It’s common for us to want to neatly compartmentalize our lives, seeking peace of mind through structure, but this practice can result in unintended consequences, particularly when it comes to our finances. Retirement planning isn’t black and white; rather, it’s riddled with various shades of gray. Join John as he guides us through the prevalent pitfalls that could jeopardize our retirement if we don’t plan for the gray. (1:08) Plus, find out why diversification always means having to say you’re sorry. (24:11)
Episode Notes:
Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!
John Hagensen: Welcome to the Rethink Your Money podcast presented by Creative Planning. I’m John Hagensen and ahead on today’s show, why your financial plan doesn’t need to be black and white, the state of the housing market and weather prolonged interest rates signal a recession on the horizon. Now join me as I help you rethink your money.
It feels good to pack things neatly in black and white boxes, and I’m not just talking about your wallet, but your outlook more broadly on life. That all or nothing attitude, that’s the American culture in 2024, though. We’re wired to compartmentalize things. Social issues, check, politics, check, religion, check, and even finances, check that box too. But as inconvenient as it might be, life and finances don’t fit perfectly into two categories. There is an allure of the simplicity of black and white thinking when it comes to financial planning and investing. I’m going to highlight five of the most common black and white statements around money and then unpack the gray reality.
How about the classic? If the market doesn’t perform well or I experience a prolonged bear market, my retirement savings will be completely wiped out. Of course, you’re going to experience times where the market doesn’t perform well. If your peace of mind around retirement and your success ultimately in retirement is contingent upon amazing market conditions, that would be really stressful. Fortunately though, retirement success in the midst of market drops isn’t about Wall Street wizardry, certainly not about timing the market or just not investing at all. It’s about building a plan that aligns with your personal objectives. And as mentioned, those may look different from your neighbors.
A typical person’s retiring around 65, if they lived in ’95, you think those 30 years are all going to be up and to the right. Of course not. By contrast, your plan should be built under the assumption that one out of every three to four calendar years, the market will be down, that about every five years you’ll have a bear market, one or two times a decade you’ll experience an absolute crash, and then on average most calendar years, you will see a correction of about 14%.
So rather than the black and white thinking of if the market performs well, I’ll be golden. And if the market doesn’t perform well, I’m in a whole world of hurt in retirement, build an investment strategy that accounts for not if bad markets occur, but when they occur.
Here’s a simple breakdown and way to think about buffering your more volatile long-term growth investments with safer options to weather the storm during down markets. Your stocks need a four letter word, and no, not one of those four letter words. Time. Stocks need time. Which is why when you’re young, you’ve got all the time in the world. You’re 35 and you’re not going to touch your 401k for 30 years. You’re crazy to put monies that have a three decade runway in bonds. But if you’re 65 years old, you don’t want to let everything sit there until you’re 75 years old just because the markets are down. You want to have access and not be holding to Trump’s next tweet or Biden’s next executive order, things that you can’t control. So you diversify into safer investments to buffer your stocks. In the event that they’re down in value, you do not have to sell them when you don’t want to.
So remember, market performance or the sequence of good and bad years should not define your retirement if your plan is built correctly. Gray and nuanced thinking means that you’ll have periods of good markets and periods of bad markets and that your retirement will need to adapt. Along those same lines, the black and white statement, I’m conservative or I’m aggressive, which I hear all the time in first visits with prospective clients. Maybe you can be a little bit of both depending upon your situation. I just mentioned it. If you don’t need any withdrawals from your accounts for the next five or 10 years and you have the temperament for volatility, go for it. Being aggressive makes sense.
If you need money two years from now, but you say I’m an aggressive investor, well, it doesn’t really match with your income needs. You may have an appetite for risk but not a capacity within your plan to take that risk on. But where I see this far more often is with the retiree who says, I am conservative. Let’s suppose you’re 70 years old and you say, well, I’m not going to go back to work. What I have saved is what I have saved. I need to protect this nest egg. And by the way, that’s logical thinking. But if you get to the root of that statement being conservative, it’s not really that you’re conservative. It’s that you don’t want to run out of money and you think if you lose money, you’re more likely to run out of money before you run out of life. Again, all logical.
However, if you live until you’re 90 or 95 years old, that means some of your assets are going to need to last another 20 years. The money that you need at 89 years old should be growing the next 19 years so that you don’t run out of money, which is what your objective is by being conservative. March Madness is here. Imagine Zach Edey, seven foot, four inch center for the number one seeded Purdue Boilermakers. Imagine he had the ball with one second remaining. He’s at the top of the key, Purdue’s down three, and he just held the ball. He didn’t shoot as time expired and the horn sounded. Imagine in the press conference, reporters asking, “Why didn’t you shoot? You were down three points. You were holding the ball.” And his response was, “Well, I’m not really a three point shooter. I’m a center.” Everyone would say, hey, you be an All-American, but you’re nuts, because you have to shoot the ball in that situation. The same is true when it comes to being conservative or aggressive. It’s not black and white. It should be situational.
Next black and white statement, I’m a saver or I’m a spender. Now, I used to think my wife Brittany was the spender and I was the saver. She’s buying random lamps from home goods and other pair of shoes, her 10th pair of yoga pants. Of course, always have to have more throw pillows. And so by transactions, yeah, she is more of a spender. But while I buy one item for every 25 of hers, mine are big-ticket items. I probably spend more money than she does in reality throughout the year. We just spend differently. It’s nuanced, it’s gray. It’s not black and white.
And unfortunately, I’ve seen so many people wrap up their identity in being a saver, in particular, spending people. “I’m not a spender.” People don’t want to admit that, but people take a lot of pride in being savers. The problem is they hit retirement, the whole reason they saved all this money, so then they could eventually use it for their enjoyment. And they even tell me, “My kids are doing better than I am. We just want to enjoy this and travel and we’re going to use some of this that we saved up,” and they don’t spend hardly anything and their kids are rolling up to the office in a new seven series BMW before there’s dirt on their coffins. They didn’t have any problems spending it. And of course, if you have questions about how much you can be spending or saving, are you on track for retirement or if you’re in retirement, how much income can you comfortably live on to ensure that you don’t run out of money, that you can accomplish all of your goals if you don’t have a written, documented detailed financial plan tailored for your situation?
That’s what we’ve been providing for over 40 years here at Creative Planning. It’s complimentary, so why not give your wealth a second look. Schedule a meeting with a wealth manager just like myself at creativeplanning.com/radio.
Let’s continue on to my final two black and white financial statements. How about I’m either a do-it-yourselfer, or I hand everything over to a financial advisor and they do it all. Advisors are different. The services that they offer are different. And seasons of your life are different. I know a retiree who wakes up every morning, spends three to four hours per day watching CNBC, making trades, researching stocks. He loves it. Total do-it-yourselfer. Now he’d tell you he has the time, he has the expertise and he has the desire to do it himself. And remember, I don’t believe everyone needs a financial planner, but everyone needs a financial plan.
What I do find interesting though is hearing his wife’s perspective. She says it monopolizes his time, takes away from their retirement together, causes him stress and anxiety when trades aren’t going as well as he’d like them to or the markets in a drawdown like in 2022. Furthermore, she doesn’t have any desire or expertise to handle this if something were to happen to him, she’s not interested at all in the stock market or investing. And the reality is, while he thinks he’s an expert, I’m not trying to pick on him, but he’s not a CFP, he’s not a CFA, he’s not an attorney, he’s not a CPA. I mean no one else would pay him to manage their life savings. So I’m not really sure how knowledgeable he really is to be honest. But regardless, it’s his money. He likes doing it himself.
Here’s the point though. This doesn’t need to be black and white. I do everything on my own or I turn it all over to a wealth management team and I no longer have any say, and it’s all delegated. It should be a collaborative process with your financial advisor, working as a team, them offering a different perspective, sharing their experience from working with hundreds or thousands of other clients, offering guidance and discipline to ensure that your plan stays on track and that there’s continuity in the event of unexpected death or cognitive decline. And I don’t know why it works out this way, but I swear it’s always the CFO of the family, the one that’s interested, that’s doing it themselves that dies first, that happens to suffer from mental decline. And it leaves the other spouse in a situation where they don’t often know what’s going on. And what I found is that very few do-it-yourselfers are experts on estate and tax and risk management planning. Usually it’s more of a focus on trading and investing.
And so the point is, whether you choose to hire an advisor or not is a personal decision. This involves your life savings. But it doesn’t need to be as black and white as many think. It could just be an initial discussion. Having a financial plan built out to start the conversation and see if there can be some value added and maybe an incremental progressive relationship can evolve. And then the final black and white statement is that of success or failure. Investing in financial planning isn’t March madness. It’s not the final four where you either win or lose. Success or failure with money is somewhere along a very broad spectrum. And oftentimes our assessment of success or failure’s rooted only in short-term outcomes and that ignores the importance of patience and discipline and long-term performance. Evaluation of investing. Compounding is the eighth wonder of the world, and that inherently takes time.
So let me encourage you, play your own game. Don’t worry about what game others are playing. There are always going to be others who have more than you. So if you’re worth $5 million, you’re doing incredibly well, but not compared to your friend who’s worth 25 million and that person isn’t doing well compared to the person worth 50 million, and that person has magnitudes less than one of these tech or finance billionaires. Financial success should be defined by being able to do the things you want to do with whom you want, when you want to do them, and not having stress and anxiety related to your finances along the way.
And for some that might mean saving a million dollars, retiring at 45, and spending 40 grand a year from the portfolio and never working again. For others, that means working 40 hours a week until 85 years old, even though their net worth is far more than enough to satisfy their financial goals because they love it. This is the reason why I love personal finance, but it’s nuanced and complicated and impossible to put in a black and white box because it involves people and all of our unique goals, concerns, experiences, which is why I encourage you, be okay living in the gray.
I’m joined today by Creative Planning private wealth manager, Stacy Lewis. Stacy is a certified financial planner and also somewhat of a national movie star. She’s maybe not quite on Emma Stone’s level yet, edging her out for best actress, but she is one of the faces on Creative Planning’s national TV commercials that air during Monday night Football and other events where 20 million people are watching. No pressure. This is small stakes compared to what you’re used to, Stacy. And thank you for joining me on Rethink Your Money.
Stacy Lewis: Great to be here. Thanks, John.
John: We think so often about growing our wealth, which is certainly important, but once a nest egg is built up, protecting it can even be the higher priority. So today I want to discuss with you protecting what you’ve saved through the use of proper insurance. And you and I are both CFPs. We meet with clients. This isn’t the most exciting topic, but it’s vital to a good financial plan and one that can so often be overlooked or forgotten entirely. So let’s start with life insurance. Do people need it? If so, how much and what type do you recommend?
Stacy: One of the main reasons people have life insurance is income protection. So I’m working and my family is reliant on the income that I make. And so if something happened to me yesterday, how do I make sure that my family’s protected if my income goes away suddenly? And so in a lot of those cases, term insurance is going to be a great solution for clients and an inexpensive solution for clients. But then you also have to look at, well, how much? And so that’s really where we dig deep into the planning that we do. What are the lifestyle needs? What are the cashflow needs? How long are we going to be working and generating that cash? How long do I need to protect that? What types of debt do I need to pay off? Do I have kids that are going to be going to college and I need to fund that? There are just so many things that go into it. And so we’ll model that out for clients to help give them an idea of how much is appropriate and for how long.
John: You bring up a good point. It’s often just a shoot from the hip, I don’t know, 250,000, 500K, maybe a million dollars of life insurance. They select it as if they’re picking from a Cheesecake Factory menu. But really this is where that written documented financial plan comes into play because within that process here at Creative Planning, we call it an insurance needs analysis, you can quantify exactly how much coverage is actually needed. This shouldn’t be a guess because then you may be over under insured, neither of which is optimal. Also, whether term insurance will in fact do the job.
Stacy: That is exactly right. So understand cash needs, but also what other assets are available for a survivor. But yes, we’ll run through a survivorship analysis just to make sure that we can make some great recommendations that are specific to that family. And as I tell clients, there is a point where insurance becomes a nice to have not a need to have. And there are some clients that even though they don’t need to have it may choose to because they have goals to leave their children a certain amounts of money and that’s fine. So we’ll talk through all of that. In many cases, the need goes away.
John: What do you see as the primary differences between term and permanent life and if you want to speak more broadly, when someone might want to use one versus the other?
Stacy: Yeah, so again, in general, term life is going to fit the bill for a large portion of the folks that we’re going to meet because income protection is the number one goal, but whole life certainly has a place if there’s this desire to make sure that the insurance is there regardless of when I pass and it’s not for income protection, I want to leave it to my heirs. There are also situations where clients have potential estate tax issues where their net worth is over the estate tax exemption amount and they want to protect, how can I make sure my kids get as much as possible and they don’t have this huge estate tax bill. And in those cases that can make sense as well.
John: You’ll hear Ramsey or Orman say, permanent life insurance is the worst thing in the entire world. You’re an idiot if you buy it. And for probably 99% of people, they’re mostly right, they don’t need permanent policies, but there are absolutely those unique situations where it can make a lot of sense.
Zooming out a little bit and looking at this at a higher level, we talk about risk management when it comes to financial planning, and I love the definition of risk that says, it’s what’s left over after you think you’ve thought of everything else. But when evaluating insurance, one of the nice things is that these are known risks that we can solve for if we’re diligent in the planning process.
Let’s transition over to homeowners insurance. How often should someone review their homeowners’ coverage?
Stacy: This is one of those areas where I think a lot of people just put their policy in place and forget it at that point, just not thinking about it anymore. But I do think it is important to look at it every couple of years for one, one of your biggest risks is could I replace my home if it burned down or something happened? And what we’re seeing right now is the cost of construction is so much higher than it was a couple of years ago. It would cost quite a bit more. We’re seeing insurance carriers bump up those replacement costs.
But also one of the areas where I see clients miss is if they do renovations or improvements to their house and they don’t necessarily think to go back to the carrier and say, Hey, by the way, I’ve done this. This has increased the value. It would be more expensive to rebuild this house, so let’s make sure we address that.
And so I really work with clients to make sure we’re looking at it every couple of years. We might even have our folks look to ensure there’s no ways we can save on premiums or maybe if insurance coverage needs to go up.
John: But to me this makes sense because especially when you’re purchasing a home, you’re thinking about securing your financing and then the appraisal and then your buyer’s request for repairs and your realtor and you’re going back and forth and when are we going to close? And now I’ve got to get movers. And it’s almost like an afterthought. You reach out to your property and casualty insurance agent and “Hey, I’m buying this new house, I’m excited. Can you get me some homeowners’ coverage?” And they say, “Sure.” And often that’s the extent of the conversation. And I’ve heard Ryan Schwartz, a great managing director here at Creative Planning out of our Omaha office, say that he advises his clients take their cell phone at the end of every year around Christmastime, do a quick video of everything in their home to make sure that if there is a loss, they actually know what used to be there and can prove that to the insurance company. Now, your rates may bump up slightly because you’re making sure that the new kitchen renovation is captured in the value of that home, but you want that protection.
Stacy: But you need that protection. Absolutely.
John: Yeah. You’re not going back at the end saying, “Oh no, no, we had made that way nicer.” And your insurance company’s going, “Well, we didn’t know that.”
Stacy: Right, exactly. That’s exactly right. And think about the fact that for a lot of people, their home is their biggest asset.
John: Absolutely.
Stacy: You want to protect that.
John: I’m speaking with Creative Planning private wealth manager, Stacy Lewis.
Let’s transition over to umbrella coverages. I see high net worth clients regularly in their insurance review have state minimums on their auto, they’re underinsured on their homeowners, and on top of that they don’t have an umbrella policy. Is the perception that it’s too expensive, Stacy? Why do you think this gap exists in so many plans?
Stacy: It’s really not that expensive. So umbrella liability coverage provides an extra layer of protection if you’re sued or your family member is sued. I don’t know about you, but when I wake up in the morning and I’m watching the news, every commercial is a personal injury attorney.
John: Oh yeah.
Stacy: We live in a very litigious society.
John: We love all you ambulance chasers. No offense.
Stacy: Right. But it is the reality. I mean, personally, I was in a car accident years ago that was just a teeny little fender bender and I had a similar issue arise. So it’s really important. It’s very inexpensive. But this is also one of those categories that to me is not a one-size-fits-all when you’re determining how much to get. There are a number of things that come into play. Maybe net worth is something that should be factored in. I want to protect my personal assets. I want to make sure that there’s enough there in my policy that nobody comes after my personal assets. Profession is a big one. I work with a lot of corporate executives and I’ll tell them, look, if you’ve got into an accident and somebody looked you up and saw that you were president of a major division of this company, they’re going to anticipate that you have significant wealth and that puts you at risk.
John: It does.
Stacy: We know doctors and attorneys are high risk and so forth. Teenage children statistically more likely to get into accidents and people don’t tend to react to that well. So they’re just a lot of factors to help determine an appropriate level of coverage.
John: I think that’s really smart. And to be clear, the umbrella policy is just going to cover the extras that your other policies do not catch to make sure that you’re not coming out of pocket because again, that can really derail an otherwise good plan. And once you have a financial plan that works, your financial planner’s looking at your situation, maps out the entire plan, “Hey, you guys are on track, this looks fantastic.” You’re able to do all the things that are important to you. Now you start looking at and saying, what are the conceivable scenarios that possibly could derail this?
Stacy: Absolutely. And those types of events are one of them. I have a personal story. I’ve shared once or twice a family member, it wasn’t my direct grandparents, they were picking up my cousin from the airport ran into the back of another car, someone was loading their luggage in, happened to be a surgeon in his forties with a lot of kids, and they had built up rental properties and had all these different things, but it wasn’t totally dialed in on the registration of those properties and the coverages, and they didn’t have enough umbrella and they had built up from nothing, growing up with nothing, over 80 years, this net worth that was pretty sizable. And they essentially were left with a little bit of their home equity and a little bit of their accounts. Everything else was gone to creditors because it still didn’t really cover the lost wages for the next 25 years of this surgeon. So it really does happen.
Stacy: That’s heart breaking.
Stacy: I don’t say that to scare people, but it can happen.
Stacy: Right? Absolutely. And that’s heartbreaking. We don’t want to see anybody end up in that situation.
John: It’s tragic for the surgeon and his family too, and he should be compensated in that scenario, but you’d rather have an insurance company paying that out to them than it coming out of all of your personal assets.
Stacy: That’s exactly right.
John: All right, let’s end with disability insurance. We’re way more likely to actually need disability insurance than even life insurance. We know that from all the data.
Stacy: That true. That’s true.
John: But way more people have life insurance than disability.
Stacy: That’s true.
John: So let’s talk about do we need it? When do we need it? How much do we need?
Stacy: The short answer is, yes. The tricky part of disability is that it is more expensive in terms of the cost to get that kind of coverage as compared to life insurance, especially term insurance, which is not that expensive. Most employers will provide some level of disability coverage. What we typically see is about 60% of salary. For a lot of us isn’t really enough. And so absolutely take advantage of whatever your company offers and max out. If they do offer up to 70 or 80%, I would take advantage of that. And then for a lot of clients, I will suggest that they have an additional layer of disability coverage through an independent provider.
John: If you’re a small business owner or you’re a physician that runs their own practice and contracted with hospitals, you’re really going to want to cover that because people will get life insurance to protect loved ones. You’re looking out for everyone else and they say, “Well, I don’t want my family without my income.” Well, the same exact thing can happen when you don’t pass away but become disabled, and now they still don’t have your income. And what I’ve found is in many cases, the costs are even higher because you have all of these medical expenses and you have all these other extenuating circumstances as to why you’re disabled, but it hurts your family the same exact way-
Stacy: In addition to loss of income.
John: … because they don’t have your income regardless, right?
Stacy: Yeah, no, exactly.
John: And so disability is one that I think people, it’s, “I don’t want to make those premiums. It seems kind of pricey.” And again, you don’t need to over-insure, but making sure that you have enough.
Stacy: People don’t realize how much more likely that is to happen than you pass away.
John: I’d have to look up the data, but I think the stats I saw last were that you’re about three times more likely to need disability than life insurance. Well, this has been a great conversation, Stacy, on insurance, a topic that we so often overlook, but it’s such a vital part to our financial success. Thank you for sharing your wisdom and experience on Rethink Your Money.
Stacy: Well, thanks, John. Happy to be here.
John: Diversification, one of the most famous words in all of investing. Don’t put all your eggs in one basket is what we’re told. Well, others have said, if you diversify, the only thing you’re guaranteeing is mediocre returns at best. Is that correct? Let’s rethink this together. Diversification means not just owning a lot of stuff but intentionally allocating to various investments that have dissimilar price, movement and risks to one another. And so in being a wealth management firm that is managing or advising on a combined $300 billion along with our affiliates, we advocate diversification. And that means we never have to tell our clients that we’re sorry because it will protect them against concentrated bets and potential catastrophic losses. At least that’s the goal. But it also means we are always going to have to say we’re sorry because we’ll never advise that a client puts 75% of their portfolio in Nvidia stock.
See, being truly diversified means that there almost always will be a part of your portfolio that’s sucking wind. And this is really important to remind yourself, if every piece of your portfolio is working really well, it means one of two things. Either one, you’re incredibly lucky or you’re not actually diversified, and I’d assume it’s the latter in most cases. The alternative to diversification is to make these concentrated bets, but as the famous study out of Arizona State University concluded, only about 4%, not 40, 4% of all traded securities account for 100% of the market’s growth over the past century. So if you concentrate making these bets trying to find the needle in the haystack, one of those four percenters, and you happen to miss, you pick one of the other 96%, which statistically is far more likely, you’ll make nothing or lose money over a long period of time where the market’s clipping along at that eight to 12% that it’s averaged annually over the last a hundred years.
Apple, Amazon, Microsoft, Nvidia, they’re all examples of why this is so difficult. Of course, with the benefit of hindsight, those would’ve been great concentrated bets to make, but Apple’s had three drawdowns of over 50% along the way. Nvidia dropped over 80% at one point. Amazon’s had similar declines. Microsoft, one of the most consistent and phenomenal stocks you could have ever owned, it took around 15 years to get back to new highs after it plummeted during the .com bubble. But the key reason why I think it’s incredibly prudent to diversify is simply that the odds are on your side. You achieve that without ever needing to be right. And I’m putting up air quotes for the word right. You don’t need to find the right stock, the right time to buy it and sell it, the right money manager who can supposedly do that on your behalf, the right newsletter, the right research, the right gut instinct, none of that is required if you broadly diversify. Rebalance, repeat, and remain patient.
I mean, you’re the house in the casino when you diversify. That’s why there’s no windows or clocks in there and they’re bringing you free cocktails. They don’t want you to leave. If you happen to have a big win, they offer you a sweet the next weekend to come back, and a complimentary buffet. The crab legs are amazing. We’ll even give you the warm butter to dip them in. Why are they doing that? Because they know the longer you play, the more certain it is that they will win. How nice would it be for you to be the casino tycoon? That’s what you are as a diversified investor.
If I asked you to pick which five restaurants in your town you felt confident would be around and thriving 40 years from now, you probably wouldn’t answer that with a lot of confidence or conviction. You probably wouldn’t bet your entire life savings on those five restaurants. By contrast, if I just said you can own all the restaurants and not only your town, but all across the country and in 50 other countries around the world, and not only that, you can own all the grocery stores, farms, ranches, dairies, every single component of humans consuming food, do you think in some capacity, some of that while it will evolve, will still be around 40 years from now? There’ll be some winners and losers, but humans will still be eating. You’d probably have a lot more confidence. That’s why diversification is so important. In the game of investing, it’s not about short bursts of phenomenal returns. It’s creating a strategy for the most consistent, durable returns that compound over the longest period of time without ever blowing up because if even once during your lifetime, it all blows up on a concentrated bet, you may never recover.
If you have questions about your investment allocation, you’re unsure if your mix of stocks are properly diversified, if you have too much bonds or not enough bonds or too much in cash, or maybe you should have exposure to private investments that you don’t have right now, or maybe you’re worried you have too much allocated to low growth insurance products like annuities, whatever is on your mind, I encourage you, speak with a certified financial planner who’s not looking to sell you something but who can provide clarity and a written documented financial plan specific to your objectives. Here at Creative Planning, we have nearly 500 certified financial planners just like myself to speak with a local fiduciary. Do what thousands of other radio listeners have already done, visit creativeplanning.com/radio. Why not give your wealth a second look?
Well, all we heard about for the last couple of years was that a recession was on the horizon. There’s an inverted yield curve. Look at these high interest rates that now seem to be persisting, that expression, higher for longer. The feds not going to be able to engineer a soft landing. I mean, that’s a pipe dream. Batten down the hatches, put everything in money markets and cash. The storm is coming. I don’t think it was crazy to think that way. I think it was crazy as it always is to adjust your investments based upon a forecast or what an economist says. But both the Treasury Secretary, Janet Yellen and Fed Chairman, Jerome Powell, unfortunately were wrong about inflation. They first called rising prices transitory after Covid disrupted the entire world supply chain, and then he had Nobel winner Paul Krugman publicly admit his mistakes. Those three weren’t alone. Smart people were wrong. And here’s the key, they’re wrong a lot.
So be very careful of two behavioral biases, recency bias, which causes us to look backward and assume that what happened yesterday is going to happen again tomorrow. So when have we recently seen these factors culminate in a way that resulted in this now seemingly inevitable outcome, because that can lead you as an investor to do the opposite of what would be best. And the other bias is data mining. We have access now to so much information. The challenge isn’t finding the information. It’s figuring out within that information what’s true and what’s relevant for your situation. In many ways it’s more confusing today because you can find almost any data at some time period in history to support your thesis. And many times the scary thesis, the one where the world ends or your investments go to zero, those are the ones leveraged by fantastic marketing firms and sales organizations to get you to buy high commissionable products that in the moment make you feel really good.
So as I say often, ignore the noise. Don’t just kind of listen to it. Maybe act on it. Completely ignore the noise when it comes to predictions and forecasts, even when coming from the Fed chairman or the Treasury Secretary and certainly when it comes to the local financial advisor looking to sell you a product. It’s time to rethink that recessions always follow high interest rates.
I want to transition over to elections and why hating the government is not an investment strategy. Simply put, it doesn’t matter who is in power because regardless, the market goes up on average. No matter how much you think the person is an idiot, the market goes up. No matter how much you hate their policies, no matter how much you dislike their disposition or their attitude or the way that they look or talk, I know, if your candidate doesn’t win, you think the country is crumbling, but the market forges on to make new highs.
How many times have you been unhappy with the party in control of the government? Probably about half the time because we’re almost split down the middle between Democrat and Republican presidents. And when you are, do you consider changing your investment strategy? I know a lot of folks did when Trump won in 2016. Democrats are like, “Man, I am going to cash.” That was a bad move because the market continued up higher in record fashion month after month following Trump’s victory. And the same thing is true of Republicans when Obama was elected or President Biden in 2020. But remember, the market isn’t red or blue, the market’s green. All it cares about are the future earnings of businesses. The average market growth during a Republican president’s 48 months in office, 49%. When it’s a Democratic president, 46%. When there’s a Republican sweep in Congress as well, the market’s averaged 48% during those four years. When it’s a democratic sweep, 41%. And when you look at all elections, the average market growth over four years is 47%.
Don’t let your political worries, which may be just and valid for your life, derail your long-term investment strategy because you’re still going to go to Chipotle, we’re going to buy things on Amazon, you’re going to buy new shoes, you’re still going to renovate your bathroom regardless of whether the party is in office that you like, and that’s what drives the stock market. So rethink this common wisdom that if your candidate doesn’t win, it’ll be bad for the stock market because it’s simply not true.
It’s time for this week’s one simple task where in 2024, I’m providing you with 52 simple to execute steps for improving your financial life. Today’s is an idea that I referenced earlier in the show during my interview with Stacy Lewis and that is to video a walkthrough of your house. Home inventory videos are a great way to keep track of all of your possessions in case of an insurance emergency. When you trigger a homeowner’s claim due to a loss in the home, whether it be flood, theft, fire, whatever it is, this helps both you account for what actually was in there because most of us don’t remember what’s in every single room and in every single drawer, and for it to be documented so that when you make those claims to the insurance company, you have video evidence and proof that those things actually were taken from your home. This takes no more than 15 minutes once per year and can save you a lot of money and hassle in the event of a homeowner’s claim.
I want to summarize where we’re at right now with real estate because by far the most questions that I receive in conversations with clients, emailed to the radio show, in discussions with friends and family, out in the real world on the weekend, hanging out at kids’ baseball games are real estate related, which makes sense because we all need shelter. It’s widely documented that sales of existing homes plunged last year in 2023 amid soaring mortgage rates and elevated home prices that just simply didn’t drop as much as most projected they would in the midst of those rapidly increasing mortgage rates. While prices didn’t compress, existing home sales did in fact drop though by 19%. Interestingly though, sales of new houses increased by nearly 4% in 2023. So those who were buying seemed to be more interested in a new home where potentially the builder was offering to buy down some points or credits at closing to offset these high mortgage rates.
The challenge for home buyers in 2023 is that we reached this two decade high of 8% mortgage rates on the heels of the CoreLogic national Home Price Index increasing nearly 50% from January of 2020, as far surpassing the 18% increase in household incomes during that time span. So yes, incomes increased. And in many quintiles of the income scale, even outpaced inflation, but certainly didn’t outpace the massive spike in real estate prices.
And this environment has been particularly challenging for first time home buyers who didn’t benefit from the increase in their home’s equity because they didn’t own a home yet. Now they’re looking at their debt to income ratios and what they qualify for with rates still near 7% and it’s really challenging in many cities across the country.
But we’re entering the spring and we know that real estate tends to be very seasonal and sellers are seemingly coming out of the sidelines and getting ready to list their properties on the market. According to Redfin, even as buyers remain wary of the elevated mortgage rates and high prices, new listings jumped to their highest level since September, increasing by almost 4% last month, and for the year they were up close to 15%.
So it’s nice to see the housing supply is finally starting to recover in a meaningful way, which is great news for buyers who for months have been competing for a tiny pool of homes for sale, and I think that’ll rapidly increase if mortgage rates are able to come down even a little more like sub 6%, sub 5%, I think we’ll see even more people get off the sidelines and buying homes that are at a more affordable monthly payment due to those lower interest charges. If you have questions about real estate, how much should you put down, how much home should you buy, how does that fit into your broad financial plan, we have nearly 500 certified financial planners here at Creative Planning just like myself, who will answer those questions in a consultative way as a fiduciary, not looking to sell you anything but rather provide clarity around your overall situation.
So maybe it’s real estate, maybe it’s your investments, retirement planning, taxes, estate planning, whatever’s on your mind, there’s a reason Barron’s has called us a family office for all, along with our private wealth managers, over 200 CPAs, 50 attorneys all working together. Visit creativeplanning.com/radio now to schedule your complimentary visit.
It is time for listener questions, and as always, Lauren, one of my producers is here to read those. Hey, Lauren, how’s it going? Who do we have up first?
Lauren Newman: Hi John. First we’ve got Darren who wrote in and said, “Hi, John and crew. I’m Darren. Just a quick question, what would you advise someone do if they received $10,000?”
John: Thanks for the question Darren. It all comes down to what do you need the money for and when do you need it? But without knowing any of those details regarding your situation, here’s the checklist that I would work through. First, do you have an emergency fund right now that’s built up three to six months depending upon your situation? If not, you keep the $10,000 in cash. It’s the least sexy advice, but you need your emergency fund. So that’s what I would do with the $10,000.
If your emergency fund is in place, then the next item on the flow chart is do you have any high interest debt? If you do, I’d use the $10,000 to pay off that debt because you’re effectively earning that rate of return by saving yourself right now, 20 or 25% interest on a credit card. If your emergency fund is built up and you have no high interest debt, then you want to evaluate do you have any shorter term purchases or needs coming up? If you do, I would keep the money in shorter term bonds or in a money market to pay for those upcoming expenses.
If none of those things are true, I’d adjust my payroll to make sure $10,000 from my paycheck went into the Roth side of your company 401k. If you don’t have a company plan, maybe your Roth IRA if you’re under those income limits, and if you’re a high income earner, say over $370,000, married or over 180, $190,000, single, then you’re in a high enough bracket that I would put the $10,000 toward the deferred side of your retirement plan and then just use the extra $10,000 that you received for your living expenses since your paychecks will be smaller as a result of more money being directed to your retirement plan from your paycheck.
Thanks to that question, Darren. Who do we have up next?
Lauren: Marge from Goodyear, Arizona asked, “I lost my spouse last year and was taken aback by the changes this created on my taxes. Can you explain to me why I’m having to pay more in taxes?”
John: I’m so sorry for your loss, Marge. I’m sure you’re experiencing a lot of emotions while trying to manage the various moving parts that are associated with losing a spouse, but there is something that you’ll hear referred to as the survivor trap and it arises in the year or two following a spouse passing away. It’s a result of the fact that you go from married filing jointly to a single filer, and when that happens, all of your income within each bracket compresses in half. But generally speaking, you as the surviving spouse don’t have all of your income cut in half. You probably inherited most or all of your deceased spouse’s accounts. You kept the larger of your two social security benefits and had the smaller one drop off. So that’s generally a little income that decreases, but otherwise everything is the same with half space in all of your tax brackets.
So paying more in taxes may be somewhat unavoidable, but there are a few strategies that may apply for your situation to minimize the tax impact. One would be filing as a qualified widow for the two years post-death, which may be more beneficial than filing as a single individual, but you need to consult with your CPA because whether that’s available to you depends upon other factors that are outside the scope of my answer here without me knowing the details of your situation. You want to look at your income and your investments. For example, you may have previously bought corporate taxable bonds because you were married filing jointly and in a lower tax bracket. But now it might make sense to buy municipal bonds that are tax-free because the taxable equivalent yield is now more attractive because you’re in a higher bracket. You might use direct indexing accounts where you unwrap the index funds and own each individual stock.
So you still have essentially an index fund portfolio but without the wrappers so that you can have individual tax slots and better harvest losses to offset gains for more tax efficiency. You may want to look at your charitable giving. Charitable donations have dual benefits for surviving spouses because by contributing to qualified charities, you’re not only supporting causes you care about, but you’re also potentially reducing your taxable income. And this may be a great opportunity to honor your spouse by giving to something that they were passionate about. You may even want to bunch those deductions if you have a higher than typical income year by using donor advised funds and qualified charitable distributions from retirement accounts, depending again upon your age and your overall situation. Consider using HSAs for that triple tax benefit. Those health savings accounts may not have been as impactful when you were in a lower bracket, but now that deduction may warrant you giving it a second look.
And then overall estate planning and trusts. This is crucial for all individuals, but particularly significant for you as a surviving spouse, ultimately getting an entire financial plan put together in writing, documented, taking into account your entire new situation, looking at your estate plan, looking at your tax situation, all of your investments. Now, I know you’re probably spending a lot of plates and that sounds like a lot to take care of, but what I’m not saying is make big investment decisions and changes like buying locked up insurance products and annuities. I don’t advise you make any huge directional changes. I wouldn’t do that, but I would go see a certified financial planner and get a detailed financial plan put together with all the recommendations that now are appropriate for your situation as a single tax filer.
And if you’d like help with that, Marge, we have three offices here in the Phoenix area and myself or a member of my team would be happy to sit down and help you get organized and answer your most important questions. You can request that of course by visiting creativeplanning.com/radio.
If you’d like to submit a question, send those to radio@creativeplanning.com just as these listeners did.
I just got back from an amazing trip in Rocky Point, Mexico, with my father, my father-in-law and my 12, 9 and 7-year-old children. We settled in at a base camp with an organization that has built over a thousand homes for those in need. I met some incredible people. The home was for a single mother and her one-year-old son, and I just had so many takeaways along the way from this experience that I hope resonate with you as well. And the first is that these sorts of trips, I think we go into them with the thought that we’re going to help them. And certainly having a safe shelter is important. In fact, in that Rocky Point area, children are two times more likely to graduate high school if they have a concrete floor instead of a dirt floor. We’re not even talking about a roof or what we would consider a proper house. Just a concrete floor doubles their likelihood of graduating high school. It was such a neat experience.
This single mother was there stuck going right alongside me for the four days that we were down there. She was laughing at my mediocre Spanish. I was trying to make jokes and communicate with her. I think half the stuff I was saying was probably the wrong word, and she was joking with me that her English is muy malo, very bad. And we joked that everything seems the rapido, way too fast in the other language when people are speaking. But I was blessed by seeing how hard she has worked to go through this organization’s community development process toward earning this beautiful home for her son and her. What a sense of accomplishment and pride and joy as she was there at the job site with us working, eating, lunch with us and interacting.
But it wasn’t us helping her. It was us coming alongside her. She helped my children through that relationship, through that experience. The benefits were very much mutual. I also had that reminder of how vital our perspective is toward our happiness. And I’m sure you know this, but your circumstance is far less relevant to your contentment than your perspective is. It’s really easy to get caught up in American expectations and lose sight of how most of the world actually is living right now as you listen to this. I don’t say that as if it’s bad for us to aspire for nice things or feel guilty that we live in America, that we have these luxuries. I mean, I enjoy wearing a nice robe, walking around the hotel spa every couple of years and sitting in the steam room and getting a massage. It’s one of my favorite things in the whole world to do, especially with seven kids. It’s like, ah, peace and quiet. I’m listening to the little spa music playing and the fountain and the eucalyptus smell. There’s nothing wrong with that.
But I do think it’s important, at least for me, to have these times of a reset where you get out of your normal cadence of life and shock your system. It helps me reassess the measuring stick I’m using regarding priorities and my mindset. And consider this, if you have a net worth of a million dollars, you’re sitting in the top 1% of the world, top 1%. But in the US you need around $6 million to be in the top 1%. If you planning to move to Monaco, you like the F1 race there at Monte Carlo, you’ll need $12.8 million to be in their top 1%. 30% of their 38,000 residents are millionaires. So you go there and if you’re not driving a Lambo around, it’s like, “Oh yeah, I’m not doing very well.”
It’s perspective. And in many cases it’s not about how much you make. It’s how much do you make relative to your neighbor and those whom you spend a lot of time with? In fact, there’s some interesting studies that show people are happier making 60 grand if their neighbors are making 40 than making a hundred grand if all their neighbors are making 200,000. That’s how powerful our perspective can be. From an income standpoint, the median worldwide income is $13,000 a year according to Gallup. So what that means is if you make over $13,000, which I’m sure you do, you’re in the top half of the entire world at 14 grand.
And my last takeaway is if you want peace of mind with your money and really extending more broadly into your life, do things for others. As humans, I believe wholeheartedly, we are hardwired to seek purpose, and the only way you’ll find that is through a focus on others. When I feel down and I’m in a funk, it’s usually because everything is about me. So I encourage you, give to those in need. Create a strategy within your financial plan for generosity. It may be a simple pay-it-forward to the person behind you in the drive-through. It doesn’t need to be an international trip. In fact, almost always it won’t be. Those are almost easier because you get out of your normal world for a few days and you’re immersed.
But how about the small acts of kindness, the daily ways that we can improve the lives of those around us? Keep your head up and your eyes deliberate on seeking those who you can come alongside in their journey because the ripple effect of your impact, it’ll spread far beyond what you could ever possibly see. 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 Hagensen works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning or this station. This commentary is provided for general information purposes only. Should not be construed as investment, tax or legal advice and does not constitute an attorney-client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.
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