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Break Free From Financial Stagnation

Published on July 3, 2023

John Hagensen

Ready to stop procrastinating and start living the life you’ve always dreamed of? Don’t let another year slip by with stale financial goals and missed opportunities. Tune in to this week’s episode as John unveils powerful secrets for recognizing and overcoming the various forms of procrastination that hold us back. (00:50) With the biggest wealth transfer in history on the horizon, there’s no time to waste. (8:37)

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 lif

John Hagensen:  Welcome to the Rethink Your Money podcast, presented by Creative Planning. I’m John Hagensen and ahead on today’s show, the Science of Procrastination and how it impacts your financial wellbeing, the largest wealth transfer in history is on the horizon. What you need to know, as well as why stocks might not be as risky as many believe now, join me as I help you rethink your money.

Today, I’m diving headfirst into a topic that affects all of us, and I’m not trying to be call out guy, or come down too hard, but it’s worth addressing because it may be the biggest contributor to a suboptimal financial situation. Yeah, you may have guessed it. I’m talking about procrastination. That’s sneaky little habit that we’re all susceptible to that creeps into our lives and wreaks havoc on our financial wellbeing. David Star Jordan said, “Wisdom is knowing what to do next. Skill is knowing how to do it. Virtue is doing it.”

Now, two procrastination events in my life just from this past week, and I guess unfortunately they reflect my lack of virtue according to Jordan, I updated some insurance documents for my wife, Brittany, and my situation. I have a client binder here with creative planning just like all of our clients do, and instead of putting them in the insurance section of our binder, I set them in the tote bag on top of the binder and said to myself, “I’ll put it in the right section of the binder later.” Why? It would have taken me an extra 60 seconds to not have to go back and do it again. The other one, and please tell me you do this too, so that I don’t feel completely miserable about myself. I read an email and instead of knocking out what I needed to do to take care of it, which would’ve taken about 10 to 15 minutes, I remarked it as unread and I’ve had that one unread email sitting in the bottom of my inbox now for over a month.

It’s ridiculous. Why? I look at it every time I hop on my iPhone. There it is, still unread. By the way, I finally did it yesterday because I was preparing for the show. I knew I’d be talking about procrastination and I didn’t want to feel like a stinking hypocrite, so I knocked it out. Thank you for that accountability. You helped me with my procrastination in an indirect way, and that’s not the angle that I’m taking today, but it does work. Accountability can help us overcome procrastination, that’s for sure. Let’s face it, you know you’ve had an important task and you’ve thought to yourself, “I’ll do it later.” Let’s start with the basics.

Procrastination by definition is the art of unnecessarily and voluntarily delaying or postponing something, even though we know deep down that there will be negative consequences for doing so. It’s essentially a never ending loop of doom as the Ringers’ Derek Thompson dubbed it, where the more that you put off a task, the more you’ll feel anxious and guilty, which in turn will make you even less likely to be productive. The cycle just continues with additional velocity the longer it goes on.

One reason that we fall into this trap is something called cognitive dissonance. It’s that uncomfortable feeling when intuitively you know that your behavior isn’t aligning with your values or your beliefs. It causes stress. You know you should be taking action, but somehow you find yourself in conflict which perpetuates that procrastination tendency. Now, let me share with you three real world cautionary tales of procrastination that I’ve seen as a wealth manager firsthand and how it negatively impacted people’s lives. I don’t want this for you. First off, had a client, brilliant doctor, and within his plan there was a gap in not having disability insurance. It was a risk. We had discussed it. We had gotten initial quotes and needed him to do some medical tests and assessments. Kept putting it off. Why? Because he’s a doctor, he was too busy. I get it. He was thinking, “Why bother? I’m young and I’m healthy.” He’s not alone in that thinking.

According to LIMRA, 44% of people have individual life insurance policies compared with only 29% who have disability coverage. Here’s the kicker. Someone in their 20s has a one in four chance of needing disability insurance before retirement while someone in their twenties only has a one in nine chance of dying before age 65. You are more than twice as likely to rely on disability insurance, yet you’re nearly two times as likely to have life insurance. Of course, because I’m telling this story, fate dealt a cruel hand. This doctor who was a surgeon was unable to work. Ironically, he was an ophthalmologist who suffered from a degenerative eye condition, was unable to perform surgery, and the absence of disability insurance completely upended their financial situation. Everything else was great with their plan, just crushing it, making a ton of money, saving a lot of money in a good position. That procrastination on getting disability insurance turned out to be a huge mistake.

The most common area of personal finance where I see procrastination play a role is regarding estate planning. I don’t know if people think that if they get their estate planning documents done, that their death is now imminent, but that’s not how it works. You’re not more likely to die once you get your estate planning documents done. I had one couple in particular that put it off, put it off, and their documents were 25 years old when their kids were still minors. Now they were in their 70s, hadn’t updated it, and when they passed away it was a mess for their family. All public information, extra taxes, tons of money to attorneys, everything going through probate, all because of procrastination.

The last example is regarding the perils of failing to refinance. I had a client who had $200,000 on a home equity line of credit, which is floating rate. I suggested that they refinance their primary mortgage, consolidate that home equity line of credit onto a new fixed 30 year at three and a quarter percent. Of course, that’s not today. This was a while back. They didn’t do it and now as they sit, their HELOC is charging them 11% interest. They didn’t even disagree with me. They thought it was a great idea. When I would follow up with them, “Oh, we haven’t got around to that yet with our bank.” Didn’t get it done. Rates shot up like a rocket ship before they were able to lock and get it done.

While there are many strategies that can help you with procrastination, I’m simply going to give you one, just one simple, totally doable approach and that is to miniaturize your tasks.

You see, we get overwhelmed when thinking about everything that needs to get done, but if you break the actions down into smaller, manageable steps that don’t feel overwhelming, you’ll have a much higher likelihood of overcoming procrastination. Start with one thing, complete it, and then move on to the next. Before you know it, you’ll be making all sorts of progress, the compound of many small miniaturized decisions. With regards to your personal finances, let’s miniaturize the task. Contact a fiduciary who is a great financial advisor. That’s all you have to do. You don’t have to figure out your estate plan, you don’t need to figure out your asset allocation, you don’t need to figure out your tax strategies, figure out and contact a great wealth management team.

Of course, if you’re not sure where to turn, we are helping over 50,000 clients in all 50 states and over 75 countries around the world. We’ve been helping families here at Creative Planning for 40 years managing or advising on a combined $210 billion. Don’t procrastinate any longer. If it’s not us, contact a firm like us, but let’s get this done. If you think we may be a good fit here at creative planning, do what thousands all over the country just like you have already done. Visit creativeplanning.com/radio to meet with a local advisor. Why not give your wealth a second?

I saw this from thestreet.com and found it interesting, wanted to share it with you. Did you know that between now and 2045, so call it the next 20 years, an estimated 84 trillion in assets will be handed down to millennials and Gen Xers? Boomers entered the workforce during the strongest economic boom the world has ever seen. According to the Federal Reserve, when looking at assets by generation, the silent generation, people 78 years old and up hold about $18 trillion of assets. Baby boomers, 58 year olds to around 77 are at $78 trillion. About half of the pie. Gen Xers, those that are 42 through 57 years old at $48 trillion and millennials, 25 year olds through 41 year olds only are at about $14 trillion currently, again, while boomers are over $78 trillion. If you are a baby boomer, consider yourself pretty fortunate to have hit the jackpot, just in terms of timing with when you were born.

There was a massive leap in prosperity after the depression and World War II. Basically boomers got into the housing market at the time where the government created 30 year fixed mortgages. It became a really profitable investment. The average price of a house has risen by 500% nationally since the early to mid 1980s, and if you think that was good, the S&P 500 is up by almost 3000% since the beginning of the 80s. As you might expect, there is a large sum of concentrated wealth around the very wealthiest boomers. High net worth, which is about $5 million of net worth and ultra high net worth, over $20 million currently make up 1.5% of all boomer households. Here’s the wild part of this. They make up 42% of the volume of expected transfers over the next 20 years, $36 trillion of money being transferred through only 1.5% of boomer households.

What are some key implications? I think it puts an emphasis on three takeaways. Number one, if you’re a boomer, educate your younger generation have open communication and dialogue. How do they desire to invest? Do they have a written documented financial plan? Are they living below their means? It’s not helpful to transfer a pile of money on someone who has established terrible habits and doesn’t know the basics of budgeting, investing and overall principles when it comes to personal finance. Secondly, look at your tax planning. Taxes right now are historically low in the present Trump tax reform environment. They sunset at the end of 2025, so we know they’re going up. We also have $32 trillion of national debt and that’s increasing by the second.

Do you want your children inheriting, for example, your retirement accounts when they’re in their peak earning years in likely a much higher overall tax environment than we’re seeing today? Also, if you happen to be one of those high net worth families or ultra high net worth families, yes, at present you’ll receive a step up in cost basis at your date of death, which outside of estate taxes makes most of what will be inherited income tax free. President Biden’s already proposed adding a 25% annual wealth tax to households with a net worth totaling a hundred million or more probably doesn’t apply to a whole lot of you listening, but it does for a few. But it’s also important to note that opponents believe the Supreme Court would consider taxing an individual’s net worth rather than their income unconstitutional. Who knows if that’ll even have teeth, but you do want to do some tax planning around this.

Then, of course, estate planning. Do you have a good estate plan? Maybe it’s a basic revocable living trust, just a grant or trust. Maybe you should be looking at things like SLATs, spousal lifetime access trust. It’s a type of an irrevocable trust where one spouse makes gifts to the other, strategic gifting, what’s going to charity? What’s going to family members? How much can I be giving to family members strategically while we’re alive and obviously a whole host of other estate planning strategies that could be used as well.

In summary, if you are a baby boomer nearing retirement or you’re in retirement, I encourage you to look at your plans strategically and comprehensively. Taxes, estate planning, the investment piece, and really understand the ins and outs so that your heirs and causes that you care about can enjoy as much of your hard-earned dollars as possible. You’ve worked really hard. Let’s make sure that we’re disinheriting the IRS as best we can. Oh, and one final tip, don’t get too conservative. If there is a portion of your portfolio that is likely not going to be spent during your lifetime, doesn’t matter if you’re 70, keep it growing for the benefit of those who will ultimately be receiving it.

If you’d like to have your financial plan reviewed or maybe you don’t have a written documented financial plan, I know it’s 4th of July weekend, you’re with family, you’re eating hot dogs, you’re watching baseball, you’re at the lake, you’re having fun, you don’t want to think about your finances, but just as we spoke of earlier, don’t procrastinate. Take the simple miniaturized first step, contact creativeplanning.com/radio now to speak with one of our local financial advisors just like myself. Again, that’s creative planning.com/radio.

I’m joined today by creative planning Chief Valuations Officer Gary Pittsford. Gary Pittsford, let’s talk business owners and valuations here on Rethink Your Money.

Gary Pittsford: Good morning.

John: In particular today, I thought it’d be helpful for you to speak into how a business owner maybe who’s listening can begin to increase the value of their business leading up to a potential sale.

Gary: We look at thousands of tax returns and P&L statements and balance sheets every year through our valuation division doing valuations for 400 or 500 companies every year. You’ll be amazed that a balance sheet from a closely held business where whatever the gentleman does or the lady, whatever they do, they may have 10 or 20 or 30 employees, but they never pay a lot of attention to that balance sheet. The accountant spits that out every quarter or once a year.

On that balance sheet, make sure the last three to four years before you sell your company, make sure the balance sheet is accurate as possible. If your inventory is not correct, which most of them are not, and there’s all kinds of reasons for that, but write down what the real inventory number is and also keep track of all the depreciation. You may write off a truck because you can write off a half a million or more in write-offs, but if you wrote off a truck, be sure that when you sell the company, the buyer knows that he’s getting that truck. It needs to show up on your depreciation schedule. Inventory, accounts receivable, what’s 30 days, 60 days, 90 days, 120 days. Make sure that your balance sheet is up to date.

John: Basically. Don’t hire Sam Bankman-Fried to do it on Excel like they did at FTX.

Gary: That’s right, that’s right. Do not do that.

John: We got it. What else? The balance sheet’s a critical one. What would you say is also important to enhancing your company’s value leading up to a sale?

Gary: The most important item in any business is cashflow. Okay? I don’t care if it’s Apple computers or if it’s John Deere or if it’s Exxon, I don’t care what it is. It’s cashflow. That’s all they care about on Wall Street and that’s all the buyer cares about is cashflow. You may have a million or 1,000,005 of assets, but what’s your cashflow? EBITDA is what accountants call it. It’s all the earnings before taxes and depreciation, so it’s usable cashflow. That’s very important. What you need to do in three to four or five years before selling is to get your gross margin up as much as possible. If you can increase your usable cash flow by a hundred thousand dollars the next three years, you’re probably going to increase the value of your company by 300,000 to 400,000. Create another a hundred thousand of cashflow, usable cashflow profit. Take that times at least three or four, maybe five or six depending upon what industry you’re in, but that’s going to increase the value of your business by three to 400,000.

John: The counter to this, if you’re listening and you’re someone who’s purchasing businesses, double check to see if they laid off half of the workforce two years before because that’s where you’ll see things like that to try to juice the profitability in the short term, but you do want to make sure it’s sustainable and it’s not going to be once you purchase the business, then all of a sudden you need to hire 20 more people that really should have been there to begin with because you certainly see that as well. Right?

Gary: Exactly. The other thing that people forget about is what we call add backs. An add back is whatever the company paid for and deducted for the owner’s benefit, for the owner’s spouse, for the owner’s kids, the owner’s grandkids, cell phones, car repair, travel entertainment, dining out, life insurance premiums, health insurance premiums, 401K matching, whatever the company paid for the owner’s benefit, I want that list, write it on a piece of paper for the last three years so that if your company made $100,000 of profit and the company wrote off for your benefit, $50,000, then it’s really 150 is the number I’m looking for.

John: I’m speaking with creative planning chief valuation officer, Gary Pittsford, and that’s where, whether it’s your team or a team like yours, there’s a lot of value in having someone helping you and guiding you and consulting you that has done this hundreds or thousands of times. You better believe if you are dealing with a sophisticated buyer, they are looking for these things and they know where they are. You want to have good representation on your side for a transaction like this to make sure that those things are being considered and you’re not undercutting what you potentially could get for your value.

Another key point to that would be the value of your employees. Most growing businesses that are out there looking to purchase businesses are doing so in part depending upon the industry because they need talent, they’re looking to hire, and in some cases the acquisition in addition to the cashflow is allowing them to gain experienced, fantastic people within their industry that they’d otherwise be trying to headhunt from that company, maybe not successfully. Can you speak a little bit, Gary, to how a potential seller can really showcase the talent that they have and utilize that to their benefit in terms of increasing value at the point of sale?

Gary: We work with several hundred people a year and I encourage them, I just got one this morning, I asked the owner’s wife who handles the inside office stuff, dictate for me, I want a little paragraph about each key employee has been with you 5 years, 10 years, 15 years. I want to know what they’re good at, who’s good with the customers, who’s good with the employees, who’s good at ordering inventory, who’s good with the software, and have they had any training? A lot of industries have special training schools you can send your employees to. A lot of cities and states have these IV Tech or industrial schools of different kinds that you can send people to and get better training, and you put their plaque on the wall as to what schools they’ve been to and what they’re really good at.

Showcasing your employees and the ones that are really good, the owner needs to know that. If he buys a company and if he can pick up three or four really well-trained key employees, that’s going to make him happy, it’ll make him more interested in buying the company because he’s got good people there that can continue to run it. People are very important. So the balance sheet’s important, increasing cashflow is important, employees are important, all of that makes your company more valuable?

John: Yeah, absolutely. Well, I even look at creative planning, our company here and our number one growth medium is still through client referrals. We’ve acquired companies along the way over the last few years and a lot of that has been very strategic in terms of the people. We’ve added accounting firms that help specifically with business owners, and we’ve added other firms that may specialize in estate planning or do corporate tax or other things that we wanted to expand our offering to be really additive to the value proposition for our clients. If you have people that are specialized in certain areas, that can be of tremendous value to the acquiring company to have them now as a part of their team, and I think you’re absolutely right. Making sure that that’s communicated, “Hey, this person is ready to go and can hit the ground running. This is the exact person that you’ve been looking for four years on the to try to find we’ve already got them.”

Gary: The other thing that’s valuable to the seller is to have an excellent corporate attorney and an excellent accountant and an excellent financial person. Those three people are going to help that seller go through all the legal documents, get the company ready, go through all the tax returns and all the financials and make sure that what the seller is signing is best. The seller needs to know this, that they only get to do this one time and they’ve got to have the right attorneys, the right accountants, and the right financial people to help them through this process. As you’ve said before, at Creative Planning, we got great corporate attorneys, we have great tax accountants. Now, the client may already have attorneys and accountants, but if they don’t then Creative Planning has a whole army of specialists in all kinds of categories that can help every single client. There’s about 33 million business owners in the United States and all but about 25,000 are independent. If you look at the Wall Street Journal, there’s about 25,000 public companies, maybe 24,000. So the other 33 million are all privately held businesses that need help.

John: Not to talk our book too much, but you’re absolutely right. If a business owner’s listening and says, well, there’s a lot going on here. We at Creative Planning have helped thousands of people navigate this and have every piece of the equation integrating the financial planning, the estate planning, the tax planning, and that’s why Barron’s has called us a Family Office for all is that we really can help with every aspect of a transaction like that. And I would recommend, whether it’s us or a firm similar to us, incredibly valuable. You mentioned it, you’ve got one shot to get it right. No do-overs. It’s a lot like retirement. You go to retire, you’re pulling the plugs, so you want to make sure that the plan is built out right. In many cases, with this it’s even more impactful if it’s a business owner because the vast majority of their net worth in many situations is going to transition from their business into what they need to use to generate their lifestyle for the next 30 years. The stakes are extremely high.

Gary: Yeah. For most business owners that we work with year in and year out, at least 75% to 80% of their entire net worth is wrapped up in that one business. They own the business, they own their home, and they have some retirement funds, but 80% is that business. So we’ve got to get the best price, minimize the taxes so that they have enough cash left to generate income.

John: Yeah, that’s great advice. Any final cleanup that you have as we finish up?

Gary: Every business owner tries to make their tax returns look really bad every year. Now I’m going to sell my company. Okay, holy cow, I got to make it look really good now. When you do that flip, start working on it. I’ve written articles about instead of working in the company every day, spend a couple of hours every week working on the company, not in it. Don’t fill up your day with talking to customers and talking to employees. Go back in your office, lock the door and take a real hard look at that balance sheet and that P&L and figure out what’s wrong.

John: Gary Pittsford, chief valuation officer here at Creative Planning has been joining me. There is an article that’ll post to the radio page of our website at creativeplanning.com/radio where he talks about the five tips to enhance your company’s value leading up to a sale. If you’d like to read that, it will expand upon our conversation today. Of course, if you’d like to meet with us for a second opinion, you can visit creativeplanning.com/radio. Gary Pittsford, thank you so much for joining me here on Rethink Your Money.

Gary: John, it’s always good talking to you. Take care. Say hi to everybody.

John: As human beings, we sure can be irrational at times, can’t we? Of course not you or me in particular, but others we’ve seen be irrational. Our three-year-old Aria, just cutest little girl you’ve ever seen in your life and a personality to match. Well, she and I have this bedtime routine and part of this routine is once we finish brushing her teeth, she runs ahead of me into her bedroom. She goes and hides somewhere. Now, of course, there’s only two or three spots in her bedroom to hide. It’s behind the chair, under the bed in the closet, and she likes it when I come in and say, “Fee Fi Fo Fum, where’s the cutest little three-year-old in all the land?” It’s this little game we play and she squeals and she gives away where she is. Every time I find her, she kind of jumps because I startle her and she’s like, “Dad, that let’s not do that again. That’s too scary.” “Well, I’m your dad. I’m not scary. You know what’s going to happen. We do this every single night.”

Total irrational fear by Aria of our game, and of monsters, and the boogie man, and it’s the cutest thing. I know in no time she’s going to be a teenager, probably rolling her eyes at me rather than wanting to snuggle and read bedtime stories. I’m milking it. When we get older, we don’t grow out of being afraid of things that don’t exist. I was an airline pilot in my early twenties before making my way into finance, and I’d have people regularly board the airplane with their carry on, maybe they got their little Pomeranian in a handbag. They’re like, “Man, I’m really scared of flying. Take good care of me.” Of course we’re like, “Yeah, we will. You’re great.” But flying is one of the three greatest fears of Americans, public speaking, snakes, and air travel. Your odds of dying on a commercial airline flight are around 1 in 20 million. By contrast, you’re about 1 in 10,000 likely to die in a car.

The point in all of this is how we feel about things often doesn’t match the data. Our feelings lead us astray. The same principle is true when it comes to your money. The average American has made half the returns of the US stock market the last 30 years. Americans have made 5% a year instead of the 10% per year that the market’s actually delivered. Most of that lost return is a result of feelings. Selling low, buying high. I just saw last week there’s a lot more momentum, money pouring back into the stock market. I just chuckle. Of course there’s money pouring into the stock market because now we’re in a bull market and the market’s way up here in 2023.

Now the typical American gets back in after a huge run up. It’s completely predictable. Consider this, a diversified stock portfolio is way more like flying in a commercial airliner than going a hundred miles an hour on a motorcycle with no helmet. As people often perceive the stock market to be statistically over long periods of time, stocks could easily be labeled one of the safest, not riskiest, one of the safest investment options that you possibly could own. Let me put some numbers around just how predictable the stock market returns have been. Since 1932, so we’ll call it the last 90 years, there have been 977 rolling 10 year periods, the S&P 500, so just large US stocks have been positive. Of those 977 periods, 953 times. A portfolio, not just of US large stocks, but one that consists equal parts of large US stocks, large value, small cap, and small value has never once been negative since 1932 over a 120 month rolling period, the market has grown 69% of all years on record. It’s declined in 31% of all years.

Even if you are not internationally diversified, the US stock market has never declined over any 20 year period. Now, of course, over one year periods you could be down 40% or you could be up 50%, and that variability continues to compress the longer that you stay invested and it becomes more predictable. Since 1871 until today, the real total return, meaning the stock market’s return in excess of inflation is 6.8% just under 7% per year over the last 150 years. Assuming you’re not buying individual stocks, which would be more like a student pilot flying in bad weather in a Cessna 152, yeah, that’s very risky, but assuming you are broadly diversified and you have a long time horizon, we have to rethink this notion that the stock market is risky. The data simply does not support that. If you have questions about your asset allocation or anything related to your investments, speak with one of our 300 plus certified financial planners just like myself here at Creative Planning by visiting creativeplanning.com/radio. Why not give your wealth a second look?

Well, I think we all understand that markets change quickly. Look at this year for example, growth is trouncing value, which is the exact opposite of what happened last year in 2022. Markets can and do rapidly shift. Oftentimes, the best performing asset category over one or two years becomes the worst performing over the next one or two years and vice versa. If you think about it from the perspective of mean reversion, it makes sense. If two investments expected returns are similar and one was flat and one was up 25%, then it’s not surprising to see those reverse. The problem is that these changes are quick and often with no warning. When you pick your head up 5, 6, 12 months later and the changes already happened, it’s why market timing is incredibly difficult. The dot-com bubble bursting is probably one of the most practical examples we have of this.

Leading up to the market massacre in the year 2000, In 1995, the NASDAQ was up 40%, ’96, it was up 23%, ’97, it made another 22%. 1998, it made 40%. 1999, it made 86%. You did not mishear that. It was up 86% in that fifth year of an absolute historic run. And if you were someone pounding your fist on the table saying, Hey, you know, family member friend, like you don’t understand the Internet’s taking over the world. This is changing our lives. This is email. This is a whole new world. You were right, but a lot of that was already priced in because in the year 2000, the NASDAQ dropped 39% and then in the year 2001, another 20%, and then in the year 2002, another 31%, and this is a great reminder that you can be right on your thesis in this case the transformative nature of technology, but because the market is forward looking and may already have that assumption priced in, making money on that trade can still be incredibly challenging.

An idea that I often hear from clients, perspective clients, is that the economy is always teetering. We really should rethink this. Here in America, we are pretty good at solving problems when we need to bet against the stock market, you’re basically betting against human nature. The reason for that is because when you are broadly invested, say in index funds, you are a co-owner of hundreds or thousands of the largest companies that are producing goods and services. As long as there are 330 million Americans who need goods and services, the demand for companies to produce those things won’t go away. 10, 15 years ago, I was up in Bismarck, North Dakota where my wife Brittany is from. They were having this 100 year flood and the water level was extraordinarily high and places were flooding that people never even considered could flood. I tell you what, this community of people banded together thousands of sandbags, diverting water, different places.

I was amazed at the resourcefulness. When your back is up against the wall, I mean consider covid. If there was ever a scenario where we would never recover, that would’ve been it when we shut down the entire global economy. Looking at history, there have been 16 different recessions since 1926. I’ll give you a few of the notable ones. The Great Depression, now this was a bad one, decimated the US economy. Unemployment rate climbed to, and this is wild if you really think about it in today’s terms, 25.2%. Industrial production plunged 48.6%. The recession was three and a half years. The market downturn was just under three years. The drawdown to the stock market, 83.6%. If there were ever a time, “This is the end.” This would’ve been it. It didn’t crush us. We rebounded. The oil crisis, inflation hit double digits during 1973, ’74 and ’75, big recession, the market lost nearly half its value in the first 11 months.

The recession was 16 months long. The market downturn was just under two years, and the drawdown 46%, it didn’t crush us. We rebounded. The tech boom and bust, which I just talked about. Most didn’t realize that the stock market had started a very deep decline before a relatively mild recession in March of 2001. And of course this was followed up by a great tech boom thereafter, but the recession was eight months. The market downturn was 13 months. The drawdown on the stock market was 33%. If you’re in the NASDAQ, you were hurting, you were down over 80%, which is just another reminder why no matter how good it seems, don’t over concentrate in any single sector.

These last two we’ll all remember quite well, the global financial crisis in ’08 and ’09, it was an 18 month recession. Unemployment hit over 9%. Industrial production tumbled 17%. The market downturn lasted 16 months, and the drawdown whew, it was painful, 50%, yet it didn’t crush us and we were able to rebound. My last example is the most recent Covid-19 pandemic. It was the shortest recession in the past 100 years and the deepest decline in GDP since World War II, it fell 8.9%. The drawdown was 20%, but the recession and market downturns only lasted two months. But as we sit here today, from an economic standpoint, didn’t crush us and we’ve rebounded. Here’s the takeaway. Don’t fall victim to the sky is falling. The world’s going to end. The economy is teetering.

The market and the economy have gone through many rough times in the last a hundred years, and despite all of it, it hasn’t crushed us and we’ve rebounded. The economy continues to flourish and the market’s provided generous returns. If you have questions about anything related to your personal finances or you’d like a second opinion on your financial plan, speak with one of our local financial advisors just like myself. We’ve been helping families for 40 years. Why not give your wealth a second look at creativeplanning.com/radio.

It’s time for listener questions. If you have questions you’d like me to answer, email those to radio@creativeplanning.com. Let’s hand it over to one of my producers, Lauren, for today’s questions.

Lauren Newman: Hi John. The first listener question I have for you today comes from Amy in Greenwood, Indiana. Amy says, “Hi, I’m a regular listener and I’ve been inspired to engage in charitable giving. However, I’m unsure about the best approach to maximize the impact of my donations while also considering the potential tax benefits. Here are some details on my situation if that is helpful.” She actually lists out a lot of information about her, John, so I’ll go through that. She says, “I am 62 years old, single, and make 175,000 a year. I have two kids and would like each of them to get at least half of my estate with the rest going to charity. I’d like to give 10% on average. In total, I have 700,000 in 401k, 100,000 in Roth, 300,000 in my house, and 150,000 in a brokerage account and roughly 50,000 in the bank.” She says, “I do not plan on retiring before 70.”

John: Well, Amy, this is a great question and it’s fantastic that you’re thinking about giving more than just spending because that is ultimately where you will find peace, where you’ll find contentment and ultimate fulfillment with your money. You’re obviously doing very well, high income earner making nearly 200,000 a year. You have another eight years before you want to retire. Also, when you work until 70 years old, your years that you need your money to work for you are also shorter. Not only do you have more years to add to your investments, you have more years to let the investments grow before withdrawing, and then when you start taking those withdrawals, you don’t need them for as long. Overall, I don’t know what you spend. I guess if you were spending $500,000 a year, well then you’re probably not in a great situation, but you wouldn’t have saved what you currently have. I’m going to assume that you’re looking good here for retirement.

Well, I always encourage people to give with a warm hand rather than a cold one. It’s more fulfilling. You have more control. You get to see the fruits of that. You’re able to make adjustments along the way because you’re around to see the impact of those monies. And oftentimes people shift where they’re giving money from where they initially thought. But, if you’re giving purely postmortem, you don’t have that luxury. From a giving now standpoint, I would consider a donor advised fund, which might even be where you do what’s called deduction bunching. That might mean you give five years upfront. If you were going to, in your words, do 10%, maybe that’s 15 to 20 grand a year of giving, give $75,000 to a $100,000 all at once to the donor advised fund.

You can still give it to the organizations over a five-year period if you’d like at 15 to 20 grand a year. That’ll give you that $75,000 to $100,000 deduction upfront. Then over these next four years, take the standard deduction, which through 2025 is still through the roof. You get a little bit of a have your cake and eat it too with that approach. If you’d like to give also to your children some of that 50% now, maybe they could use it for a down payment or maybe you want to take my five year challenge that I talked about last week on the program. By the way, you can find that if you didn’t hear it at the radio page of our website@creativeplanning.com slash radio or wherever you listen to podcasts. You may want to reimburse them and encourage them to save, and you can give without any gift tax implications up to $17,000 per year to each of your children.

Those may be some good present ways to give, but if we’re looking bigger picture, let’s just assume that your estate’s going to be 3 million at death, and that’s a big assumption. It’s a total shot in the dark. I don’t know how you’re invested or what your living expenses are, whether you have a pension, how much your social security benefit is. Do you have longevity in your family? How is your current health? Do you plan to downsize on and on and on? Which is why having an in-depth written document, a financial plan, Amy, I would encourage you to do, if you’re not sure where to turn, we can help you with that here at creative planning. But that plan will answer a lot of these questions. But if I’m just painting with a broad brush today, the $600,000 pre-tax portion of your 401k should be earmarked for charity because when they inherit that, unlike your children, they’ll pay no income tax.

The other $600,000, so the Roth portion of your 401k, your brokerage account, the equity in your home, the money you have in the bank, all of that will have a step up in basis at your death, meaning your kids won’t pay income tax and you’ll effectively disinherit the IRS with that strategy. If you have more questions about this, Amy, and want us to take a deeper dive into your specific situation, we’re happy to look at your situation comprehensively, build out a full financial plan, and we have offices near you there in Greenwood. All right, Lauren. Hit me with the next one.

Lauren:  Our last listener question comes from Paul in Baltimore, Maryland. He says, “I’m 45 years old and have about 350,000 in my 401k, which is the bulk of my savings. I’ve been in mostly cash for a while and I’ve noticed the market rally recently. Did I miss my opportunity to get back into the market now that it’s gone back up?”

John: Well, Paul, thanks for the question. I don’t know if you’re entirely on the sidelines right now. I’m sort of feeling like you might be based upon the question, but this is always the challenge. The risk of being out of the market is often greater than the risk of being in because the market will temporarily correct downward, but historically speaking has always over the long run, gone up and to the right. When it runs away from you to the high side, it often never has a deep enough drawdown to come back to where it was when you were originally in cash. Of course, I like no one else have any idea in the short run if you’ve missed the temporary market upswing or if the market’s going to correct or go back into a bear market, but I feel pretty confident over the long term that the market has plenty more room to run higher because it always has, and I referenced this earlier in the show.

Every 10 year period, a diversified portfolio has been higher than it was 120 months earlier. Of course, past performance, no guarantee of future results. It really all comes down to your time horizon, Paul. I’m going to assume that these are not monies that you need for the next seven or so years. These monies are in a retirement account and that you’re 45 years old. Unless you plan on incurring a 10% penalty, I’m assuming you’re not going to withdraw this money for at least 15 years. Now, if you are really gun shy and goosey, you could dollar cost average in maybe over a year and take the average rate of return by putting one 12th in per month until you’re fully invested. Statistically, that’s not the best approach because 70% of all calendar years, the market’s higher than it was 12 months earlier.

Only 30% of the time would you end up with a higher return and be able to buy shares at a lower price by placing that bet in more of a systematic investment approach. In summary, and by the way, I know I sound like a complete broken record, but long-term monies should be well diversified in stocks, get them invested as quickly as possible, and short and intermediate term needs should be bridged with bonds and cash. Do not pay any attention. Notice I didn’t just say some attention. Don’t pay any attention, not one second of energy or strategy dedicated to today’s headlines. Thank you for those questions. Again, if you have questions that you’d like me to answer, email radio@creativeplanning.com.

Well, I realize we’re here at the 4th of July and what an incredible country that we live in. I don’t know about you, but I frequently take for granted all the freedoms that have been fought for and earned and that we get the great benefit of. And I want to conclude with this theme of freedom for today’s show. I want you to declare your own financial independence day. I know it’s a little cheesy, it’s a little cliche, but just hear me out on this. Benjamin Franklin said, “The purpose money is to purchase the freedom to pursue that which was useful and interesting.” Another great Franklin quote was, “When you run in debt, you give to another power over your liberty.” Financial freedom is really monetary stability if we boil it down to its most basic level, doing what you want in life without worrying about your bank balance.

In general, just high level, how do you achieve financial freedom? I’ll give you a few simple steps. The first is find your why. What do I mean by that? Figure out what you deeply care about. What makes you tick? What brings you joy? Because without that, money is just a number on a page. If it’s bigger, great, it’s bigger. It has an extra zero, but it doesn’t really mean anything. Next, address the limiting beliefs that you have about money. We all have these. Oftentimes, they’re rooted in the way we grew up, maybe things we heard, we saw, past experiences. What might be holding you back from achieving the ultimate independence around your money? Next, determine your financial independence number. How much do you need to be financially free? I’ll address that here in a moment, but it will be found in the development and monitoring of a written, documented, comprehensive financial plan.

The fourth and final step to achieving financial freedom is to adapt. The value in your financial plan is not in building it so much as it is changing it. If you’re 45 years old and you build a financial plan that says, “This is what life will look like the next 55 years.” Now that’s not what life is going to look like the next 55 years, but we have to start somewhere without adapting the plan to changes in your life, changes in the laws, changes in the markets. The plan ultimately won’t get you to your desired outcome. Find your why. Figure out what limiting beliefs you have about your money. Build a plan and through that, determine your financial independence number and then adapt the plan. What amount of money will you need to feel like you are financially free? Is it 500 grand, 1 million?

Is it 10 million? Is it 50 million? Everyone’s different, but here’s a very good starting place. Take what you spend right now and multiply it by 25. I know, I’m making you do some math here. John, it’s a holiday weekend. I don’t want to do math. Just humor me. If you spend 5,000 a month, that’s 60 grand annually, multiply it by 25, it’s $1.5 million. If you’re spending 120 grand a year, it’s 3 million. If you’re spending 240,000, right, 20K a month, 6 million. You see the reason that number is an important one is that it represents about what you’ll need to take, what is considered in the financial planning world as a safe withdrawal rate. Some people think it’s 3.5% percent. Some people think it’s 4.5%. Some people think it’s 5% or 6% depending upon who you talk to and what their assumptions are for inflation and market returns moving forward.

At 25 times your annual expenses, you’re in the ballpark because those investments, if managed properly, and some of the basic conservative assumptions take place, should produce enough growth to sustain you. That makes you financially independent because at that point, if you don’t want to work, you don’t have to. You are not relying any longer on someone else, a customer, a boss for your financial security. In your head right now, how close are you to that number, to that financial independence day? Are you already there? Have you blown past it? Are you close? Or maybe you still have some work to do? Regardless of where you’re at on your financial journey, I encourage you to continue pushing forward and maximizing your potential because after all, 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 proceeding program is furnished by Creative Planning and SEC registered investment advisory firm that manages or advises on a combined 210 billion in assets as of December 31st, 2022. 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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