From home remodeling to investing, there’s a certain intrigue around being a DIYer, but it’s not for everyone. And just because you’ve maybe found some success doesn’t mean it will last. This week, discover the challenges DIY investors face and why the risk of financial loss may actually be greater than the potential gains they hope to achieve.
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, the challenges of DIY investing, the distinct difference between a fine and a fee when it comes to investing, as well as one simple task that had a big impact on me personally. Now, join me as I help you rethink your money.
In our first house, my wife Brittany and I loved doing home projects. We put up a backsplash in the kitchen all by ourselves. We had zero tile experience. If you’re wondering how it went, we eventually spray-painted it, I’m not joking, to make it look a little better, let the grout stay on a little too long in hindsight. I also extended our small patio area for an outdoor dining space using concrete pavers. I went to Home Depot. I made the 72 trips back and forth over the course of a week because I constantly needed other materials and different tools.
By the way, is that not how every Home Depot project and experience goes? You’re on a first name basis with all the people in the store by the end. You’re almost hanging your head kind of in shame when on a Saturday, you’re back for the fourth time, and you’re just kind of wandering through the aisle ways. I’m all of a sudden finding myself looking at light bulbs. “Wow, the LEDs, that warm white’s really not… The soft white’s a little more yellow. Interesting. I didn’t realize that.” And then you kind of snap out of it, “Oh wait, I’m doing a paver patio. What am I doing wandering up and down these aisle ways?” But in the end, I had blisters on my hands and a lot less money in our bank account for a really uneven paver patio. It wasn’t full Leaning Tower of Pisa style, but it was way worse than a simple napkin stuff under one of the table legs to stop it from jiggling. It was way worse.
The best part of all of this, I looked on Zillow at this house recently and the recent listing photos still had that spray-painted awful backsplash. That’s still there. I didn’t know whether to laugh or cry, I don’t know. But it begs the question, why do we try to do things ourselves when we know we’re not an expert? Or maybe even worse, we’re terrible at it. No one with half a brain would have ever hired us to do a backsplash or build a patio, but we thought it was a good idea to do it on our own home that we actually had to live in. In our case, I can answer the question. We were newlyweds with a negative net worth. We were completely broke, and so paying someone literally wasn’t an option. We also perceived what we were doing to be really simple, and I’m putting up air quotes. “This isn’t hard. We can easily do this ourselves,” and it ended up being more expensive in the end than had we just paid someone, and probably looked worse than had we not done anything to begin with.
And I see similar thinking and mistakes from do-it-yourself investors as well, but the negative implications aren’t a chuckle and a bottle of spray paint. They can be devastating to financial futures. Now, there are plenty of people out there who are successful do-it-yourself investors. It’s a strategy and a plan that works for a subset of people. The issue is though there are many people who are not successful do-it-yourselfers, and they just don’t realize it yet. That’s often the problem, is that by the time do-it-yourself investors do in fact realize that there’s an issue, unfortunately far too often, it’s too late. Let me share with you seven reasons why I don’t think you should do it yourself when it comes to your money through personal experiences of meeting with literally thousands of people and hearing about the history and interactions they’ve had with their money.
Number one, you’ll miss important steps. A certified financial planner will spend considerable time on every single detail. Our planning process here at Creative Planning is sequential, it’s organized, it’s detailed, and a regular comment I receive from new clients is, “Wow, I hadn’t even thought about most any of this.” And financial planning is a lot more like baking than cooking or grilling. Every single ingredient needs to be done correctly because it impacts the rest of your plan. Number two, you don’t understand the full cost. Do you know exactly what your investments are costing you right now? If you can’t answer that, don’t feel bad. You are not alone. Most of the full cost are internal and difficult to quantify, especially if you don’t have experience knowing where to look. What is the full cost of you doing it yourself? What are you paying?
The third reason why you shouldn’t do it yourself is that some jobs require an expert. I use the humorous example of simple home projects, but what if I was doing something structural? What if I needed to make a repair to the foundation? Well then I need a structural engineer. The complexity level has increased far beyond what I’m capable of. This is why people are more likely to hire a wealth manager as their net worth increases.
Next, trying to do it yourself can put stress on your relationships. The amount of do-it-yourself investors who come in for a second opinion and they say, “I’ve got this taken care of and I’m doing great and I love this,” and I look over at the spouse and they’re looking down, shaking their head and I say, “Well, what’s going on? It seems like you want to say something,” and they answer, “I have been begging this person to delegate this task because when we were on the Disney cruise with our grandkids a month ago, he was spending two hours a day stressing out because the market wasn’t doing well and wondering if he should be making trades and getting up early and turning on CNBC while I’m trying to sleep in because we’re on vacation. It’s awful.” Money is one of the leading causes of divorce and strain in a marriage.
Number five, you don’t have the right tools. At Creative Planning, we have the technology, we have access in the private investment space to what I consider to be the top managers in each space, and the list goes on and on. If you are one person managing your portfolio, do you have access to the right tools and do you know how to use them? Number six, you might hurt yourself. I hope this doesn’t happen, but I can think of several scenarios over the years where this was the case. And number seven, the final reason why you shouldn’t do it yourself is that those mistakes can cost you far more than paying for professional guidance. I mean, that’s the irony. I want to save money to do it on my own and in the end, you not only didn’t save money, you cost yourself far more.
A good financial advisor will pay for themselves. It should not be a cost. That’s what’s so fantastic about financial advice and money management and tax planning and estate planning versus even my example of a do-it-yourself home project. A credentialed financial advisor can provide strategies and implement those and execute those in a way that you simply wouldn’t have done on your own, and therefore should not be a net negative. Ask yourself these three questions. If you are a current do-it-yourselfer, I know you’re probably annoyed at what I’m saying right now, right?
If you’re already someone who delegates this, you’re like, “Yeah, I get it. I’m not handling our entire life savings,” but if you’re currently a do-it-yourselfer, you’re someone who’s considering, “Maybe I want to do it myself,” ask yourself these three simple questions. Do you have the time to truly dedicate the amount of time that it takes to do a great job with your life savings? If you do ask yourself this second question, do you have the desire? Is this something you want to commit your energy and your efforts towards? If both of those answers are yes, here’s the third one, do you have the expertise?
If you’re not sure, because I’ve run into a lot of people that say, “Oh yeah, I’ve got the expertise,” and they don’t know the difference between a Roth IRA and a traditional IRA. They don’t know the difference between an ETF and a mutual fund. They barely know the difference between a stock and a bond. I know it sounds harsh, but they’re not experts. Are you an attorney, if you’re talking about estate planning? Are you a certified financial planner, if we’re talking about financial planning? Are you a chartered financial analyst, if we’re talking about investments? Are you a CPA, if we’re talking about taxes? That’s one place to give yourself a little check.
And another way to evaluate this is to ask yourself, would anyone else pay you to manage their life savings? Would a really successful person in your life come to you and say, “Can I pay you every year to oversee everything we’ve worked for?” If any of those answers are no, for a lot of people, all three are no, they don’t have the time, they don’t have the desire and they don’t have the expertise. But if any one of the three is answered with a no, then it’s time to hire a financial advisor. And if you are not sure where to turn, we offer a no obligation complimentary consultation with a local credentialed financial advisor just like myself, and you can request that by visiting creativeplanning.com/radio. Why not give your wealth a second look?
New York has had a massive uptick in millionaires leaving for places like Florida. Some of it’s for the palm trees and the aqua water, but a lot of it’s for the 0% state income tax, but New York is not laying down without a fight. They now have 300 auditors in the state just for residency verification. They’ll check phone records and all sorts of other things utilizing AI. In fact, I saw an article where there are billionaires who wait until 12:01 A.M to cross the state line just to ensure that they’re not overloading their allowed days in New York state so that they don’t have to claim residency there. I bring this up not because you’re likely a billionaire sitting at Newark in your private jet waiting to get off so your driver can take you into Manhattan, but there are plenty of millionaires next door who have two homes and are trying to evaluate which state to claim residency in.
Now, if you have the flexibility, maybe you’re a snowbird, this is something you should look into and it’s not just about income tax. That’s one of the mistakes that is commonly looked at. What’s the state income tax rate? Whichever one’s lower, that’s where I’ll claim. Not necessarily. To lay the foundation, your domicile is the state you regard as your home. Most states will consider you a resident for tax purposes if you spend 183 days or more within that state. And if you spend a substantial amount of time in two different states, keep good records so that you can prove which is your domicile, so when the New York auditors or whatever state it is, wants you to show them exactly why you’re not planning on paying tax in their state, you have the documentation to justify it.
Some simple steps to take, update your mailing address with the postal service and have bills and financial statements sent directly to the home you want to claim residency in. Obtain a driver’s license in that state. Register to vote in that state. Close accounts at local banks in your old state, or at least open a new account in your new state. If you’re splitting time between two, you might not want to close those out, but definitely open accounts in your new resident state. Look at changing doctors, dentists and other professionals to that new state as well. Now during the pandemic, this got a little fuzzy because I had people saying, “Well, I’m going to claim residency in Wyoming because we have a place in Jackson Hole.” Well, where do your kids go to school? “Arizona.” How do you plan on doing that? “Well, they’re remote right now.” This is a little fuzzy and I know what you make and you’ve never filed taxes ever as a Wyoming resident, and you’re going to do it just this one year that you have a big liquidity event? That’s not going to fly.
And while you can be a resident in two states, a lot of people don’t know that, you can, you can only have one domicile, which is considered your permanent and primary residence. You will want to know and abide by the rules of each state where you have residences in order to avoid double taxation. You definitely do not want that, and I highly recommend that you speak with a CPA to evaluate and review exactly how you may be able to legally minimize your taxes.
It’s Memorial Day weekend and a time where we honor and mourn US military personnel who died while serving in the United States Armed Forces, and I have a special guest, Tony Favela, chartered retirement planning counselor, fellow managing director and partner here at Creative Planning, but also a veteran, and he’s here to discuss the financial nuances associated with a career in the military. Tony, my 22-year-old son is active duty army, and that proximity is given me even more appreciation for the sacrifices made by our servicemen and women. Thank you so much for joining me and most importantly for your service to us all.
Tony Favela:
Absolutely. It’s an honor to serve.
John:
Our country isn’t perfect, but it is a great country and you’re still serving now just not on the battlefield, but in a different capacity here as a wealth manager at Creative Planning. Let’s begin with common veterans benefits and which ones do you see most often overlooked?
Tony:
There are so many veteran benefits on the federal and state side, but I think what veterans tend to overlook are the VA home loans. That’s a critical one. That’s where you can put no money down, which is a wonderful benefit. Also, the VA has a tremendous amount of benefits. I think of the VA as a Walmart. They have everything, but you have no idea what you’re looking for, but you really should look at the VA even if you haven’t served your 20 years, even if you’ve done two years, four years, six years, 10, the VA has a lot of benefits for us. There’s a tremendous amount of benefits that the states grant veterans as well.
John:
So what sort of benefits would apply? Is 20 years where you’re going to receive full benefits in terms of pensions and medical benefits for life?
Tony:
Yeah, 20 years is what you would say in the military is the golden retirement. You get your 20-year letter that gives you your full military pension, your medical and spousal benefits and all of that. So everyone’s always shooting for their 20, but even if you can’t, like myself, I’m at 18 and now I’m looking at a medical retirement, so I’m going to be short of that, there’s a lot of things that’s going to be available to any veterans below 20 years.
John:
What are some good resources for someone maybe like my son who’s planning to do the reserves after his four years, where would be a good resource for him to learn about some of the benefits that may be available to him?
Tony:
You can go to the VA.gov. That would be a great resource. Also, the Veteran Services, VSOs, Veteran for Foreign Wars, American Legion, Disabled American Veterans, and then also states have their own VSO as well, but those are free nonprofit organizations that just help veterans navigate all the benefits directly. And I would stress using VSOs because there are a lot of claim sharks out there that are looking for veterans monies and things of that nature. So you want to stay with accredited VA officers.
John:
With the VA, aren’t there VA disability payments that can be received on top of even your military pension?
Tony:
Yes, that is correct. And there are ratings from zero to 100%. 10%, you get around $150 a month, up to 100%, you’re getting up to $4,000 a month. That is tax-free pay and that’s a pension that in some cases may never go away. So you add on your social security, your military pension, as well as VA disability, that really changes your retirement projections quite a bit. We signed an oath to protect the country and the government also signed an oath to take care of their veterans. So for the longest time, I know a lot of Marines and Army folks, they don’t want to get the disability, they don’t feel they’ve earned it, but when you’re jumping off tanks and doing a lot of crazy stuff that we do in the military, you do tend to get broken. So don’t feel guilty about signing up. That is money that’s owed to you and put in a claim at the VA, and again, the VSOs can help you with that.
John:
What are some of the practical examples, you hit on state benefits, that you’ve seen vary between states?
Tony:
They vary a lot by states. So for Texas, for example, if you’re 100% VA disabled, you get 100% property tax exemption, which is huge. That can save you thousands and thousands of dollars every year. You can get free tolls in states, so if you hit certain disability, say 50% in Texas. In your state, John, Arizona also has quite a bit of benefits as well. So Army Benefits has a really good site per state that gives you everything that you’re entitled to. You could even get free national park passes and education. Texas has Hazlewood Act, which gives your kids 150 free credits at any Texas public state institution. So when you talk about education benefits, that’s a whole nother podcast in itself, so I won’t go down that rabbit hole, but I would encourage everyone to look at the VA, look at your state benefits and look what you’re entitled to because they are entitlements. You served your country, you deserve to know what’s out there for you.
John:
Yeah, absolutely. It’s knowing where to look and understanding what the options are. I shared with my son, everywhere you go, just ask if they have a military discount or a veteran’s benefit because a lot of places will give you a discount and he’s like, “Oh, I don’t know if I want to ask for that.” Why not? You’ve served and a lot of places want to reciprocate that by giving you some discounts. I’m speaking with veteran and Creative Planning partner, managing director, Tony.
I think the other thing this speaks to is working with someone who understands what those benefits are, but if you’re a veteran and a huge part of your financial plan involves specific aspects of military benefits, it certainly helps to work with someone who has been there before and done it for themselves and worked with a lot of clients who are in similar situations like you have Tony, and if you’d like to speak with Tony and his team to learn more about what your benefits are, visit creativeplanning.com/radio. Let’s transition Tony over to the TSP. I have a pipe dream that this TSP would be available to everyone because it is a phenomenal plan with extraordinarily low costs. What is the TSP for someone who’s not familiar, and what are some of the unique aspects of the TSP that are different than a traditional 401k plan?
Tony:
The Thrift Savings Plan is a wonderful tool. It’s basically the government’s 401k plan. It has about five or six different options. There’s government securities, large cap, things of that nature. So it has good options, good investments, very, very low cost like you said. And now these days, I know at least for the government side, I believe the civilian DOD contractors also have a TSP as well, but for the military, they have changed it. A few years ago, they went from a straight pension where old folks like me, I had the option of keeping the pension and still doing the TSP, but now, they do a blended where you still get a pension and the government actually gives you a 5% match. So if you’re serving, if you’re not doing a 5% match, at the very least, you’re doing yourself a disservice because that’s free money that the government is giving you.
John:
By the way, for those listening that can’t see Tony like me, he called himself old. He looks like he’s about 35 years old. I don’t know what his skincare regimen is. You’re not old in my book. Now you’re making me feel really old. One of the things about the TSP that I think is interesting is how low cost it is, and then the G fund that you mentioned, that bond fund, the government fund, I don’t know what they do on the back end to make it work, but it doesn’t go down in value and it earns really good returns from a fixed income standpoint. So I would just love to see the person working for a small company who doesn’t have access to a retirement plan, it would be so great if they made something available similar to the TSP because I just think it’s a phenomenal savings vehicle, which is, again, what I’ve shared with my son when I was helping him set up his contributions. This is a great plan with almost no cost.
Tony:
It’s a great plan, and if you signed up when you were 18 and 19 and you started your TSP plan and you saved as much as you possibly can, especially for the soldiers, when you get deployed, like I have several times, you’re not spending any money. That’s the best time to sock away as much money as you can. Anytime you hear a deployment, you just max out your TSP plan because the government’s paying for your deployment anyway and you got nothing else to spend it on. So remember that. Don’t go spend your money when you’re deployed.
John:
Where were you deployed to?
Tony:
I was stationed in Okinawa. I was stationed in the Middle East, Kuwait and Saudi Arabia, Jordan. I’ve done three overseas deployments and then quite a few missions stateside since I’m in the Texas Army National Guard right now. So hurricanes and fires and things of that nature.
John:
Incredible. So what branch of the military were you?
Tony:
I was in the Marines for eight years and now still serving in the army, Texas Army National Guard.
John:
You have any interesting stories to share with us that you can in fact share?
Tony:
One of the interesting stories was, and this actually correlates with Creative Planning, we always give our binders to our clients, during Hurricane Harvey, I got activated for three weeks and I was in Zodiacs pulling people out of their houses, and my clients called me actually when I was on a boat, they told me that their binder floated away. They needed a new one. So I told them, “Well, we do recommend fireproof and waterproof safes. Did you put it in there?” And they said, “No, we didn’t put it in the safe,” so I sent them a new binder, but they did get that waterproof safe.
John:
That’s a good one. Yeah. When the waters receded, all the Creative Planning clients in New Orleans found all their safes at the bottom, picked them back up and were intact if they followed our instructions and actually put it in the safe.
Tony:
That’s right. That’s right.
John:
Thank you again for your service, Tony as we especially remember this weekend, those who made the ultimate sacrifice for us to enjoy the freedoms that we have. It was a pleasure speaking with you, and I appreciate you sharing your insight here on Rethink Your Money.
Tony:
My pleasure.
John:
Financial author Morgan Housel tweeted recently, “The difference between a fine and a fee. A fine is that you screwed up and you’re in trouble. Avoid repeating that mistake,” Housel said, “A fee is the cost of admission that’s worth paying to get something worthwhile in return.” He ended that tweet by saying, “Market volatility is a fee, not a fine.” Now these ideas are often misunderstood and the practical examples and differences between a fine and a fee are endless. I have plenty of personal ones. I mean, a traffic violation is a classic fine. I don’t know what’s going on with me driving to Northern Arizona, but a couple of our most recent trips, I’ve been pulled over.
Now before you start judging me, let me give you the specifics. The first time was in Payson, Arizona at an extremely busy intersection where I was making a left turn. The light turned yellow as I was turning into the intersection, but due to heavy traffic, backed up into the intersection, the light turned red. I’m hanging out in our 12 passenger van that’s basically a mini bus. So I pull off to the right, almost into the shoulder to create space for traffic that now has a green light, but I was sticking out a little bit. Finally, I was able to inch forward out of the intersection only to look in the rearview mirror and see a police officer’s lights on. Now, she was very nice. She told me that my infraction creates a lot of road rage in town because it happens regularly at that intersection. But then rather than giving me a ticket, probably because she saw I had crushed up goldfish and kids screaming behind me in the car, she just let me go on my way with a warning. Very nice of her. So no fine for me.
And then most recently, I was going exactly the speed limit because I saw the highway patrol tailing me, and they still pulled me over, and it was one of those where the officer asked, “Do you know why I pulled you over?” And I said, “I promise I’m not just saying this, I have no idea why you pulled me over.” “Well, sir, I noticed when I was in front of you that your windshield has a slight tint and that’s illegal.” Well, interestingly, I bought my truck used and I certainly didn’t tint the windshield and had never noticed it because it was ever so slight. Thankfully, I was given a required repair notice and sent on my way. Again, no fine. Yes.
The downside is that my wife was in the passenger seat during both of these events and she loves to not let me live it down. She regularly says, “Well, I’m clearly the better driver. I mean, how often do I get pulled over? Way less than you.” So you could argue that I still did face a fine, and that is the fine of being taunted by my beautiful wife. Now, a fee is different. I took my kids to an NF concert. There was a fee, and that was the cost of admission. You can’t just walk into the concert without a ticket and that ticket costs money. And yes, when we wait in a backup of 75 cars at In-N-Out Burger in the drive-through and we order, they ask to run my card. The food isn’t free, there’s a fee. The key differentiation is that fines are for when you do something wrong, you try to avoid them, you generally are upset when you have to pay them, and fees are expected and are in response to value you receive.
How does this apply to your money and to your investments? Well, let’s start with stocks in general. When you invest money in stocks, they’ve averaged almost 10% per year for a century. But the fee is volatility. And notice that I didn’t say the fine. It’s not a fine, it’s the fee. It’s not an unexpected, “I invested in properly, someone messed up. My strategy stinks, I need to drive slower on the freeway or not have a windshield tinted fine,” it’s the fee. If you want a delicious animal style, double double, it costs you $4.90 cents. You don’t throw the burger back in the worker’s lap because they asked you to pay for it. Yet when it comes to investing in the stock market, the moment there’s volatility, it’s easy to feel that way, like something’s wrong. This is some sort of fine, this is harming me.
The reason you approximately double bond rates of return in the stock market is because of the volatility. It’s the price of admission. The stock market minus the ups and downs, becomes a government bond with government bond return expectations. To be clear, the fee is volatility. It’s not risk necessarily. And that is a very important distinction. If you’re able to get that 8% to 12% rate of return with your stock investments, but you have a fairly high probability of losing everything, that would be a huge fee. That’d be sitting in the nosebleeds at a Double A baseball game and being charged 50 grand per ticket, obviously not worth it, but volatility is worth it as long as you don’t need to sell those positions when they’re temporarily down in value. Remember, volatility is just watching your investment price go up and down.
Risk is owning Enron or America Online or Yahoo or in 2008, Washington Mutual. That’s risk. And that’s the very reason why diversification is so important. But there’s a fee as it relates to diversification as well, and that fee is that you’ll never hit the Grand Slam. If you own bonds and real estate and US stocks and international stocks and small stocks and large stocks and growth and value, and we have a run in tech stocks as we’ve seen for the last five or 10 years, the fee you’ll incur is that you’re not going to average 20 or 30% annual returns when your diversified, but it’s not a fine, it’s the fee. It’s the worthwhile price of admission by not having all of your eggs in one basket, by having multiple investments that move dissimilarly to one another in an effort to protect yourself against the strikeout.
You are human, you’re not a robot, you’re not an algorithm. You come with biases and emotions, and those are very healthy to living a well-adjusted life with other human beings. But when it comes to your money and your investments, remind yourself of these fees, because otherwise, you’ll naturally want less volatility. When the market is down in value, you’ll feel that fee more substantially. It’ll be front and center in your mind, and you’ll be more willing to discount that fee, “That’s not a big deal,” when things are looking good, which is the exact opposite of how you make money as an investor, which is by buying low, selling high, and staying disciplined along the way.
Adam Grossman over at the HumbleDollar had a fantastic article titled, Stories We Tell, where he highlights some half-truths, wives tales, whatever phrase you want to use for topics that I would say we need to rethink. The first is that investors should be careful when the market keeps hitting new all-time highs. Doesn’t this seem like it ought to make sense? If you were an investor in the late ’90s and early 2000s when the dot-com bubble burst, you may be concluded. “Well, isn’t that correct?” Like I watched the NASDAQ go down more than 80%. That was clearly a bubble that continued to make new highs before crashing back to Earth. But here’s the problem. The stock market trends up into the right over time, so it’s not only abnormal but should be expected that it continues to hit new all-time highs. There have been thousands of all-time highs, and the stock market has averaged just under 10% per year for 100 years.
J.P. Morgan provides this perspective. In nearly 30% of cases when the market closes at an all-time high, that new high has represented a floor below which the market has never dropped more than 5% from. Put a different way, while sometimes a bubble truly is a bubble, yes, Zoom and Peloton and AMC and GameStop weren’t actually worth what their stock price grew to out of the pandemic, but that’s not always the case. And if you are broadly diversified, you should expect that portfolio to continue making many more all-time highs as you stay invested. Another piece of common wisdom I hear often that we should rethink is that, “In my parents’ generation, people could live on the income from their portfolio. Things were way better then than they are today.”
While it’s true that if you look at your investment statement, you are probably not hooting and hollering over the dividends. Some stocks don’t pay dividends at all, and on average, the S&P 500 as a group currently yields only 1.5%, and that does contrast with history. From 1926 to 2023, dividends accounted for nearly 40% of the entire Index’s total return. So it’s common that you would hear retirees talk about living on the income from their portfolio, and investors’ nostalgic for that era might see today’s meager dividends as a big negative, but that doesn’t tell the full story. Companies are not less profitable today. To the contrary, public companies profit margins have dramatically increased over time, but companies have changed the way they allocate those profits. In the past, a much greater portion was paid out to shareholders in the form of dividends. Now, dividends are smaller and companies choose to buy back company shares in many situations, which begs the question, why the shift?
A lot of it now comes down to how executives at these companies are compensated. There is a far greater emphasis on stock-based compensation, and that’s created more of an incentive for managers to see their company’s share price rise. As a result, companies today allocate more cash to buying back shares because buybacks have the effect of driving up share prices. So should you be upset about this? I don’t think so, because an aggregate buybacks now account for about 1.5% Of the S&P 500’s total return with dividends providing, as I mentioned earlier, about 1.5%, once aggregated, totals 3%, and that’s not that far off from the 4% that investors back in the good old days have historically received as dividends. So they might be lower than in the past, but you’re not worse off as a result, because price appreciation plus dividends aren’t lower.
Another story we tell ourselves is that there’s a penalty if I claim social security while I’m still working. You may have heard that formula, which does sound punitive. Social Security is going to deduct $1 from benefits for every $2 that you earn. There’s more nuance to it. There are some income restrictions in terms of when that starts and how much you need to make, but it doesn’t tell the full story and overlooks unfortunately, a couple of the most important details. The first one being that the penalty is only imposed if you claim benefits before full retirement age. So if you claim benefits at 67 years old and you make $100 million a year, you don’t have to give any of it back. It doesn’t matter how much money you make. This only applies if you’d like your social security before full retirement age and are still working.
But secondly, this isn’t an actual penalty. You don’t lose those dollars. Instead, after you reach full retirement age, social security adds back in the amounts that were earlier withheld. It’s as if you never tried to take them in the first place. In addition, any year in which you work will add to your social security earnings record and that could potentially even increase your benefit. So the bottom line is if you want to work part-time in retirement while receiving social security, no need to worry.
Well, it’s time for this week’s one simple task where I help you make 52 improvements throughout 2024. Today’s tip is to review your auto-pay subscriptions. Forbes recently had an article titled, The Five Tools to Help You Cancel Unwanted Subscriptions. In the article, they pointed out that when asked how much people were paying, consumers underestimated their subscription costs by an average of $133 a month, or if you annualize that, just under $1,600 per year. And even worse, the same poll found that 42% of people had stopped using a subscription but forgot they were still paying it. This tip unfortunately hits close to home. Somehow my credit card information was exposed, and I was notified this last week from my card company that there was a charge for a little over $600 on Hotels.com that originated from somewhere in Africa. Of course, I let them know that I was not in Africa and that was not me. And they said, “All right, well, we will reverse that and send you out a new card.”
But if this has happened to you before, you know what your first thought is, “Oh, no, how many auto-pays do I need to update?” I thought it was pretty cool. Capital One said, “We’re also going to send you an email that shows all of the auto-pays that have been coming out over the last 12 months.” That’s really cool. What was even better is that gave me a chance, not because I voluntarily took myself up on this one simple task, but because I was forced to actually see which of these subscriptions do I even want to contact to ensure that they stay in place?
And so I encourage you, it can be quite eye-opening to review those auto-pays and those subscriptions. On the iPhone, fortunately, you can see very easily what you are subscribed to. But when it comes to your credit card, grab the statement, look through it, and review those auto-pays. You may find hundreds or thousands of dollars underneath the couch cushion. To view all of 2024’s simple tasks, you can find those along with corresponding articles at creativeplanning.com/radio. It’s time for listener questions, and one of my producers, Lauren is here to read those. Hey, Lauren, how’s it going? Who do we have up first?
Lauren Newman:
Hi, John. First up, I have Nancy from Ohio and she wrote in and asked, “My husband, and I want to help our 30-year-old son and his new wife with their first house purchase, but are nervous about using our retirement for this and potentially running out of money later in life. Any suggestions on what we should consider before making this decision?”
John:
Well, Nancy, I love your heart. Fantastic you want to help out your children. I’m sure they would greatly appreciate the gift, but just remember, once you gift, it’s not coming back. And the fact that you are describing in your question that it makes you nervous makes me a little bit nervous. Now, I love the idea generally speaking about giving with a warm hand rather than a cold one. And this is a season of life for your son and daughter-in-law where you can make a huge impact by helping them get into a home. And this is a lot more common in terms of parents or grandparents gifting down payments because inventory’s low, interest rates are still historically high, and pricing hasn’t come down much, if at all, depending upon the local market.
I’m certainly not an expert on Ohio real estate, but Nancy, I’d encourage you go talk to a certified financial planner and get a detailed, written, documented financial plan. Have visibility on exactly where you stand, and then they can model out for you what a gift would look like and how that would impact your future projections. Because before you make this gift, you want to feel assured that you’ll be okay, that your oxygen mask is on first before you’re assisting others. Between your husband and you, you can each gift $36,000, 18K to your son and 18K to your daughter-in-law, and again, you can both do that. So you can get them $72,000 in 2024 toward a down payment without any gift tax implications. If you say, “Well, John, they need more than that.” Give them 72,000 in 2024, and January 1st, give them another 72,000, then you’re up to 144,000, which I would think would be more than enough depending upon the price of the house. It’s a great question, but one you want to feel confident in before stroking the check. All right, Lauren, let’s go to Bernie.
Lauren:
Yeah, Bernie wrote in and asked, “How do I protect my estate from paying an astronomical amount in estate taxes when I pass away? Are there life insurance policies that can assist with the final expenses or settling my estate?”
John:
Thank you for that question, Bernie. Let me just begin by laying the groundwork for what the estate tax is, which you’ll also hear referred to as the death tax. It’s a tax levied on a dead person’s inherited assets, and generally is taxed at 40%, but in 2024, it only applies to assets over $13.61 million. So very few people does this apply to. Now 13 states levy estate as state tax, which I know is kind of confusing. The estate’s value is what will determine whether it’s exempt from the tax or not, and those thresholds vary wildly from state to state. I mentioned the federal estate tax is nearly $14 million per person. Connecticut has a debt tax, but it’s the same exemption amount as the federal, but D.C.’s at under 5 million. Hawaii’s a little over 5 million. Illinois is at 4 million, Maine’s at 6.8, Maryland’s at 5 million, Massachusetts, 2 million is all, Minnesota, 3 million, New York, a little less than 7 million. Here’s a wild one, Oregon, a state exemption, $1 million.
So if you die in Oregon with $2 million, you think to yourself, “Well, I’m golden. I’m not even close to the 13.61.” Yeah, that’s federal. You’re a million dollars too wealthy to avoid paying estate tax in Oregon. Rhode Island’s 1.77 million, Vermont’s 5 million, and the state of Washington is at $2.19 million. So Bernie, you didn’t mention which state you live in, but be mindful if you live in one of those 13 states. Your question was how do you protect your estate from paying these high taxes? If you already knew those limits, you either have over $14 million if you’re single or $28 million if you’re married. So congrats on that and if that’s the case and you’re looking to reduce your estate taxes before you die, here are five strategies.
Number one, enjoy yourself. Spend some money. Another strategy is spreading your assets. These are the same numbers that I shared with Nancy. You can start giving $18,000 to anyone in your life who fogs a mirror, like just rolling around with a giant briefcase full of hundreds like you’re Lloyd Christmas in Dumb and Dumber, and just start handing them out to people. That’ll reduce your estate. As long as you stay under 18K on the gift to any individual, it doesn’t lower that exemption. You can also give away your assets to charities, which is deductible from the gross estate. You can shield your assets in a trust. And lastly, you can reduce or avoid estate taxes by moving to a more favorable tax environment. And if you’d like to talk to a wealth manager or an estate attorney regarding your specific situation, you can do so atcreativeplanning.com/radio. And if you have questions, submit those just as these listeners did by emailing [email protected].
Author Simon Sinek famously wrote a book titled, Start With the Why. The idea is that if you’re not clear on your why, then the what doesn’t really matter. I mean, think about this related to our money. We focus a lot on strategy. How do I minimize taxes? How do I lower internal expenses? How do I optimize my investment returns? All great questions, but I think on occasion, we fail to stop back up and ask ourselves, “Why are we saving money in the first place?” Saving money just to save money without any why is futile.
S.J. Scott wrote a fantastic piece, Offering Ideas For How to Find Your Why, and I’ll share a few of those here as we wrap up the show. First, identify the things that you can do to make other people’s lives better. Number two, think back to the activities you did that made you forget about the passage of time. We’ve all heard the saying, “Time flies when you’re having fun.” Psychologists might refer to it as your flow state. Whatever is the case for you, these activities are where your passions are. And a good way to discover that is maybe to recall what you liked to when you were a kid. You can see glimpses of your purpose by remembering the things that you did just for the sheer fun of doing them because you were a child, there was no other motivation or agenda.
Number three, observe what people ask of you when they come to you for help. Is it a specific talent that you have? Are you a sounding board for your friend’s concerns? What do people thank you for? Appreciation from other people can help fuel your work and help you find your why. Number four, imagine what you’d be doing if you learned that you only had one year left to live. I know we don’t like to think about our death, but it is inevitable. And when confronted with it, it forces you to focus on the things that truly are important. This mindset can lead you to realize what your why is and simultaneously allows you to let go of things that are trivial or distracting from your main purpose.
And finally, if you were given the chance to teach others, maybe for example, young people, what would you teach them? I mean, consider this question. You’re really thinking about, what would you change about the world or what knowledge would you want to pass on to future generations? That can really fuel your why. Clearly knowing your authentic why gives meaning. It promotes relentless daily effort. It’s very motivating, provides you a profound emotional pull to persevere against the external and internal odds. When you’re confronted with challenges, you keep going. Your why gets to the bedrock foundation on which goals and dreams and purpose must be built to outlast inevitable storms. And remember, we are the happiest society in the history of planet Earth. Let’s make our money matter.
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Disclaimer:
The proceeding program is furnished by Creative Planning, an SEC-registered investment advisory firm. Creative Planning, along with its affiliate, United Capital Financial Advisors, currently manages or advises on a combined $300 billion in assets as of December 31st, 2023. John works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not necessarily represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment, tax or legal advice. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels. The information contained herein has been obtained from sources deemed reliable, but it’s 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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