you just didn’t feel it. But what happens when that income spigot gets turned off?
So she retired at 65 with a hefty lump sum. She sold her business. She’s on top of the world. How hard could it be? But as you know, sometimes life has a way of throwing us curve balls. So Susan started withdrawing from her retirement account first without any sort of clear plan. She had a lot of non-qualified money as well, and she let that sit there. By the way, not invested properly, very conservative there, was taking more risk in the account she was withdrawing from. She had taxable bonds in the after-tax brokerage account. Should have had those flip-flopped. A classic case of a mismatch from an asset location standpoint, but whatever.
She splurged on a waterfront condo in Florida. She joined a hoity-toity country club, which by the way, that’s great, play in nice golf courses. I’ve got no judgment there. And she bought a really expensive car and she didn’t really think much about it until down the road when she contacted us. She hadn’t accounted for taxes on her withdrawals. She had really no withdrawal strategy in terms of which accounts to pull from and then how to marry the investments with those accounts. And her spending, even though she had a lot of money, was actually outpacing a sustainable withdrawal rate.
And by her early 70s, she was on the wrong side of the bell curve. The depletion percentage of her accounts was accelerating and she was healthy and still not that old. To make matters worse, she hadn’t planned for healthcare costs, which had began piling up. And when did she notice this? In 2022, right, when all of her bonds that were longer in duration than they should have been, and her tech stocks that she had gone heavy on were getting clobbered, all of them.
And in the end, she sold her condo and bought something far cheaper to backfill her investment accounts to lower her cost of living. Her luxury car is now used. She probably wishes she had a newer one but can’t afford it, and she’s not at a point where she needs to go back to work or build another business, but her lifestyle is very different and it didn’t need to be, but she didn’t have things invested properly and aligned with her situation. She had no written financial plan because she thought to herself, “I have plenty of money. I’m in good shape.”
So the lesson for you in this, regardless of whether you have 500,000 or 10 or $15 million, you need a written, documented, detailed financial plan. When I was an airline pilot, we would not push off the gate at LAX to head over to Chicago and just start flying east. We had a flight plan. We had specific taxi instructions, departure procedures, arrival procedures. And by the way, almost every flight those were adjusted for inclement weather or choppy air or heavy traffic, whatever it might be.
I have a simple question for you because it would’ve helped Susan so much. Do you have that plan, and do you have confidence in that plan? A great advisor and a detailed financial plan will answer the vast majority of the questions that are rattling around in your head, and that’ll give you more clarity and more confidence and more peace of mind so that not only do you hopefully have better financial outcomes, but you’re living a better life along the way. You’re not stressed out, you’re not second guessing yourself, you’re not asking your neighbor what they’re doing with their money and wondering if you’re missing something. As JP Morgan once said, “The first step toward getting somewhere is to decide that you’re not going to stay where you are.” Unfortunately, Susan didn’t figure that out until it was really late in the game and it cost her dearly.
My special guest today is Creative Planning Director of Tax Services, Ben Hake. Here at Creative Planning, we file tens of thousands of individual and business tax returns. We have over 250 CPAs on the team, and Ben is the leader and our special guest today. So Ben, it’s a pleasure having you. Thanks for joining me here on Rethink Your Money.
Ben Hake: Thanks John. It’s been a little while, so I’m glad to be back.
John: Often people think, “Tax season’s over,” referencing that they filed their return and they mentally unplug. They just stash the idea of taxes on a shelf until next year, but this is the time to be tax planning. What are some strategies you suggest people look at here as summer wraps up on this Labor Day weekend?
Ben: We get a lot of clients who start to get towards the end of their working years, are starting to retire and start to look at some of those things like, “What should I be doing now?” And the first thing I almost ask all my clients, “Where are we at in terms of healthcare and how are we going to be getting that?” Because if you go your whole life getting an employer sponsored plan, the first time you see those premiums without anyone helping, it’s like, “Holy smokes, 20, $25,000? That’s a lot of money.”
So that’s what a lot of our clients are figuring out. It’s not directly a tax, but it’s figuring out how we could get them positioned. Especially with the Affordable Care Act and some of the plans that are in place there, there’s a way to get a pretty decent discount on your health insurance premium specifically if you can monitor your income. And the big one, and it really pivoted right around COVID, because there used to be the ACA plans had a hard cap. So if you want a dollar over whatever the threshold happened to be that year, you had to repay every dollar.
John: Terrified as a financial planner, by the way, probably for you as a CPA too.
Ben: Yes. I’ve had many an anxious night when I was like, “I think we’re over just a little bit,” and somebody owes $15,000 of credits back. But after COVID, they basically came back and said, hey, instead of having this hard cap, what they say is that the average household should spend eight and a half percent of their income on premiums. And if their premiums are above that number, then the federal government will give a credit for that. I like easy math, so you make a hundred grand in retirement, if your premiums are $10,000, IRS is going to cover that amount. That’s over 8,500.
So for a lot of our clients, we’re looking at, what’s your cash need, what’s your ability and sources of income for that? Maybe it’s, hey, we just retired, so we’re going to be on COBRA. So we’re actually going to maybe realize some income this year that we don’t really need immediately. Maybe take an IRA distribution, take some money out of a taxable account so that we’re pre-funding it in that first year with the expectation that next year is going to be the year we’re going to have our income almost artificially deflated because we’ve pulled that forward.
So maybe you’ve paid some incremental increase in tax over here, but those credits can be huge. It’s not uncommon to have people five, 10, $15,000 credits, especially with the health care premium going up. So that’s one of the big areas we do where it’s very counterintuitive that you think, “Well, let’s realize a bunch of income this year,” but it’s setting yourself up for the future. And for those clients, depending upon how close they are to Medicare, we may alternate that strategy where it’s one year we get the credit, the next year we realize income and are looking to do that in a tax-efficient manner, and we’ll flip it the other way.
John: And it speaks to the fact that before you make those types of decisions, you need to really assess the implications because you’re talking about a tax planning strategy that may be over multiple years and strategized from one year to the next within the context of your full comprehensive financial plan. Looking at the big picture, what I’m alluding to is very different than just walking in and saying, “Well, here’s all my forms. CPA, can you file my return? Can you put the right numbers in the right boxes and be an accurate historian?”
Ben: Correct. And that’s why as people are retiring, especially if you’ve got existing employer provided insurance, sometimes COBRA makes sense because you’ve already hit your deductible. You’re not resetting a whole new plan and restarting that. So again, not always income tax related, but definitely a great point of contact for almost all of our clients who are making that transition. That’s almost always when we’re trying to talk with them.
John: Let’s talk about diversification of savings. What are some of the benefits of being diversified? And I think some are obvious, some are a little less well-known, but by having diversification between an IRA that’s deferred, a traditional IRA versus a Roth account, maybe some after-tax brokerage accounts, what are some of those benefits?
Ben: A lot of individuals save through their employer provided retirement plans, 401Ks, plans of that nature, and they wind up with a sizable investment account and in retirement they realize that it’s not really a dollar you get because you got to pay tax on it as you go. So we get some clients, they want to spend X number of dollars a year, but they also want to do something big. Maybe they need a new car, maybe they want to take the family on a trip. And it’s one of those where you start to budget that and if all of your money is in those pre-tax accounts, it can really snowball as you pay the tax and what you really are left with.
So for a lot of our clients, we’re focusing on if you’re in those early retirement years, maybe we could do some Roth conversions. Again, we take it out of the pre-tax account, move it to the Roth where eventually when we take those funds out, we’ll end up having that be tax-free.
John: Another counterintuitive thing where you’re triggering tax in the moment.
Ben: Exactly.
John: And throw people off.
Ben: And sometimes we want to pay a lower lifetime tax rate.
John: Yes.
Ben: We know we’re going to have a bunch of income at some point in our life we can’t turn off, social security, required minimum distributions, things of that nature. So you actually have an asset where I got five years where I don’t have any of that on me and maybe I’ve got a hundred thousand dollars of income I can realize at a relatively lower rate.
But we also have clients who they’ve got a bunch of other stuff going on. They’ve got taxable brokerage accounts and sometimes they’re looking at it saying, “Hey, I don’t think I’m going to need a whole lot of this IRA account, so I think it’s going to be my kids who take these funds and ultimately inherit it.” Well, when you pass, your kids are maybe in their prime working years. They’re at the peak of their career, they’re at their highest earning potential with the change of the secure act, all of a sudden they’ve got 10 years to liquidate what may be a million, two million, $3 million IRA, which could be a big hit.
John: Ben, this reminds me of a story. I had a client who was basically spending nothing. They had a ton of money in their IRAs and they were just taking their RMDs out, didn’t really know much about Roth conversions, and we started talking about their kids. I mean, both their kids were just crushing it. One was a radiologist making millions of dollars a year in Manhattan Beach, California. The other one was in Silicon Valley in tech making seven figures a year. They were young. There was no sign they would be slowing down.
And these retirees, their parents were basically spending nothing. They wanted everything to go to their kids per their plan that was left over. And then they’re at the same point asking me, “Why would we do Roth conversions?” Well, you’re in North Dakota and your state tax is around 1%, so essentially these conversions for them made a lot of sense. They could do them, pay maybe 22% in their bracket, barely anything in state tax, rather than 50 plus percent of it going to the IRS and the state of California at their passing if their kids were to inherit it.
So we ran the math in the lifetime calculator. And to your point, it’s counterintuitive. I’m telling them they should consider triggering a whole bunch of tax that they don’t need to purely because they’re doing it sooner, and this was hundreds of thousands of dollars and their estate wasn’t massive, massive, but it was a good size. And it spoke to this idea, you’re just diverting money that would go to the IRS and putting it in your kids’ pockets, but it requires you to do it today and that feels wrong.
Ben: And it’s the sort of thing that every year that you wait on it is a year gone. You’ll never be able to have that opportunity to use up those low brackets. So it’s really something that once you start it, every year, that’s something we’re evaluating with our client base. And some years it’s, “No, we want to go on that family trip to Europe and we’re going to pay for everyone to go.” Well, then that’s not going to be the year we do that Roth conversion or maybe some of these other strategies, but it definitely is a conversation that needs to happen.
John: Back in the day, I think people were a lot less likely to move. Their kids were a lot less likely to live far from them, but that’s not necessarily the case anymore. Where I’m at in Arizona, we’re the capital of snowbirds along with Florida. There’s people that spend half the year in Kansas by you and half the year down here in Arizona. And many of them are wondering where should their primary residence be located? What makes the most sense from a tax standpoint? And I would guess where you’re at there in Kansas City, I mean this may even happen across the state line, like, should we live in Missouri or should we live in Kansas? Which makes more sense for our financial situation? So can you speak a bit to how you counsel clients with this residency question?
Ben: I always joke, I think more of this is non-tax and income tax related because obviously you’ve got your people in the Northeast or California who want to go to Texas, Nevada, Florida, but I get a lot of clients who say, “Well, what should we consider?” And I was like, “Are your friends and family going to move there? Do you have kids in college? Are they now 12 hours away versus two?” So there’s some considerations there.
I had a client, they were primarily living off social security and their IRA. “We live in Iowa, we’re paying quite a bit here, five, 10, $15,000. Let’s move down to Florida.” So they moved down to Florida. I’m wrapping up their return and I’m like, “How’s it going down there?” They’re like, “Honestly, not as great as we thought. Insurance is a lot more expensive. We’ve got some friends and family.” And I was like, “Ironically, Iowa just revoked all tax on retirement income, so they’re not taxing social security, not taxing IRAs. You could move back to Iowa right now and have the exact same tax situation you had in Florida.” “Done. We want this place. We want to stay down here, but we don’t want to be here six and a half months out of the year. We want to be here January to April 15th and then come back.”
So it was one of those where, again, all the states as their budgets get stronger, the first thing they’re looking at is how can they reduce taxes? And a lot of times they’re targeting retirees in that situation.
John: Any other closing thoughts or tips, Ben, you have for us before we wrap up?
Ben: Well, yeah, John, the big thing that I’ve been telling my clients is now is the time to talk. We’ve got a lot of runway between now and the end of the year. There’s a lot of opportunity to make significant improvements to your tax situation and that wanes as we get closer to December 31st. There’s not a lot you could do retroactively, so don’t be shy. I’m sure your accountant wants to hear from you. We definitely want to hear from our clients.
John: That is a great one. Ben, thank you so much for joining me as always here on Rethink Your Money.
Our oldest two boys are about to turn 24 and 22 years old. When we adopted them at 11 and nine, I thought I had a game plan. My wife and I had our strategy. It won’t matter that they don’t speak any English. We’ll buy Rosetta Stone. Sure, they will have never gone to school, but that won’t be that big a deal. We’re just going to love each other and everything will be great.
You think about what a child knows here in America by the age of 11, by the age of nine, let me tell you, the learning curve was steep. You want to get humbled? Be a parent. It was like trying to teach one of our kids to ride a bike while they’re going downhill at full speed. There were a lot of bumps and bruises and rethinks. In fact, it’s great that we’re at a point in our relationship where we can laugh about it now and I can apologize to my boys and say, “Look, I just didn’t know what I didn’t know. I was trying.” And I’m so proud of them.
But in the process, they taught me something important. And that is that sometimes conventional wisdom needs a fresh perspective. And one that’s been making the rounds for ages is that a lack of wealth must mean that you’re not disciplined, you know, that somehow wealth is correlated with hard work or discipline, and both of those are important. There’s no doubt. Certainly gives you a higher likelihood of having wealth all things being equal, but all things are not equal.
There’s a subset on social media that’s dedicated to what I like to call hustle culture. And these influencers and posts will have you believe if you’re struggling, all you have to do is work harder, wake up a little earlier or eat the exact same breakfast as Elon and you’ll be a billionaire in no time. Of course, I’m somewhat joking, but this kind of advice glosses over the bigger picture and ignores the fact that millions of hardworking, disciplined people still struggle unfortunately to attain financial security due to a lot of factors outside of their control.
I’ve met with very successful, very wealthy people, some of which billionaires, many of which worth nine figures, and I haven’t met a single one who doesn’t say, “Well, there is a decent amount of luck. Quite a few things broke right for me to put me in this situation.” Now no doubt, they’re smart, they do work hard, but that wasn’t the entire story.
In fact, I remember a family that I worked with who were some of the most disciplined people that I had ever met. They stuck to their budget religiously, envelope system, diligent. But despite all of that, they were still struggling to get ahead financially, part of which was because they just weren’t high income earners. But more than that, they had one unexpected medical emergency that threw their carefully laid plans into complete chaos, and there was no amount of waking up a little earlier or eating a healthy breakfast or going to bed not until midnight that would’ve prepared them for that.
And so the lesson is that while discipline is crucial, and I advise that you do your best to be disciplined from a financial perspective, with your fitness, from a spiritual perspective. Discipline’s important, but sometimes life throws curve balls, and that’s where having a solid financial plan and a little bit of grace as well for yourself can make all the difference.
And speaking of solid financial plans, if your current advisor isn’t taking into account those types of curve balls that life’s inevitably going to throw your way, like the unexpected medical expenses or job changes, it might be time for a second opinion. Our free retirement review isn’t just about making sure you’re disciplined with your savings. It’s about ensuring that you’re prepared for the unexpected as well. Visit CreativePlanning.com/podcast. Why not give your wealth a second look? This offer is available through Friday, September 6th at midnight.
Now let’s move on to another piece of common financial wisdom that could use a little rethinking, and that is that you should maintain 10 times your annual income in life insurance. Now, on the surface, this seems like sound advice. After all, if something were to happen to a family sole breadwinner, the financial impact could be catastrophic. I’ve seen it for families that were underinsured or uninsured.
Remember, that’s the whole purpose of insurance, that you have an insurable need and in many cases, that insurable need is quantifiable. That’s one of the things we’ll provide in that free retirement review and insurance needs analysis and look at what the impact of death, disability, and other insurable variables would be on your family. And for some families, 10 times that income might be more than enough, while for others it might fall short.
I mean, what if you’ve got significant debts? You’re a surgeon, but you’re only three years into your career and you have $600,000 of loans, but now you’re making 500,000 a year and you have a young family. You’re going to be in a good position assuming that you can work for the next 30 years. Your family is going to be in dire straits if something happens to you in the next year.
How much insurance would you need in that case? Well, you need to run a financial plan and it will be answered because that plan will take into account all the details such as are you going to have more kids? Do they go to private school or public school? What you’re answering there is what are your expenses? Do you expect those to increase? Do you want to eventually buy a second home? How expensive is your primary residence? How big is your mortgage? What is that interest rate? Will you be caring for an aging parent? Will you be inheriting money? How long do you want to work full-time? Do you plan on potentially owning a practice or buying a practice or working as an independent contractor, as a W2 employee? Does your spouse plan to work? If so, how much money do they make? How long do they want to work for? What type of college do you expect your kids to go to? Will they have a scholarship? Will you be paying 100% of it? Will it be in-state out of state?
See, that’s why it’s okay to make generalized rules, but that’s all they are, general rules. They are not a replacement for a detailed, written, documented financial plan that every single American needs to have. So think of it like ordering a meal at a restaurant. Some people need a large entree to feel satisfied. Others are perfectly content with a side salad, little soup and salad. Everybody’s different.
My in-laws, they’re so cute, they’re sharing everything. And my wife sometimes is like, “Hey, can we share it?” But maybe I’m not as go with the flow as my father-in-law. He just lets my mother-in-law order whatever she wants and he eats half of it. I don’t know. Yeah, I mean, maybe I’m not quite as good a husband. Maybe that’s something I need to work on, but you’re looking for the portion and the dish that’s right for you. Risk management isn’t just related to your asset allocation, not owning one single stock and being diversified. It’s also about preparing for those unexpected events and knowing that you have enough.
And I have one final piece of common wisdom that I’d like to rethink with you, and that is that your finances should be boring. Finally, we’re rethinking something that I agree with and I’ll tell you why. In a world filled with flashy investment opportunities and you’ve got TikTok influencers with videos on crypto and whatever other get rich quick scheme is out there, boring doesn’t sound enticing. You’re normal. If a diversified low cost, strategically rebalanced, tax loss harvest approach doesn’t get you giddy. And here’s the thing, it shouldn’t.
When it comes to your finances, boring is often better. In fact, if your financial advisor is calling you every few weeks, every month bringing you the next exciting idea and you’re pumped up and you’re excited and you’ve got some emotions flowing like, “This is going to be awesome,” you might be in trouble because these so-called sophisticated investment products that most people don’t understand at all and often seem too good to be true are just that, too good to be true. Many financial services and products exist solely because they make other people a lot of money, not you. So the tried and true strategies are often simple. They’re straightforward, they’re understandable, and they aren’t exciting. They’re the opposite.
Think of it like going to your doctor. If you’re in good health, you don’t want to suddenly discover that you have a laundry list of issues that require a dozen different treatments. You’re hoping to go to the doctor and when your spouse says, “How did it go for your physical?” You say, “It was pretty boring, uneventful. There were no big, huge changes.” You wouldn’t leave that doctor’s appointment and go, “Man, I need a new doctor. They just can’t come up with anything crazy. I wanted to do some wild treatment, this experimental thing that I heard they were doing in Sweden, but they said I don’t need it. Kind of disappointing.” And the same goes for your finances.
A client recently came to me with a portfolio full of complex, ridiculously high fee investments that had garnished massive commissions from this previous advisor, and I’m using that term loosely as a broker. They had sold them all these confusing, expensive and ultimately underperforming investments. And after simplifying their portfolio and focusing on low cost, well-diversified, tax efficient, their financial situation was not only improved, but it also became a whole lot easier to manage. They went from having all of these different proxies getting sent to them and now do we switch from this one to this one and now this is rolling off and do we need to buy another one and now this just went public. I mean, it was like a full-time job even though they had a broker trying to track these things and then figure out when they were getting K1s and then when will we know that we can file our taxes? I mean, it was just crazy for under-performance, but don’t worry, a bunch of other people were getting rich, so that was cool.
I love the Warren Buffett quote where he said, “Risk comes from not knowing what you’re doing.” And this isn’t a knock on this person. I don’t know of anyone, even most professionals would’ve been able to keep track of all the moving parts and sophisticated investments that they had going on. The more complicated your investments, the much harder it is to evaluate and understand the risks. And that’s not a place you want to be with your life savings that you’ve worked decades to accumulate. So when it comes to the idea that your finances should be boring, that is absolutely 100% true.
Before I dive into this week’s listener questions, it’s time for our one simple task where I help you make incremental improvements one week at a time with the goal being that you enter 2025 having made significant progress through 52 easy, actionable items here in 2024, and this week’s task, it’s a simple one, hence the name. I know, I’m creative, but incredibly powerful. And that is name an accountability partner.
So whether you’re training for a marathon like I’ve done a couple of times, barely got across the finish line, I’ll have you know. I watched those Olympics and I’m like, “Wait a second, they’re sprinting the final lap faster than I can run one mile. This makes me feel even worse about myself.” But outside of not being a trained Olympic runner, maybe part of my problem was I’ve never had a running accountability partner. I’ve heard those work well. And whether it’s fitness or you’re trying to stick to a new diet or yes, saving for retirement and being financially disciplined, having someone by your side to not slap the back of your hand… I mean, it might be that, but also maybe encouraging you, helping keep you on track and measure your progress, it can make all the difference.
When it comes to something as important as our financial future, it’s easy to go about it alone, isn’t it? It’s like, “Well, it’s my money. I want to be kind of private. I don’t know who I want to share that with.” And by the way, this is often the case for a good advisor. And that doesn’t mean that all roads need to lead to Creative Planning, but sometimes that’s the natural fit and a comfortable person that’s bound by privacy regulations, in fact, that you can just be vulnerable and open with about your financial challenges and where you’d like to go and have them hold your feet to the fire on what you say you care about when it comes to your money. As the legendary football coach Vince Lombardi once said, “The player does most of the work, but a great coach does something that a player can’t do. He holds the mirror up.” So this week I want you to take a moment, identify that person in your life, figure out who that is right now, and if you don’t have one, find one.
Speaking of accountability, it’s time to answer some of your questions. Those of you that have reached out for guidance, I appreciate those questions. And remember, you can always email your questions to radio@creativeplanning.com and I may answer yours on the air as well. One of my producers, Britt, is here to help out with those questions.
Britt, hey, how’s it going? Who do we have up first?
Britt Von Roden:
Up first we have Jeff in Omaha. John, Jeff wants to ask you about sequence of returns. He thinks he kind of understands it, but is hoping you can explain it more and help him understand how this applies to someone on their way to retirement.
John: Jeff, this is a great question. You lost some people probably with sequence of returns. You’re ahead of the game using that phrase, but it’s a concept that’s actually really important for anyone nearing or entering retirement to understand. And the reason for that is because sequence of returns, and I’ll explain it here in a moment, doesn’t matter when you’re accumulating wealth but is extremely impactful once you’re taking withdrawals. Simply put, it’s the risk that the order and timing of your investment returns can negatively impact your retirement savings, especially as I mentioned when you’re taking withdrawals, but in particular early in retirement.
So here’s how it works. If you experience poor investment returns in the early years while you’re drawing down your portfolio, it can significantly reduce how long your nest egg will last. So the difference of someone retiring in say 2007 and then going through the great financial crisis and a 53% drop in the stock market, the second largest since the Great Depression, that person’s portfolio looked very different than someone who was accumulating during that period and then went and retired let’s say in 2014, and for the most part of this entire decade since they retired, they’ve had positive returns.
See, that person wasn’t smarter. They were probably just younger. They retired seven years later. And the reason it has such a lasting impact is because even when the market recovers later on, it’s like you were caught in a rainstorm just as you left your house. So once you’re soaked, yeah, the sun’s out, it’s starting to kind of dry you, but you’re still drenched because it was a monsoon that you were walking in. You’re already wet.
Now, this doesn’t mean that you have to time your retirement with positive returns because that’s impossible because no one knows the future of the markets. But there is one way to mitigate the risk, and that is by maintaining a buffer of five or so years, maybe seven years, maybe 10 years, depending upon some other factors like your overall appetite for risk, your capacity for risk, and your emotional and behavioral fortitude in down markets.
But just using five years as an example, you want to hold more conservative investments like bonds once you get near retirement so that in the event you are the person who retires in ’07 and you have enough and your plan’s going to work, and then the market drops 53%, by the way, you’ll probably still not be loving life, but you can still end up okay because you sell off your safer investments to create your income in 2008 and 2009 and 2010 as the markets are recovering and those investments weren’t down 53%. Many of those were up slightly or flat. This allows your stocks the four letter word that they need, and that is T-I-M-E. They need time to work back to their averages.
And if you have to sell shares when they’re at a significant loss, you essentially are cannibalizing the portfolio because you need to sell so many more shares just to clear enough cash to make the transfer to your bank for your living expenses. And that’s the last time you want to sell those types of investments, which is why sequence of returns risk is something that needs to be taken into account when you are building out your retirement strategies.
All right, thank you for that question, Britt, let’s head to our final question for the day.
Britt, Questions:
Our final question for the day is from Kelly in Alabama. John, Kelly wants to know what the key differences are between a traditional IRA and a Roth IRA, and how do the tax implications of each affect long-term retirement savings?
John: Well, Kelly, you are one of multiple questions every single week that I receive about deferred retirement accounts verse Roth accounts for the show or in our office, but this is an important question. It’s a good one to ask when planning for retirement. The main difference is, well, that they’re the opposites in terms of how and when you get the tax benefit.
So with a traditional IRA, and this goes for a 401k or a 403B, any sort of other deferred retirement account, you get the tax deduction when you contribute, which will lower your taxable income in the year you make the contribution. So you make a hundred thousand dollars, five grand goes into your IRA, you pay tax on $95,000. It then grows tax deferred, but when you withdraw the money in retirement, it’s taxed at ordinary income. It stacks on top of the rest of your income. So deferred retirement accounts are fantastic if you believe your bracket today is higher. The rate you would have to pay now on that income is greater than the rate that you’ll have to pay when you make that withdrawal in the future.
On the other hand, contributions to a Roth IRA are made with after-tax dollars. So you still have to pay tax on your hundred grand in my example. But the magic is that when you withdraw the money, assuming a few basic rules are followed, it comes out tax-exempt. And this can be a huge advantage if you expect to be in a higher tax bracket later on.
Now, let me be clear to conceptualize this. If you are in a 22% bracket now and you’re trying to make this decision, “Do I defer? Do I utilize a Roth?” But we had a crystal ball and we could see into the future and down the road, you’re also going to be somehow magically still in a 22% tax bracket, forget it. It doesn’t matter. Regardless of which you choose, you will have down to the penny the exact same amount of money after the withdrawal, assuming that you invest it in the same exact manner and get identical returns.
So the decision really comes down to, again, do you think your bracket’s higher today than it will be in the future or lower today than it will be in the future? No one knows, but conventional wisdom was, “I’m working. I make more income today than I will be when I’m in retirement, so I should defer.” That was the popularity of the traditional 401k, traditional deferred IRA accounts. I mean, Roths weren’t even around until near the turn of the century, but due to the Trump tax reform, we’re in a historically low tax environment right now and we have 35 trillion of national debt. So a lot of people now when they ask that question, because these low brackets have been expanded to include so much income, that answer doesn’t seem to be as simple. In fact, a lot of people are wondering, “I might be in a lot higher bracket in retirement.” I don’t like the variable of not knowing where tax rates will be. I don’t really want to have a significant partnership with the IRS in retirement and their cut is completely out of my control. And based on whatever rates end up at when I’m needing to take those withdrawals or passing those accounts onto kids and now they’re paying at whatever the mercy of the IRS is at that time. I want to be very clear that both IRAs and Roths have their own rules, contribution limits, required minimum distributions. There’s all sorts of nuances that may impact which account is best for you, and that’s why this is no substitute to receiving an actual financial plan.
I want to take a moment to examine the American dream. Oprah once said, “The big secret in life is that there is no big secret. Whatever your goal, you can get there if you are willing to work.”
The American dream, by the way, it’s not just about financial success. I think so often it’s like the picket fence and a house and a dog and two kids. And I think your American dream probably looks different than my vision of an American dream. But it’s about you having the freedom to pursue your passions, to build a life of purpose and a life of meaning, and to leave a legacy that reflects your values to those in your life that you care about, your friends and your family. And in some cases, those pursuits require money. They may be enhanced by you having financial freedom, but money in and of itself isn’t inherently valuable.
There’s nothing worthwhile directly about having a larger number on a statement. But when you use that number wisely, it absolutely can open doors to opportunities and empower you to turn your American dream into a reality, whether that’s ensuring a comfortable retirement, providing wealth for your family, maybe giving back to your community. Regardless, the ultimate goal isn’t just accumulating wealth to accumulate wealth. And I think that’s easy to lose sight of. I know I have at times. It’s using the wealth to create a life that’s rich in experiences and relationships and fulfillment.
So as you enjoy this Labor Day weekend, I encourage you to think about what the American dream means for you. What does that look like? And how can you use the financial strategies maybe that we’ve discussed today or that you’ve accumulated and collected over the last several years to not only secure your future, but to live a life that’s truly meaningful? Because at the end of the day, it’s not the money that matters, it’s what you do with it. 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 Hagensen works for Creative Planning, and all opinions expressed by John or his guests are solely their own and do not necessarily represent the opinion of Creative Planning.
This show is designed to be informational in nature and does not constitute investment, tax, or legal advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on the show, will be profitable or equal any historical performance levels. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.
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