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Building a Financial Plan off Your Life Phase, Not Your Age

Published on April 8, 2024

John Hagensen

It’s a well-known practice to create financial plans based on age. And while there’s some good logic to it, it doesn’t always make sense. Planning instead by what phase of life you’re in provides a more tailored approach that recognizes your current needs and priorities and how those will evolve as you move into different phases over the years ahead. John explains what this approach looks like and how you can adapt your plan accordingly. (2:05) Plus, learn how to avoid falling victim to this year’s most common tax scams (37:06) and why asset allocation is only the first piece of the investment puzzle.(24:05)

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 age-based financial planning is flawed, the IRS Dirty Dozen list of scams to be wary of this tax season, and why it’s so important to pay attention to not only what you own, but where you own those investments. Now, join me as I help you rethink your money.

The other day, I was at the gym, and I saw a gentleman, probably in his 70s, I would guess, who was absolutely ripped. I mean, this guy looked better than most 30-year-olds, even in-shape 30-year-olds. He certainly looked better than me, I could tell you that for a fact. And he jokingly told me, “Man, age is just a number.”

Think about this related to sports. We hear about players entering their prime or they’re out of their prime. They’re past their best years. Yeah. Most quarterbacks fall off a cliff in their mid-30s, but look at Tom Brady. He’s the GOAT for a reason. He’s going out and winning multiple Super Bowls at what was considered to be way too old to be a quality quarterback. And even as he retired a year ago, his arm strength was still there.

Let’s take it to the NBA. LeBron went nine for 10 on three-pointers just a week ago, and is shooting threes at a higher percentage than the greatest shooter of all time, easily my favorite player to watch, Steph “Baby Face” Curry. Their objectives were different. Their skills were different. Their commitment to their bodies, eating avocado ice cream all offseason, no alcohol.

Meanwhile, Barry Sanders chose to retire at the peak of his ankle-breaking powers. Pat Tillman retired from the NFL in what was considered to still be his prime age in his 20s to become an Army Ranger. And not what everyone would’ve done, but as a father to a son in the Army, man, what an incredible sacrifice he made. He’s a legend here in Arizona, and for good reason. But I say again, age is just a number, and that principle is true with the decisions you make around your money as well.

Should a 41-year-old, child-free adventurer backpacking around Europe with a lock-and-leave condo have the same financial plan as me, a 41-year-old father of seven? No. But many of us often approach financial planning with this age-based mentality. You’ll see articles written and radio shows like this one talking about, “Well, if you’re 80 years old, you should have 80% in bonds, and that’s a great starting place.” No, that’s a terrible starting place. It makes absolutely no sense.

I mean, I know we love to have these hacks and simple rules, but that’s just a dumb one. And it’s illogical because I have a 65-year-old client who has early-onset dementia, unfortunately. Her husband left her when she came down with her diagnosis. It’s just awful. Awful human, that guy, by the way. Terrible. She’s spending about $120,000 a year on her care.

I have another 65-year-old client, exact same age, who’s not planning to retire for another five to 10 years. She’s saving 100K a year and is in her peak earning years, with no sign of slowing down. There are 25-year-olds who have $100,000 of student loans and others who came out with none due to help from their parents, maybe from scholarships. That person may be earning twice as much as their friends, who are the same age. Their plans will not look the same and should not look the same.

A few recent studies provided an interesting look into how unique we all are. One survey asked employees how they want to move into retirement. The largest pool of people, 52%, responded they’d like to gradually decrease the amount of time working in whatever field they’re working in, and eventually stop working. 36% said, “I’m just putting the deuces up. I’m walking out. I’m giving everybody a high five, and I’m going to move immediately from working full-time to not working at all.” While 7% said, “I’m going to change industries or careers with the main goal of winding down in anticipation of retirement.” So just taking on something that’s less stressful, less hours, not as high-pressure. That was the final grouping.

Now, employee expectations for retirement that came from this study as well was the question, “When do you expect to retire?” And the most common expected age for retirement was 65 years old. But while 51% said they have a specific age, the next highest category was 26% that said, “I want to retire, but I don’t have any sort of timeline.” 17% said, “I want to retire, but I’m not sure if I’ll even be able to.” And 6% said, “I don’t ever want to retire.”

But rather than simply focusing on your age, think more about the stage of life you’re in, which may come way earlier or later than the average person. And if you have a personalized, tailored financial plan that’s written, that’s documented, that’s dynamic for your current wishes, for future wishes, for current tax laws and estate planning strategies, that should be specific to you, and that will answer so many of these questions that should be individual.

If you don’t have a detailed financial plan that you can reference right now, that you can view all of your retirement projections, your asset allocation, your tax strategies, your estate planning documents, your risk management strategies, and you want that and you’re not sure where to turn, do it thousands before you have done. Visit creativeplanning.com/radio now to request your complimentary. Sit down with a credentialed fiduciary that’s not looking to sell you anything. We help 75,000 clients in all 50 states and over 75 countries around the world here at Creative Planning.

Why not give your wealth a second look at creativeplanning.com/radio? One of my colleagues here at Creative Planning, Certified Financial Planner Jennifer Lopez. Yup. That’s right, Ben Affleck. We have our own J.Lo here at Creative Planning. She wrote a great article entitled Financial Tips for Every Stage of Life, and let’s look at these briefly together.

The first is what I would call that exploratory phase. This is when you’re saving money in a clear jar or a piggy bank. My four-year-old, Aria, and my two-year-old, Luna, both got piggy banks, one purple, one pink, just this last week. Came on Amazon. They bedazzled the heck out of them. They stuffed some coins in them. They carry them around, and they tell me that they’re rich. It’s fantastic.

Aria even asked me the other day if I needed to borrow some money from her. It was great. I was like, “Man, I hope not, but I appreciate your generosity. We must be doing something okay as parents. You’re so giving. That’s fantastic.” But this is where you start receiving an allowance. You start understanding the value of a dollar. You’re asking for things for Christmas, and you’re finding out how much they cost, and those are fantastic discussions.

There are a lot of tools nowadays outside of simply opening a traditional bank account where during that exploratory phase, you’re able to start building an understanding of money, an important tool that’s necessary to operate in the world. If you’re a parent, you consider opening a brokerage account. Let your child choose some of their investments or discuss with them why you’re investing it the way you are, why it’s diversified, why you look at low-cost options, whatever it might be. That’s your philosophy, how you rebalance.

Those are important lessons during that exploratory phase. The next one is the foundational phase, and this may be when you’re 18. This may be when you’re 35 or 45. That’s why, again, it doesn’t come down to your age. Whichever exact age you’re at, there are times for most of us in life, unless we inherited money or we’re Macaulay Culkin in Home Alone and a child movie star, you have limited resources, and even small steps can have a big impact on laying the foundation for a solid financial future.

This is when you start saving an emergency fund, start saving for retirement, taking advantage of your company match, if you are fortunate enough to have one. You prioritize paying off debt if you’re carrying credit card debt, hopefully not, or some student loan debt. Focus on paying that off. You may open a credit card to start building credit history. I just talked to my 20-year-old about this. He said, “I’ve heard credit card debt’s really bad. You’ve told me that. I don’t want to go into debt. They scare me a little bit. Why would I want to apply for one?”

I said, “Just use it for gas, and set an auto payment for the full account balance and never think about it again, but you need to build some credit so that you can get a lease on an apartment, because right now, there’s no credit history.” This foundational phase usually sees you enrolling in health, in renters, or disability insurance. You’re establishing legal documents. Maybe just a simple financial and medical power of attorney.

Once that foundational phase is accomplished, you move into that growth phase. And this is where resources are starting to accumulate, and you establish clear financial goals. Maybe it’s buying a house, starting a family, saving for a child’s college education. You start increasing your retirement savings. It may not just now be the match. It might be maxing out this account. “I’m saving 10 to 20% of everything I make. I’m increasing my contributions maybe by 1 or 2% each year,” or whenever you receive a raise. That’s the strategy that I love during this growth phase.

Every raise you get, take half of it and enjoy it, and take the other half and add it to your contributions. Consider your insurance needs during this season. Maybe you need a life insurance policy to protect your family. Maybe an umbrella policy for additional liability. You’re probably spending more time during the growth phase thinking about how you’re invested, “How am I diversified?” You start implementing strategies like tax-loss harvesting and charitable giving and saving you an HSA.

This is really when you start, as it’s labeled, growing your wealth. So you’re through the exploratory phase. You’re through the foundational phase. You’re through the growth phase. Now you hit the strategic phase. This is when you start implementing financial planning strategies to not only grow your wealth, but now you’re thinking, “How do I protect it? How do I achieve retirement security? Because I’m working hard for my money now, but what about when I want my money to start working for me?”

You start not only maxing out your retirement plan contributions, but maybe now you’re adding catch-up contributions, if you are age 50 or older. Again, you may or may not be. That’s the point of this. I don’t know what age you’re at. You might be 45. You may be 65. If you haven’t hired an advisor, this is often when people reach out to a firm like us at Creative Planning, and they say, “Hey, my situation’s more complex. I need to be more strategic. There’s more at stake. I have a lot more that I’ve saved. I need to make sure that I’m doing the right thing.”

This is where you also start reviewing your investment allocation to ensure it continues to meet your ever-evolving needs and goals, because those might not entirely be for growth anymore. And then from there, you migrate into this impact phase. This is when you start really enjoying all the hard work you’ve put in along the way, and you start enjoying your money, and you start enjoying the freedom that your money can provide you.

And again, this may happen at 40 years old. You may be a part of the FIRE movement and you’re financially independent, retire early, and you’re 29 years old. I don’t know. You might be 90 years old. But this is when you say, “I don’t need more. I want to be a good steward of what I’ve saved. I want to be intentional about this, but I’m okay. I’ve put my oxygen mask on. Now I’m looking around. Who else can I help?”

You start implementing withdrawal strategies, hopefully that are tax-efficient. You remain flexible and prepared to make changes to your financial plan as life continues to evolve. You reevaluate your estate plan on a regular basis. In this season, you don’t create an estate plan and let the binder collect dust for 15 years. You’re reevaluating it. And if there’s one thing I’ve learned in visiting with thousands of people, in all different seasons of life, spanning across the spectrum of all these phases, don’t wait for that impact phase.

You will be more fulfilled and content if you begin thinking and acting upon that impact phase, even while you’re mostly in that foundational phase or growth phase and maybe strategic, because that mindset is what will ultimately bring maximum peace of mind when it comes to your wealth. And the next time someone says, “Well, how old are you? What does your risk tolerance questionnaire say?” well, that’s all you need to know to build your financial plan and your investment strategies. I want you to tell them that that’s something they should really rethink.

It’s time for this week’s one simple task where I’m helping you improve your situation each week here in 2024. Today’s tip is to check and, if necessary, update your account beneficiaries. Now, if you’re like most people, you open an account, maybe you select your beneficiaries at the time, or possibly you say, “Well, I’ll add those later.” But when’s the last time that you reviewed your life insurance policies and your investment accounts to ensure that your beneficiary designations are accurate and applicable for today?

I’ve seen ex-spouses on accounts by mistake. I’ve seen estranged siblings, minor children listed, who can’t even directly receive the assets. People who aren’t even alive I’ve seen listed on beneficiary designations. Check for the following information, everywhere you need a beneficiary: full legal name, date of birth, their relationship to you, full address, telephone numbers, and their Social Security number, because the last thing you want is your hard-earned assets received by someone that you don’t want to.

To review all previous tasks from the year, visit the Radio page of our website at creativeplanning.com/radio. My special guest today is Creative Planning estate attorney Chrissy Knopke. Chrissy, thank you for joining me here on Rethink Your Money.

Chrissy Knopke: Thank you for having me.

John: Well, the most common estate planning question I’m asked is, “Do I need a trust, or is a simple will good enough?” Why would someone consider a trust in the first place over solely a will?

Chrissy: I would say the two main reasons people use trusts are to control how a distribution is going to benefit somebody. So whoever they’re naming as the beneficiary, they get to control that distribution to them, and it avoids probate. So those are the two basic reasons people move into trust. There’s a lot more reasons beyond that.

John: Revocable trust, by far the most common. Why are they used, Chrissy? When do they make the most sense, and what are some of their characteristics?

Chrissy: Revocable trusts are used to avoid probate and to control assets, like if you have a minor child and you pass away, and you want to dictate that they receive assets on their 30th birthday, and somebody else manages it until they reach 30. You would use a trust to do that.

John: I think the key is that word revocable. It’s right in the title, that you can change it whenever you want to. If you are the trustee of that revocable trust, you don’t lose any sort of control.

Chrissy: Right. In a revocable trust, you’re completely in control. Your day-to-day life does not change. Your access to your assets doesn’t change. And so, that’s probably the biggest difference between a revocable and an irrevocable. Irrevocable trust, to really work properly, you can’t have your cake and eat it too.

John: Sure.

Chrissy: So, you don’t get to control it and get all the protections that an irrevocable trust can provide to somebody. So you have to give up management of your own assets, typically, for an irrevocable trust.

John: It’s the reason why also revocable trusts are so much more common and apply to such a broader swath of people than an irrevocable trust, which is much more specific. We can’t overstate the impact of avoiding probate in a state like Arizona, where I’m domiciled. There are a lot of snowbirds, a lot of people looking for warmer weather, and the probate court is just completely overwhelmed.

And that is not a small thing to say, “Oh, well, yeah, that might be a little better for my family to avoid probate.” No, it’s way better for your family if you avoid probate, because it takes forever, and you end up paying way more in court costs than just to establish a trust with a good attorney and get it set up in advance. It can be so much easier from that standpoint.

Chrissy: Well, and you just hit on something else, snowbirds. They usually have two residences, so one in Arizona, maybe one in Kansas, where I am. If you have probate, you have probate in each state you own real estate in. So you’d have an Arizona probate. You’d have a Kansas probate. You’d have two different lawyers involved. It’d be not easy and very-

John: Yeah. Significant flexibility, and I think some people think, “Why do I care? I’m going to be gone. Whatever they get, the kids get, they should be happy about.” But actually, it can have a huge impact, even while you’re alive, by doing proper estate planning.

Chrissy: Right. For sure. Definitely.

John: Okay. Let’s transition to irrevocable trusts. Let’s talk about how those are different than a revocable trust.

Chrissy: Exactly the word. So revocable means you can change it. Irrevocable means you cannot change it. So people call me. They have these irrevocable trusts, and they’re like, “You know what? I don’t like how I set this up. I want to change the provisions, or I want to change the terms of the trust.” And you can’t do that. They’re irrevocable. So you set them up, and then you put your assets in them. You’re designating who the beneficiary is, and then it’s hands off.

John: High level, why would someone want to create an irrevocable trust?

Chrissy: High level, I always say there’s a few reasons. So Medicaid planning, someone needs to become Medicaid-eligible. In a lot of states, you can only have $2,000 to your name to become Medicaid-eligible. So if you have a house, you have cars, you have an investment account, you’re not going to become Medicaid-eligible. And if you go in a nursing home, they’re going to lean against all those properties. So if you do proper planning, you can become Medicaid-eligible using an irrevocable trust.

John: You’re shifting the money out of your estate. It is no longer yours, which can be the negative aspect of an irrevocable trust. But in this case, you’re trying to deplete your assets. To be clear, you can’t find out you’re going into a nursing home, and the day before you go into the nursing home, you put everything in an irrevocable trust and go, “Give me Medicaid.” It doesn’t work that way.

Chrissy: Exactly.

John: There’s a look-back period. I think it’s five years or seven years in some states. What is it?

Chrissy: Yup. It’s a five-year period. They’re talking about making it longer, but right now, it’s still a five-year look-back period.

John: Okay. It’s still five. That’s one aspect of an irrevocable trust that can be valuable. How about for wealthy families looking to contend with estate taxes?

Chrissy: Yeah. That’s the big one you hit on, is that an irrevocable trust pretty much gets these dollars off of your book and puts them somewhere else. So if you are nearing the federal tax exemption level, which, in 2024, is $13.6 million per person, if you already know you are over that, people will start doing irrevocable trust planning to give their assets away and still have control over how that person is going to use them.

So the majority of the irrevocable trust that we draft are for wealthy clients that are over those exemptions or nearing them, and you can do this easily with exemption planning, so the annual exclusion. Right now, every person in the United States can give as many beneficiaries $18,000. If they’re married, they get to double that.

Well, if you have a 12-year-old kid, you don’t want to just write them a check for 18, $36,000 if you’re married. If they’re 20, you might not want to give them that type of money. And so, people will create irrevocable trusts where they’re getting it off of their book, but putting it in trust for a family member or a friend, and then they get to dictate who’s in charge of that and how that child or beneficiary receives it.

John: Yeah. And this is a hot button right now because of the fact that at the end of 2025, the exemptions are set to be reduced when the Trump tax reform expires. And so, there’s a lot of movement saying, “I have more room right now to move money and use some of that exemption while it’s higher before it drops.” Your team will be really busy in 2025, probably even more so than this year, because nobody wants to actually do it in advance.

They wait until November of ’25 and go, “Wait a second.” We’ve been telling you this since 2018, but it’s like, “Well, now I have a deadline.” So I imagine estate attorneys will probably be making some pretty good money and being really busy as those are set to be reduced. Yeah. I remember in high school, I had a buddy who I played basketball with, and he had this wealthy aunt that lived on the East Coast, nowhere near Seattle, where we grew up.

He barely knew her. But every year, he got his check because she was just giving out the gifting amount to every single person that she knew in her life that could fog a mirror. And so, he had this fully restored 1964 Ford F1… It was just amazing, this truck. I mean, it was one of the coolest cars you’ll ever see. And the guy had no money. I mean, he’s a high schooler, but he kept getting his money from this aunt that he had met twice in his life. I thought that was pretty cool. So she was doing some estate planning with the good advisor somewhere.

Chrissy: And if she was worried about him buying a car instead of maybe paying for college, she would’ve put it in an irrevocable trust and dictated how that was going to be used.

John: So maybe she didn’t have good planning. She knew just enough to be dangerous. But yeah, I always wish, like, “Can I be her nephew? Do you think you can convince her?” I’m speaking with Creative Planning estate attorney Chrissy Knopke. Let’s transition over to a specific type of trust that we haven’t talked about before on the show. That is a domestic asset protection trust. How do those work? It’s a type of irrevocable trust, and who would that apply for?

Chrissy: Yeah. So mostly, when you’re doing irrevocable trust, you’re doing it to benefit somebody else. A domestic asset protection trust benefits the person creating it, the actual grantor.

John: Interesting. Okay.

Chrissy: So it’s a self-settled trust, which is not legal in most states. There’s only a handful of states that allow us to do them, and they’re pretty much done for people that are in abnormally high-risk professions, in business dealings that could go wrong, or they have an uninsurable risk. So they have to appoint a trustee. And when we create them at Creative Planning, our trust company is based in Nevada, which is a state that allows us to do self-settled trust. So typically, if the client’s down in Florida, we’re still having a Nevada trust with a Nevada trustee.

John: Even someone listening, let’s say, that lives in one of the states that does not allow for this could still set up this irrevocable trust, because the trustee, in the case of Creative Planning, us, we would be domiciled in Nevada, as our trust company basically handling it. So it wouldn’t preclude someone living in one of the other states, “Hey, I can’t do it because I don’t live in Nevada,” for example.

Chrissy: Correct.

John: Okay.

Chrissy: So essentially, if you’re putting the right trustee in place to manage those assets, and that trustee is in a state that essentially allows self-settled trust, you can create them, whether you’re in a state that allows it or not.

John: Give me an example of a type of client. I mean, you said high-risk professions, but who have you seen these work well for?

Chrissy: I will preface this with that most people think they’re going to get sued, because that’s just the litigious society we live in. So everybody thinks, “Oh, I need to create a domestic asset protection trust,” which is not accurate. There’s lots of things that are out there on the market, insurance that help with all of those.

In circumstances where we can’t get insurance or we don’t have other protections, like a medical device company that is creating large products that they know, in the end, might have some sort of liability, the person creating it or an investor could put assets into a domestic asset protection trust. The key here is that you can’t already know that you’re going to get sued.

John: Yeah. That would be way too easy. That’s like the Medicaid example, like, “I’m going into a nursing home. I’m going to get everything out of my estate. Oh, I know someone’s suing me for everything that I own. I’m going to open one of these.” Tell me, Chrissy, you’ve gotten calls, right?

Chrissy: I would say the majority of people that call us have already been sued, and they’re like, “No, I heard about this domestic asset protection trust.”

John: That’s hilarious.

Chrissy: And so, under state fraudulent transfer laws, that would not be a viable option. So if you already know that you’re getting sued or have an idea, there’s a letter, there’s a demand letter out there, anything of that nature, you cannot just go drop all your stuff in a domestic asset trust and protect it.

John: So, this same person calls us on December 31st to do a Roth conversion and, in 2025, in November, wants to set up an irrevocable trust before the exemptions drop, and wants one of these asset protection trusts once they’re being sued.

But it is important to note, you’ve got to be really proactive and use foresight here to say, “This is just a risk. If I do this for 30 years in this type of profession, it’s almost certain that something will happen. So I need to be proactive and get this established in advance,” because, again, the purpose, if I can summarize, is to protect your assets by getting them where they’re not owned by you technically anymore. And so, there’s an arm’s-length aspect to that where you’re not going to lose what you’ve worked for for decades because of, in some cases, something that’s completely out of your control but that went wrong.

Chrissy: Yes. Exactly.

John: Well, if you’re someone who has estate planning questions, we have over 50 attorneys here at Creative Planning, just like Chrissy. Contact us today at creativeplaning.com/radio. Chrissy Knopke, thank you for joining me on Rethink Your Money.

Chrissy: Thank you for having me.

John: I was on a road trip between Phoenix and Los Angeles. And once you get west of about Buckeye, you aren’t seeing much until you hit the thriving metropolis of Quartzsite, then you head west until you hit basically the Palm Springs area. And while on this road trip, I saw a sign for 50 acres for sale. Beautiful 50 acres. If you want dirt, 120 degrees in the summer, you want to hang out with some rattlesnakes and cacti, and I remember thinking to myself, “Who in their right mind would want to buy 50 acres right here, what I’m looking at right now? And what possibly would the price be?”

You can have these 50 acres for a box of marbles and a pack of bubblegum. Literally nothing there. The exact opposite would be oceanfront property in Maui. You even want a postage stamp lot. You’re looking at $10 million. I mean, we understand with real estate that location is everything. It’s what drives the price, because it’s what you can’t change. Location is equally as important when it comes to your investments and your portfolio design, and this is probably the single easiest way for you to optimize an already decent or even great investment mix.

Well, you’ve heard of asset allocation. Right? It’s that fancy pie chart with all the colors on your investment report. It shows you how much you have in stocks and bonds, and it’ll break it out if you’re a layer deeper on US stocks and small stocks and big stocks and international and real estate and cash and commodities and whatever else you own. But have you overlaid that with the location of those investments?

If you’re not convinced that you have personally analyzed this and given it the attention that it deserves, or you have an investment advisor, because you’re outsourcing this, who doesn’t review your tax return, you may be leaving huge tax opportunities on the table, like six and seven figures, depending upon the size of your savings over the rest of your life.

I encourage you to have your investments reviewed along with your tax return, that’s the key, by a Certified Financial Planner, ideally like us here at Creative Planning, where we also have over 200 CPAs who are integrated in the process as well, because why would you want any chance of paying more than you are legally required to the IRS by simply owning potentially even the right investments, so you’re doing a lot of things well, but in the wrong accounts?

Again, location, location, location. You don’t want your portfolio to be a beautiful custom home downwind from a water treatment plant. And that’s what having interest income in a nonqualified account is akin to, or nonqualified dividends hitting your after-tax brokerage account, and then you simply just reinvest them. Well, that’s the wrong location. Put that inside of your IRA or a 401(k). You want taxable bonds inside of those deferred retirement accounts.

You want your growthiest investments in your Roth accounts, first and foremost, as that growth is tax-exempt. It’s easy to get hyper-focused on your overall broad asset allocation, but that’s only half the story. To maximize your investments, you want to be saving on taxes as well. I’m pleading with you, have this reviewed. It doesn’t need to be by us here at Creative Planning, but by a competent, experienced fiduciary. If you’re not sure where to turn, speak with a colleague of mine. We have nearly 500 Certified Financial Planners waiting to answer your questions. Why not give your wealth a second look at creativeplanning.com/radio? Because we believe your money works harder when it works together.

With NVIDIA’s meteoric rise, I’ve been asked recently, is NVIDIA the next Apple or Microsoft or Amazon? Is that what we’re looking at here? Creative Planning President Peter Mallouk was a guest on CNBC and asked this very question as well. His response is the same as mine, and that is that Apple, as a company, has a significant moat that will protect them for a long time. NVIDIA is more comparable to Netflix or Tesla, which are incredible, innovative companies but don’t have giant moats. They have a head start, and those are very different things. In companies with a head start, the market, usually, when looking at history, eventually catches up.

In the context of publicly traded companies, a moat refers to a competitive advantage that allows a company to maintain its market position and profitability over the long term. And it was popularized by Warren Buffett, who used it as a metaphor to describe the defensibility of a company’s business model. A moat can take various forms, but generally, it represents barriers to entry that make it difficult for competitors to challenge the company’s position.

And so, we’ll see what happens over the next decade or two. Maybe NVIDIA will prove to be a formidable competitor and even larger than Apple when we look back, but it would certainly surprise me. I saw a Walt Disney ad from 1944 that had a greedy grasshopper salivating, clutching his money and a lunch pail as he hops from job to job in search of a higher salary.

Now, it’s a stylistic reference to a 1934 Disney illustrated short, The Grasshopper and the Ants. Not exactly Lion King. It was before my time. Not familiar, but it was one which many Americans of working age would recall with fondness from their childhoods. During World War II, American unemployment levels dropped to 1.4%. Incredibly tight labor market, due to the influx of production jobs from the war effect. And these types of posters sought to dissuade defense workers from using the labor shortage to job-hop. What I didn’t tell you was included on the poster was the headline, Job Hopper. “Our soldiers are sticking to their guns. Stick to your job.”

And I think in a way, there’s still a negative stigma regarding changing jobs, like, “Hey, this is a lack of loyalty. You need to stay at your existing company. Whether you’re happy or not, whether you’re challenged or not, whether you enjoy your coworkers or not or what you’re pursuing, you need to stay there. It’s not good to change jobs.”

And while I’m not suggesting you need to change jobs, I think we should rethink that common wisdom, because the data suggests that if you want to max out your income, changing jobs may actually be a viable solution. We’re sitting right now in one of the best times ever to get a new job. In fact, in 2023, according to the Atlanta Federal Reserve, wage growth was the strongest ever for people who changed jobs.

So according to Yahoo Finance, here’s what’s going on. Dating back to 1998, and almost all months for the past 25 years, data shows that people who switch jobs have higher wage growth than people who stay in the same position. The only significant exceptions were in the wake of recessions, which tend to create a short-term preference for stability. Right? If everyone around you is getting laid off and job security isn’t great, and obviously, in addition, unemployment is usually a lot higher, you’re not likely to switch jobs. It feels too risky.

Historically, job switchers have tended to gain an advantage of between a half and 1% over those who stay put. So, for example, if you take January of 2017, according to Yahoo Finance, job stayers had an average wage growth of 3.2% compared with wage growth of 4.1% for those who switched jobs. But in the past two years, and especially in 2023, that advantage has doubled.

In June of 2023, wages grew by an average of 5.5% for workers who stayed put. Those who switched jobs averaged a 7.3% raise. In April of ’23, those numbers were 5.6 and 7.6, respectively, and 5.5 for job stayers versus 7.7 if you go back a little over a year ago to January of 2023. This is not me suggesting that you should constantly be jumping around from job to job looking to squeeze out a little more money.

But I think the relevant takeaway is, if you’re not happy with your job or your boss refuses to give you raises, or you don’t feel like you’re advancing, it’s okay to at least pick your head up and see what else is on the horizon. And along those lines, another piece of common wisdom that I’d like you to rethink is that everything is within your control when it comes to your investments.

I’ll admit it. I can kind of be a control freak, parenting a ton of kids. I’ve lightened up on that. I’ve learned that I’m going to have a stroke wondering why the remote was not set in the exact correct spot on the coffee table. Shoot, I’m genuinely happy if I can even find the remote in a room near where the television’s located.

But here’s the key. There is no actual way for you to be fully in control when it comes to your money no matter how hard you try. It’s impossible. Derek Thompson had a fantastic guest on his Plain English podcast, the author, Brian Klaus, of a book titled Fluke. Klaus said, “The world could be totally different if just for a few random things breaking differently.” Henry Stimson vacationed in Kyoto with his wife. 19 years later, he’s the secretary of war. And the Target Committee submits their plans to drop the atomic bombs, and Kyoto is one of the cities, but this is his pet city that he fell in love with.

So he twice meets with Truman and convinces him to take Kyoto off the targeting list, drop the bomb on Hiroshima instead. The second bomb was supposed to go to Kokura, but there was a dense cloud cover, so they pivoted to their backup target of Nagasaki. So think about this. Quite literally, hundreds of thousands of people lived or died because of a vacation two decades earlier and a cloud.

Randomness can be hard for us to accept. So while I understand your need for control and the representation that money has on things that are important in your life, you’re going to take on some degree of risk, regardless of where you put your money. “No, no, no.” You’re saying that, “John, I’m in control. I just bury it in the backyard. That’s why I do that, so I can be in control.” No, there’s risk that your money’s going to be eaten by a bug that comes and destroys it, or Nicolas Cage’s character in National Treasure hunts around for it with a map, finds it, and steals it.

I get it. You keep it in a safe, not buried in the backyard. Yeah, then you get robbed at gunpoint. I know, I’m being hyperbolic. But more predictably, your cash has inflation risk, which you also can’t control, as we just saw coming out of the pandemic. Let’s say you put everything in fixed-rate bonds, AAA-rated, corporates or government treasuries. There are still risks with the US government defaulting or even a highly rated corporation going under. It’s very low risk, but it’s certainly possible. You can’t control it.

More practically, you have interest rate risk. As we saw, rates rise fast. Some long bonds were down nearly 40% in 2022. Even many intermediate-term bonds were down 10, 15, 20%. And so, you say, “Well, no, I’m in control of that too. That’s why I only own floating-rate bonds.” Well, you still have default risk. And in this environment, your risk rate’s dropping and your income decreasing.

“This is why I put everything in an annuity, so I can control it.” Well, you’ve got a lack of liquidity. You still have insurance company risk if they go under, your risk of not keeping up with inflation due to low growth, lack of flexibility if your life changes, and no inflation adjustments often on the annuity payments. And these are examples of the safe ones that you, at a surface level, can control.

Obviously, there’s risk in the stock market. 30% of calendar years, you lose money. A 10 to 15% annual drop at some point during the year is completely normal and should be expected. There have been multiple drops of over 30%. A bear market, which means the market’s down 20% or more, happens about every four or five years, and it can fall 35% in six weeks when a black swan event occurs, like COVID.

So I’m sharing this with you not so that you’re depressed. I don’t want you curled up in the fetal position in the corner of your house sucking your thumb, but the reality is, just accept it. Things are random, and you won’t ever be able to fully control what happens next, no matter how hard you try. In light of that, don’t fool yourself into thinking that you can, because once you accept that and there’s self-awareness, you begin building a realistic financial plan that acknowledges that, the key being you diversify per your time horizons and your objectives.

You have plenty allocated to various investments that zig when others zag, the goal being to smooth out returns, to never blow up your portfolio, and stack compounded returns over decades in the midst of crazy, completely out-of-your-control events. Invest your money to provide yourself with the highest probability of success, because, again, this isn’t within your control.

Last year, the IRS received 294,138 complaints of reported identity theft, which was the second most in history. The most, by the way, was 328,000 and change in 2021, which reflected the massive surge of cybercrime that spiked in the middle of the COVID-19 pandemic. The practical key here is, how do you stay alert this tax season, and how do you spot a potential tax scam? If the sender’s address looks off, there are numerous grammatical errors, ties to a current event, it’s not always the case, but oftentimes, scammers use current events, such as tax season, as a leverage for their messaging to make it a little bit more believable, “Oh, this is relevant. This can’t be wrong.”

An urgent request, “You got to get back to me in 24 hours or as quickly as possible, or this expires,” or consequences to inaction, like, “Hey, if you fail to send us this money or click on this link, negative consequences will occur,” are all pretty obvious phishing schemes. It’s also important that you understand how the IRS communicates with taxpayers. The IRS doesn’t initiate contact by email, text message, or certainly not social media channels to request personal or financial information.

They’ll also never request PIN numbers, passwords, or similar access information for credit cards or banks or financial accounts. Remember, the IRS official website is irs.gov. So if you receive electronic communication asking you to visit any URL different from that or requesting a type of financial information, it’s most likely a scam.

Make sure you take action to avoid becoming a victim. So if you believe you maybe revealed sensitive information about your organization, report it to the appropriate contacts at your company, such as network administrators or IT. They can be alert for any suspicious or unusual activity on your organization’s network.

And if you think you personally maybe provided financial information to a potential scammer, be sure to contact your financial institution immediately to make sure they’re on the lookout for any fraudulent charges. And, of course, sign out and change your passwords for any financially sensitive accounts as soon as possible.

Well, now that we’re all feeling really good, rainbows and unicorns, talking about horrible people trying to scam us for everything we’ve ever worked for, let’s move on to a lighter note, listener questions. And as always, one of my producers, Lauren, is here to read those. Lauren, who do we have up first?

Lauren: Hi, John. First, we’ve got a question from one of our WHO radio listeners in Des Moines, Iowa, and they ask, “Please explain and give advice on the various cost basis methods. At Vanguard, there are five: minimum tax; specific identification; highest in, first out; first in, first out; and average cost.”

John: This is a great question. So your custodian is required to report cost basis for covered shares to both you and the IRS. And many custodians will report the proceeds of the sale, and then you’re responsible for reporting your basis, which is important, because if you don’t report a basis, you’ll often be taxed for the entire amount of the sale as if it were all gains. Basically, there is no basis, so it’s zero. So everything that you sold for is growth.

So I’ll unpack each of your five. The first is the minimum tax cost basis method, which automatically selects the lots of securities you sell in an attempt to minimize the income tax you’ll owe for the current year. So it’s available for mutual funds, ETFs, and stocks, and it can be automated. This method’s going to sell or transfer tax lots in the following order: short-term losses, then long-term losses, then no gain or loss, then long-term gains, and finally, short-term gains.

Of course, even though it’s named minimum tax, it may not be the best for your specific situation at minimizing your tax bill. The specific identification method gives you, by far, the most flexibility, but it requires you to put in the time. So if you don’t have an advisor, like us here at Creative Planning, helping do this for you, it’s not going to automatically select which shares to sell, as the name suggests, because you have to specifically identify the exact shares.

Theoretically, this should be the most optimized method from a tax standpoint, assuming you are dialed in, knew your exact situation from year to year, and didn’t make any mistakes. Highest in, first out is also automated, totally hands off, and it just sells the highest-cost shares first, and attempts to minimize any gains or maximize any losses for each individual transaction.

With this method, shares with the highest cost are sold first, and it doesn’t matter how long you’ve held them, so they might even be the most recent. It’s just the highest in. Next is first in, first out. You’ll see this referred to as FIFO. And generally, I don’t like this at all, because you’re simply selling on acquisition date and not evaluating at all potential gains or losses.

And finally, you have the average cost method, which, at most custodians, is the default treatment for mutual funds, because it’s the simplest method, where your gains or losses are spread evenly across all the shares you own. Vanguard’s website actually has a great breakdown of these, as well as some examples of how each method applies to a real-world scenario of buying a couple tranches of investments at different intervals.

But at the end of the day, as I mentioned, if you can specifically identify per your individual situation and everything else you have going on, not only with your portfolio, but anything else in your financial world that impacts your taxes, well, that’s going to be the best approach if you or the person handling it for you is proactive and experienced in what they’re doing. All right, Lauren. I have time for one more question. Let’s go to Nate in Anaheim, California.

Lauren: He writes, “I’m 50 years old, married with three children, ages 17, 18, and 24. My wife and I have not done any estate planning. What is your advice on where we should start?”

John: Well, Nate, this is a great question, and I’m going to leave this to Creative Planning President Peter Mallouk, who recently spoke of this on his podcast, Down the Middle. Have a listen.

Peter Mallouk:  So, I’ll start with the healthcare power of attorney. Very simple document that just says, “Hey, if I can’t make a healthcare decision for myself, here’s who’s going to make it for me.” And a lot of people say, “Well, do I really need that? Won’t the hospital just listen to my spouse, my mom, and my dad even though I’m an adult?” And the answer is no. You have to have a healthcare power of attorney that says, “Here’s who’s going to make a healthcare decision for me.”

If you don’t have that, what happens is people might wind up in probate court fighting over who gets to make a healthcare decision for you, and that process requires people to get conservatorship over you, takes six months to a year often. By then, the healthcare help that you are going to provide is long gone, or you can’t make the same difference.

So make sure you have a healthcare power of attorney, not just for you, but everyone in your family that’s over 18. If you’re a listener in your 40s or your 50s or more, you should be thinking about your kids that are over 18. Make sure they’ve got a healthcare power of attorney, and you should make sure your parents have them too. And healthcare powers of attorney aren’t just life and death, they’re also moving somebody from a hospital to a hospital or a doctor to a doctor, or a long-term care facility to another one. It’s a very, very important document.

There’s also a financial power of attorney, “Hey, if I can’t make a financial decision for myself, who’s going to make it for me?” There’s two main kinds. An immediate is, “Hey, I’m Peter, and my wife, Veronica, can make financial decisions for me whenever she wants. So she can go do things for me today,” or there’s a springing power of attorney which says, “Only if I’m incapacitated and two doctors write letters saying I’m incapacitated, then she can go make financial decisions for me.”

Obviously a very important document. Without it, someone has to go to probate court for often six months, pay tens of thousands of dollars to get conservatorship to be able to handle things for you. Then, we all know about having a will. If you don’t have a will, the state’s got one for you. A lot of states say half of the money goes to your spouse, half goes to your kids, or if you’re single, it goes to your kids, or if you don’t have kids, to your siblings and parents.

Nobody wants the state to decide that for them. No one wants the state to appoint a conservator. Have a will. Name who’s going to raise the kids if you’ve got them, who’s going to get your inheritance and when, are you going to make a charitable bequest or not, and you take control of who’s going to handle things. You name that person. We call that person an executor.

And lastly, for those that want to avoid probate, which is people that have hundreds of thousands or more in taxable investments or real estate, or multiple assets, instead of a will, you want to have what’s called a revocable living trust. And it just takes the place of a will. Instead of an executor, we call the person who settles your estate a successor trustee. We still have beneficiaries. We decide when the beneficiaries get the money.

The difference is, with a trust, we take your assets and we retitle them so they’re owned by the trust. And so, the advantage is, it moves privately. No one knows what you owned. It’s quickly. No one has to wait for the process. And it’s infinitely less expensive, because we’re not dealing with courts and lawyers and all of those things.

And so, most of our listeners, a trust combined with these powers of attorney is the way to go. Make sure your adult kids have these things in place, your parents have these things in place. And most importantly, that you do as well so your wishes are fulfilled and you’re not a burden to the people you love the most.

John: Again, that was Creative Planning President Peter Mallouk, who began his career as an estate planning attorney. Thank you for both of those questions. And if you have questions, email those to radio@creativeplanning.com to hear my answer. Well, I saw a great tweet from Carl Richards at his handle, @thebehaviorgap, and he said, “Make two columns, things you’ve always wanted to do and then things you’ve done. Now, pick something from the left column and do whatever it takes to get it into the right column.”

Some things may take years, others months. Some of them you can knock off right away. You may even find things like skydiving. Move that right over, or like me trying to learn Spanish, that’s going to be a lengthy endeavor, but I’m working on it every day. If you’re like many people, the only thing preventing you from doing what you’ve always wanted to do is permission. Consider this podcast your permission slip. But as Richard said, now you have no excuses. Time to make your dreams come true, because 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 the 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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