On this week’s episode, we’re kicking off year-end planning — an exceptionally important practice when it comes to your finances. We’re setting the stage by diving into three financial planning misconceptions, rethinking three common financial practices and welcoming back to the show one of our nearly 500 CERTIFIED FINANCIAL PLANNER™ professionals, Managing Director Ryan Swartz, to share his insights. Tune in and give yourself a successful jump-start on one of the busiest times of the year.
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!
Episode Notes
John Hagensen: Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m your host, John Hagensen, and today I’m diving into three common misconceptions that could be holding you back from financial success. Plus later in the show I’ll be joined by a Creative Planning managing director and one of our nearly 500 certified financial planners to help you close out the year strong and set yourself up for an even better 2025.
Now, join me as I help you rethink your money. Have you ever blindly followed the crowd and assumed that just because everyone’s doing it, it had to be right? I remember waiting like an idiot at a bathroom in a gas station while my entire family sat in the car at the start of a road trip only to find out that every single person in this line was waiting for an individual to come out, even though it was a multi stall bathroom, it wasn’t even a single.
It’s like, “What are we all doing here?” Same thing with the latest diet trends. I heard something about Dr. Adkins, that I can eat 29 pieces of bacon, but as long as I don’t eat one single carb, it’s good for me. But guess what? Just because something’s popular doesn’t make it right for you. You have to have individual thought.
Here’s how our mind plays tricks on us. There is a study where a group of people were asked to join in on an elevator experiment. Whenever the people in the elevator turned and faced the back, the person who wasn’t in on the experiment also turned and faced the back. Why? Because we’re hardwired to follow the herd. It makes us feel protected even when it doesn’t make any sense. But here’s where it gets dangerous, especially when it comes to your finances.
The same misconceptions, the same mistakes they keep happening. Because financial knowledge happens to be cyclical. It’s not cumulative, as one of my favorite financial authors, Morgan Housel pointed out. With medicine for example, it’s cumulative. Doctors build on the science that came before. It’s why we no longer think that bloodletting is a good idea and we have antibiotics to infections that used to be fatal. With finance, however, many of the challenges are behavioral.
You have the exact same fears and the exact same temptations today that your great-grandparents had a hundred years ago. The variables haven’t changed much. It’s like that famous quote by Jesse Livermore, the legendary stock trader from the early 1900s who said, “The game of speculation is the same today as it was 50 years ago. It’s always the same. Fear and greed keep moving the market.” That’s as true today as when it was said then.
My point is misconceptions are easy for all of us to fall into, but they can be exposed. That’s the positive aspect of this. And my job here today, I want to shine light on some of these blind spots and help you see what’s true and what’s simply not serving you when it comes to your hard-earned money. Misconception number one is that every financial advisor is the same. I want to start with this one because it’s a big misconception. People think an advisor is an advisor, right?
They all do the same thing. Well, let me tell you, nothing could be further from the truth. You wouldn’t walk into any doctor and say, “Well, apparently they’re a doctor. Please give me open-heart surgery.” And you certainly wouldn’t go to a doctor with a life-threatening illness who was paid on how much medication they sold you at the end of the surgery. Unfortunately, while there are many great financial advisors out there, they’re not all the same, and they are not all equal.
First off, you have the broker. Brokers make their money through commissions. You want to figure out why someone’s offering what they’re offering? Trace it back to their incentives. They may have years of experience, they might be well-educated, they may be very competent, they may be well-intended, but at the end of the day, they get paid when you buy and when you sell something.
That creates a conflict of interest because what if the best thing for you to do is nothing? The second, and this is even more difficult to spot, is the dual-registered advisor, the person who is a financial advisor and a broker. Now, this person often presents themselves as a fiduciary. If you ask them, they’ll say, “Oh yeah, of course fiduciary.” But here’s the catch, they can switch hats, literally take off the financial advisor hat, put on the broker hat, and are no longer held to a fiduciary standard of care anymore.
So one minute they’re advising you, the next they’re selling you a product that earns them a commission. And in some cases, I’ve even seen these dual-registered advisors selling products manufactured by their parent company that may come with higher fees and expenses than a lower cost alternative. And you’re thinking, “I don’t know. They said they were a fiduciary.” Yeah, some of the time.
The third type of advisor and the one that I advise you work with is a pure fiduciary. A pure fiduciary is legally obligated to put your interests ahead of their own at all times, not just when it’s convenient. You’re not paying them commissions. There’s no third party kickbacks, no proprietary funds. And here’s the best part about this, when you work with a registered investment advisory firm like us at Creative Planning, we have no incentive to push certain products. So you know we’re giving you objective advice based on your unique individual situation.
Now, if you currently outsource your wealth management, your financial planning, the question I want you to ask is whether or not your advisor acts as a fiduciary at all times. Misconception number one is that all advisors are the same. Misconception number two is that a general financial plan works for everyone. This one really gets me. Have you ever tried one of those one size fits all shirts?
Yeah, it might technically fit, kind of, but it doesn’t look great. Sleeves might be too long, necks too tight, and instead of making you look sharp, it makes you look well, let’s just say less than your best. The same applies to financial planning. One size absolutely does not fit. All your financial plan needs to be customized to you and to your goals and to your timelines and to your values. What do you want to get out of life?
Do you want to retire early? Do you want to work until you can’t anymore? Do you want to leave money to your kids or do you want to enjoy every single penny before you go? These are just a few of the thousands of personal questions that should be baked into your financial plan. And a big part of this, by the way, isn’t just what your future goals are today, but much of it’s rooted in your past history with money, your money scripts, those unconscious beliefs about money that were formed early in life.
If you grew up in a home where money was scarce, you might have a deep-seated fear of spending. You could never be too overfunded for retirement. Even if you’re financially secure now, you worry, “Do I have enough?” On the flip side, if you grew up in a home where money was used as a tool for status, you might find yourself overspending to keep up with appearances.
Or maybe you go the other direction, “I’m never going to do that.” Your financial history shapes your present decisions. I remember one of my clients came to me and said, “I grew up in a house where money wasn’t discussed at all. We didn’t talk about it, we didn’t plan for it, and now I don’t know where to start. I don’t know how to facilitate these conversations with my children and with my grandchildren.” Well, we worked together to create a custom financial mission statement that reflected her values, which included providing for her family and giving back to her community.
Here’s a sample of that mission statement we created. “Our family will prioritize saving for our children’s education, maintaining a sustainable lifestyle and giving generously to causes that align with our values. We’ll strive to balance our enjoyment of life today with our responsibility to build wealth for future generations.” It was personal, it was intentional, and it provided the foundation for her custom financial plan.
And a third common financial misconception is the idea that, “I’m not in a position to have a financial plan or a financial advisor.” Too many people believe that unless they’re millionaires, they don’t need a financial planner. But the truth is everyone, regardless of your income, regardless of your assets, you benefit from having a plan. So why do people so often think they’re not in a position for this? The reasons vary.
I’ve heard a lot of them, but typically they fall into a few categories. The first is, “I just don’t have the time.” People tell me this often. But have you ever looked at your screen time report on the iPhone? And that’s humbling. I found a new category that’s called pickups, literally tells you how many times you’re picking up your phone and looking at it. Woo. Do not look at that unless you want to feel a little bit convicted about how much time you’re wasting.
They’ve got hours for Instagram, they’ve got hours for ESPN, whatever your fancy is. Let’s be honest, the time is there. This is your life-saving. It’s really more of a matter of how you’re going to prioritize it. Other people say, “Well, I don’t have enough money. Really no point for an advisor, no point for a plan. It’s just for the ultra wealthy.” I just mentioned this. No, it’s not.
The time to start planning is when you feel like you don’t have much because that’s when the compounding effect is most powerful. It’s like the famous quote from Einstein who called compound interest the eighth wonder of the world. He said, “He who understands it. Earns it. He who doesn’t. Pays it.” How about this misconception? “Oh, well it costs too much.” A lot of people think, “Well, it’s just too expensive to hire a financial advisor.”
No, a good fiduciary advisor should add value in excess of their fee if they’re doing a good job. And if you’re working with a pure fiduciary, it’s no hard sell. It’s not a big cost up front, but rather an opportunity for you to gain clarity on where you stand today and how your projections look relative to what you’re trying to accomplish.
So to sum it up, whether you are just starting out trying to balance a career and family, building your financial foundation or you’re gearing up for retirement or you’re already in retirement, whether your net worth is 50,000 or 50 million, having a financial plan is a must. Having a financial planner is not a must, but having a financial plan is. And if you don’t know how to do it or you don’t want to do it or you don’t have the time to do it or the expertise to do it, then yes, I believe a financial planner is also a must.
So to recap the misconceptions that hopefully I’ve debunked and shed some light on today, number one, every advisor is not the same. There are good ones, there are bad ones, and those who are conflicted. And you need to understand the differences. Number two, there is no one size fits all financial plan. Your plan must be customized to you, your goals, your values, and your financial situation. And everyone, yes, everyone is a candidate for a financial plan.
I’m joined today by an extra special guest, fellow Creative Planning partner and managing director of our Omaha Nebraska office, Ryan Swartz. And just like myself, Ryan has had conversations with thousands of people just like you over the years and today we’ll learn from his perspective. Ryan, thank you for joining me on Rethink Your Money.
Ryan Swartz: Absolutely. Happy to be here.
John: What is one of the biggest misconceptions, Ryan, people have about year-end planning?
Ryan: The misconception I see a lot is that it’s a long-drawn-out complex topic. And I think what that mentality leads to is procrastination ultimately. And it can be really simple. If you’re doing a calendar reminder or the same things every year, the key here to this is actually do the opposite of how I start my day.
When I start my normal day, I want to the hardest thing first and then it gets easier from there. When people are looking at year-end planning, they should try to knock off one to two really easy items, gain momentum and quick hits are moving into creating something that they think is overwhelming and complex into something that’s, “Hey, wait, I’m really making good headway here.”
John: Well, let’s suppose someone is already maxed out retirement contributions. They’re coming toward the end of the year. Maybe fortunately they’ve had a really good year and they’re wondering, “All right, what else beside the real obvious things, which I think I’ve already checked off, can I be thinking about before 1231?”
Ryan: Well, if you’ve done the retirement contributions and you’ve put yourself in a position where you’re ahead of the game, the biggest areas to really make an impact are looking at all of the tax planning that’s there. We talk a lot about tax harvesting at the end of the year, but really throughout the year. That’s a big piece. And then of course if you’re looking at charitable items or gifting, it’s a good time to think about getting all those updates in place and making sure that they’re there for the ones that you care about.
When we look at year-end planning, it’s how do we get things in alignment with our budget? What are we putting in place? What are subscriptions do we have that maybe we don’t need? Taking a review of that before the end of the year and knocking those things out. Obviously retirement contributions are a big piece, but really setting the stage for the future where they can be more automated and systematic about their normal after-tax savings as well.
I think all those fall into place as they go into the new year. And it really lines up well because people are getting their benefit elections for the next year. They’re still working what they want to do to a flexible savings account or a health savings account or what they’re doing in terms of making sure all their savings and their budgeting’s set up to start the year strong.
John: Well, and you mentioned tax harvesting. For those who aren’t aware maybe that just need a refresh, I think that can often be one of the most overlooked easy opportunities to reduce taxes. Can you walk listeners through when you refer to tax loss harvesting, what that is?
Ryan: Yes. And I actually think that is one of the most overlooked strategies. And not so much the strategy of tax harvesting, which really what tax harvesting is you can buy an investment and what you’re doing is if that investment happens to be down in the short term, you may actually sell that position and immediately purchase another position that isn’t the same but it correlates the same way. One example is the S&P 500.
There may be an ETF that is invested in that may be down in the short run, but you’re competent in the long run of that investment. You want to own that asset class. You may sell that and move to another investment that’s not substantially similar. So something that maybe tracks the top 1000 stocks. So you’re getting the same correlation, maybe 98 to 99 percent of the time. You’re getting a similar dividend yield with companies that are in the same currency, in the same market, but you’re taking that loss in the short run and you’re putting it from an unrealized loss to a realized one on your tax return.
Anyone in America can offset up to $3,000 of any of their ordinary income each year in those losses, but any losses above that can actually go to offset other capital gains down the road. So if you have losses that you’ve tax harvested and they stay on the books, if you sell a business or you sell a real estate property or you sell a stock or a bond and it has a gain, you could potentially offset that and so it really helps you to keep more of your return.
The reason it’s overlooked a lot of times is people don’t think about that and a lot of tax preparers when they’re doing year-end planning, they have a call or advisors, they say, “Well, go look at your accounts and go tax harvest at the end of the year.” Well, the end of the year in the fourth quarter may not be the best time to make those changes, right? And typically, it’s not.
Typically, the fourth quarter is a pretty strong quarter for markets in general, but maybe throughout the year there were better times to tax harvest. And as you know at Creative Planning, that’s one of our core strategies to make sure we’re taking those opportunities throughout the year at any time, one client at a time on what they need to tax harvest those. And that’s much more proactive and in a better position than maybe just talking about at the end of the year.
John: No, it’s a really good point. Markets recover so quick. You look at March nine of oh nine was the bottom of the great financial crisis, and then COVID obviously bottomed out in March and then came screaming back over 70% the final nine months of the year. If you were waiting until December, you would’ve looked at your statements and said, “Well, I’m up 20%. How did this happen? We had a global pandemic, but my stuff’s up in value. There’s nothing to harvest.” Where if you had been looking throughout the year, there were some significant opportunities to harvest. What’s the biggest mistake that you see made with year-end planning?
Ryan: When people procrastinate, it creates issues where it just limits the options. As you procrastinate, you wait toward the end of the year to do the planning. That’s a big mistake people make within year-end planning. And I think if a lot of people can move toward more of a strategic approach. As an example, when we look at contributions to your retirement plan, obviously the more you can front load those into the early part of the year or gifts to a 529 or for any education or anything that’s compounding for long-term investing is better off being invested toward the early part of the year, but the discussions almost always happen toward the end of the year.
And that gives you more options. If laws change throughout the year or markets move, you’re moving yourself into more of a proactive state with these items and they’re not emergencies toward the end of the year when we’re limited with business days to get things done. And there’s a bottleneck approach anyway with institutions and financial firms, custodians processing information. If you look at Thanksgiving and the day after, not a lot gets done there. You look at weekends and then you have Christmas and you have a few market holidays in there. You’re really only talking about less than 15 business days between November and December that you could really get things done.
John: I love that advice. Somebody’s listening, they’re a little overwhelmed, but they’re also going, “Yeah, Ryan’s hitting. I do need to do some of this,” where do they begin? What would you say, “Hey, here’s the first step to simplify this and break this out into chunks.”
Ryan: The first thing I would do is put it on calendar, set an hour time slot. Think about all the time throughout the year that you are doing different things, going out to eat, you’re going to a movie, whatever it is you’re doing. Take an hour.
John: Scrolling Instagram.
Ryan: Yes. Just take an hour off social, book it on your calendar so it’s there. The first place to start is doing the budget and looking at where things are going, maximizing retirement contributions and front loading any contributions that are there. And then knowing what the calendar year items are. Roth conversions, they’re charitable gifts, they’re things that have to be done within the calendar year.
John: Gifting to family members, right? Up to the max.
Ryan: Exactly. Gifting. Processing your qualified charitable distribution, which is part of your required distribution for some of the seniors or people that are taking those monies. One of the common things I see is people will wait because they want to make that gift to their church or they want to make it in December when it’s around that period and you process the qualified charitable distribution, that check gets cut, and we already talked about the lack of business days and the holiday bottlenecks.
That check may not get cashed till the next calendar year, right? It gets cut December 15th. If you want to make sure that things are buttoned up, they’re there, setting that hour aside, September is a great time, but anytime you can do it, even in January. If you did also have an emergency that happened and you’re like, “Wow, that didn’t feel very good. I didn’t like how that went,” turn around in January and try to get ahead of it.
That’s the other coaching piece I always tell clients is, “Hey, you were on the naughty list, emailed it December 30 this year to try to get a Roth conversion done. How about we get your tax return from 2023? We project where you’re going to be and let’s talk about it in January. And if it makes sense, let’s don’t let that be an emergency. Let’s get that off the books.” And start that different pattern, I think is a big piece for everyone. It doesn’t become as overwhelming. It doesn’t limit your options and it gives you more time to think about it as things change throughout the year.
John: What do you think, Ryan, is a piece of year-end advice that you hear that you think’s overrated?
Ryan: Sometimes it’ll be a CPA or sometimes it’ll be a friend or somebody who’s looking at their tax return. They’re saying, “Hey, I’m carrying forward this loss. Let’s go ahead and find something in there that we can just offset it.” Because the mental accounting for that client is people don’t want to feel like losses. They don’t invest in losers, right?
And we got to clean that up right away because it’s just a reminder on their tax return every year, and maybe the CPA reminds them, ideally, you have a loss carry forward as long as you can because you’re offsetting those gains. And so it’s that mental accounting piece that makes that advice overrated where somebody’s like, “Hey, you should go in and clean up and take some of the gains from these unrealized gains.” Well, if you like the company or you like the stock or you like the positioning of your portfolio and you would go buy it today for the future, there’s really no need to accelerate those gains and try to clean up some of your losses when you can carry forward indefinitely over time.
John: It’s important to remind these don’t vanish 1231. Do you have a personal story or a client example where year-end planning made a significant difference?
Ryan: Yes. There’s obviously a number of examples, but top of mind here in this particular case, I call it bridge planning, where you’re working toward when you’re going to retire and have these events. Sometimes it makes sense. In this client’s case we were doing bunching, when bunching just means that instead of giving to your church or your charity or your university every year ,you do a larger sum into a charitable fund.
They call that a donor advised fund or even a foundation where you’re putting in a larger block in one year, you’re getting that tax deduction in that calendar year, but you don’t have to grant that out to the charities all in that same year. And so if you’re doing bridge planning, you’re saying, “Well, I’m in my sixties, I’m 62 or 64 and I may retire in the next six years and I’ve got now at 73, I’m going to have to take required distributions.”
Setting up a year-end plan where we’re not changing somebody’s behavior where they’re getting more charitable or we’re telling them to donate more to charity, but it’s like, “Hey, let’s take advantage of what you’re doing and maybe bunch in three to five years of that and then itemize and then standard deduction, standard deduction, standard deduction, itemize again.”
And then when they get to the point where they have to take required distributions from their retirement accounts, they can then use those credits to give them directly to the charities. Each client’s situation’s unique in terms of what they have going on, their time frames, when they want to retire and what buckets of money they’re using that are taxed at different rates, whether it’s deferred accounts or it’s taxable money.
And this is a way most recently where we’re able to set up a plan that’s proactive, that optimizes what they’re doing. The charities end up getting more, they’re paying less in taxes, and they’re not changing anything about what they would do if they were worth 10 million or they’re worth two million. They’re still going to give to their church. They’re still going to do these things. Let’s make sure we optimize that for them and use that strategy to help them.
John: Well, that’s a great tip and a great spot for us to finish up. Thank you so much, Ryan, for your time and for joining me on Rethink Your Money.
Ryan: Thank you, John.
John: Sometimes taking a second look can change everything. One of my favorite examples of this is the story of George de Mestral. He was a Swiss engineer and it involves his dog too. I love our two dogs. Well, I love our one dog, and then my whole family talked me into getting a puppy. So now we have a perfect six-year-old dog and a puppy that chews holes in everything. Honestly, kind of makes my life miserable, but everyone loves this dog.
So anyway, everyone loves a good dog story. I digress. Back in 1941, after a walk in the woods, de Mestral noticed there were burrs sticking all over his clothes in his dog’s fur. Now most of us would’ve just brushed them off and moved on with our day, but George took a second look. He examined those burrs under a microscope and discovered the tiny hooks that allowed them to latch onto fabric and to fur.
Fast-forward, you may know where I’m going with this, that second look turned into Velcro, an invention that revolutionized industries from fashion to space exploration and likely made him a decent chunk of change. My point is, oftentimes you and I are just going through the motions, whether it’s with the advice you’ve been given or the habits that you’ve developed, but sometimes if you do take that closer look, you discover an entirely new perspective.
And that’s exactly what we are going to do today with three common pieces of financial wisdom that may be holding you back. So let’s get into it. The first is to spend your health savings account funds before the year ends. The belief that you need to spend your HSA money before the end of the year or you’ll lose it or you’ll suffer adverse consequences or it’s not smart, simply isn’t true in most situations.
One of the reasons is HSA funds can be often confused with flexible spending account funds, FSA, which does have the use it or lose it rule. But HSAs, no, they’re different and they’re different in the best way possible. The beauty of an HSA is that it’s triple tax advantage, meaning contributions are tax-deductible, the money then grows tax deferred, and when you use it for qualified medical expenses, withdrawals are tax-exempt as well.
You can also invest the dollars you contribute exactly like other investment accounts and they’ll grow theoretically if you are invested for the longterm and solid investments. Here’s where the magic happens, you don’t need to use the HSA funds by the end of the year. In fact, you don’t even need to use them over the next five years or 10 years. You can let them grow for decades.
So if you contribute to an HSA and then you immediately turn around in that year and use those dollars for medical expenses, that’s still certainly better than not having funded the HSA because you’re paying medical bills with pre-taxed dollars. So it’s not like you’re doing anything wrong in that scenario, but you’re only benefiting from the first of the three tax advantages.
You see if you can swing it and you have enough cashflow, you let that account compound for decades and you end up with a huge pile of money to cover medical expenses in your retirement and now you’ve benefited from the tax deferred growth and the tax-free withdrawals assuming you’re using them for qualified medical expenses. Plus, here’s something that I find a lot of people don’t realize that I meet with, HSAs don’t expire when you retire.
They’re not tied to your employer in the sense that you have to relinquish the account or spend it down once you’re not employed. And they’re a fantastic tool for covering health-related costs when Medicare kicks in because medical expenses tend to rise as you age and having that HSA can be huge relief to a potentially sort of risky variable to your retirement plan.
And let me throw this at you as another bonus. Actually, I’ll frame it as a question. What happens if you pass away with 500 grand in your HSA? Let’s suppose you did everything that I mentioned and it’s grown from your 20s and 30s and you’ve just been maxing it out every year but not spending it. Do you lose it? Does the IRS swoop in?
The answer is, it passes along to your beneficiaries just like any other retirement account. You funded it with pre-tax dollars, it grew tax deferred, but because you died with it, they don’t get to take it out tax-free. It’s not comparable to a Roth, but in the end, it was just another retirement account that went to your beneficiaries. It’s not the worst case scenario. And in fact, if it’s your spouse, they can inherit it and continue using it as their own.
So it’s not a use it or lose it situation. And the takeaway here is simple, don’t rush to spend your HSA funds. Well, next up, there’s this common wisdom that you should max out your retirement accounts pretty much regardless of your financial situation. Now, I’m not suggesting that having a high savings rate or being aggressive and disciplined and automating those contributions for retirement that that’s not smart.
Of course it is. But specifically into your retirement account, that’s something I want you to rethink. Because here’s the deal. There’s a balance that has to be struck in terms of where you’re saving, what the tax benefit is today, what the impact and ramifications of that contribution will be on your future self and how does that compare to alternative options. What if you need access to cash before 59 and a half?
All that money you’ve piled into retirement accounts is locked away unless you want to pay the penalty and taxes on early withdrawals or go through the process of what’s called a 72(t), which is rigid and can be a big pain, where are you going to get money? I had a prospective client come in recently, a successful business owner who had done an incredible job saving for retirement, but nearly all of his wealth was tied up in his 401k.
Well, he wanted to slow down and maybe invest in a rental property, take a few years off, but most of his assets were locked up in his retirement accounts. They were all tax deferred and he was only in his early 50s. So he had this issue of, “I have a pretty sizable net worth, but very little of it is available to me because I’ve chosen to save in a tax deferred manner in traditional retirement accounts, and I want a non-traditional retirement.”
He just hadn’t thought about this liquidity piece and I want to make sure you do. Think about it like this. We’re here in football season. Don’t be the coach who burns all their timeouts early in the third quarter. You know exactly what I’m talking about if you’re a fan of one of these teams. And then you find yourself in that tough situation in the fourth quarter with no flexibility. You want to challenge a play, that clearly was the wrong call.
Oh, sorry. You can’t challenge it. You have no timeouts left. Man, it sure would be nice to kick the ball deep here. Let our defense try to stop them and call our three timeouts and have them pump back to us. Oh, sorry, we have to onsite kick it, which has a devastatingly low percentage of success. We have no timeouts because we burned them earlier. Same exact thing can happen with your money. If all of your savings is tied up in accounts that are penalized for an early withdrawal, you’ve left yourself without options.
So yes, save for your future, but make sure you’re doing it in a way that keeps you flexible and prepared for the present too. Now, I want to be clear, saving up to the match is almost always a good idea. It’s a 100% return day one on your money. So I’m not suggesting you shouldn’t be doing that, but once you’ve met that match and now it just becomes a tax deferred account, you do want to pick your head up and rethink it.
Should I be contributing to the Roth side of my account? How much money do we have in outside brokerage accounts that we could access pre-retirement? What are some of our other objectives for college education, for kids or grandkids? Do you want to buy rental properties? I don’t want to do that inside of a self-directed IRA. Sure, you in theory can and there are a whole bunch of reasons why I don’t suggest it. So you should rethink spending your HSA funds before the year ends. You should rethink blindly maxing out your retirement accounts.
And our final piece of common wisdom to rethink together, rushing to sell underperforming investments because you want a tax loss harvest. Fellow managing director, and the guest I interviewed earlier in the show, Ryan Swartz, talked about tax loss harvesting and the value that can provide. However, don’t let the tax tail wag the financial planning dog. What I mean by that is you don’t want to make short-term decisions to try to save taxes that hurt your long-term goals.
I had a prospective client come in last year and she had sold off several of her underperforming stocks just to lock in tax losses. She had heard that tax loss harvesting was a great idea and that was kind of where she tuned out, where she lost track of the other implications. What she didn’t consider was that those stocks were part of a broader strategy. She sold off stocks that all contributed to one sector of her portfolio and most of one entire asset category, and she missed the second part, buying something similar immediately afterward to keep the portfolio constituted as it should, relative to her goals.
So it’s properly diversified. So the market quickly rebounded. She was sitting on the sidelines with those proceeds and missed out on all those gains plus the compounding potential of those gains because she sold them off wanting to book the losses on her tax return, which again, at a high level isn’t a bad idea. So here’s the broader point. Don’t panic when things are down. If you are investing in solid companies, you’re well diversified. Market dips are part of the process.
The average correction in a calendar year is about 14%, so that part is normal. But here’s the key too, she did this with individual stocks. When you hear me talk about tax loss harvesting, I am assuming that you’re broadly diversified. You have some level of long-term predictability of the portfolio. And so if large US stocks, you’ve got an S&P 500 index fund and it’s down 14%, we shrug, we don’t love it, but we shrug and we say, “That’s pretty normal.
It will likely come back since it’s averaged around eight to 12% per year for 100 years.” Of course, past performance, no guarantee. And of course the order of good and bad years are wildly unpredictable. But you use that as what you perceive to be a temporary drop to book the losses, but then stay invested in something similar for when it hopefully recovers. The same is true with rebalancing.
I’ve had people come in and ask me, “John, I heard you talking about rebalancing, but if one of your investments is down 25% and now it’s under-weighted and you buy a little bit more of that to get it back to the right percentage allocation, what if you just threw good money at bad money and it’s never coming back?” That would be true, again, if this was an individual stock or a handful of individual stocks. Rebalancing is incredibly risky because it could turn into AOL or Enron.
I totally agree, doubling down and rebalancing on undervalued positions when they’re a single stock, good luck. Who knows what’s going to happen with it? But rebalancing and tax loss harvesting within the context of a well-built portfolio that aligns with your time horizons and your goals and your tax and estate planning strategies, that’s what you are shooting for. But in general, whether it’s tax loss harvesting or some other tax related strategy, I’m going to buy an opportunity zone investment or I’m going to buy some tax credit program or an oil and gas limited partnership that offers me deductions.
Just be very careful and ask yourself, “Would I do this exact investment if there were no tax advantages?” Now, if your answer is, “Yes, I really like the investment, it aligns with what I’m trying to do at a broad level, and by the way, there are also great tax benefits,” fantastic. I think oftentimes the answer to that question is, “I would not want to deal with this complexity, this uncertainty, this lack of transparency, complications related to tax reporting if it didn’t have tax benefits.” Well, that’s a really good reason to hit the pause button.
When it comes to managing your finances or managing life, simple things aren’t always easy things. Regularly planning a date night with my wife is simple, but for whatever reason, and I’m ashamed to say, I don’t plan it often enough. I get busy, I’m doing other things, I’m distracted with all of our kids. It’s not an excuse, but it’s a reminder that simple things aren’t easy. So I like to ask myself in those situations, might there be a way to automate this?
I know, how romantic of me, how do I automate our date nights? But in all seriousness, are there ways to remove friction? So in the end, I’m actually executing on things that matter to me and that are important to me. And it’s the same with your finances. Sometimes the task is straightforward, but following through can feel like a monumental challenge.
Or you’ll look back and just scratch your head, “I have no idea why I didn’t do that.” It’s simple, but again, it’s not easy. So today I’m going to help you tackle one of those simple yet critical tasks in this week’s one simple task, which I will post to the radio page of our website, where by the way, all previous weekly one simple tasks are listed for all of 2024. The goal being to help you incrementally take small actionable steps to improve your financial situation.
Today’s, get a second opinion. Now, I know, sounds self-serving. Oh, I’m sure you want me to go to creativeplanning.com/radio to schedule my visit. And yes I do. If you are not sure where to turn and you’d like to speak with a fiduciary, we’ve been helping families for 40 years. We manage your advice on a combined 200 plus billion dollars in all 50 states and abroad. Of course, I believe in what we do.
I’m a partner here, I’m a financial advisor at Creative Planning. But find a fiduciary that is independent, that’s not looking to sell you something and get a second opinion. When is the last time you had someone else look at your financial plan? If you do it yourself, when is the last time you had someone who does it for a living review your strategies? Or if you work with a financial advisor, maybe you’ve been with them for a long time, why not give your wealth a second look? We understand this when it comes to medicine, a potential procedure.
Most areas of our lives, we’d benefit from a second set of eyes, someone we respect that has experience. The same is true with your money. Go find a certified financial planner that’s not going to peddle proprietary funds or some investment that they get massive kickbacks under the table on and have them look at what you’re doing. This is what you’ve worked a lifetime to save. Think about how many days and weeks and months and years and decades you have worked probably really hard to save what you have.
I’m biased, but I think it’s worth it. And again, we’re happy to help at Creative Planning, but if you have someone else you trust that fits the description, talk with them. It’s a simple task, but the results can be huge. Get that second opinion. Now, let’s jump into one of my favorite parts of the show, listener questions. One of my producers, Britt is here to help me out. All right, Britt, what’s the first question we have for today?
Britt Von Roden: Our first question for today is from Mike in Omaha. He is wondering what factors he should consider when deciding whether to renew his CDs or explore other investment options as they approach their maturity dates.
John: Great question, Mike. For a long time, CDs were simply an FDIC insured place to park money and earn point 000001% interest. Obviously, rates have come up, they’ve become a little bit more attractive again, so your question is a somewhat common one. As they reach that maturity date, it’s important that you reassess your options. One of the biggest mistakes I see people make is they just automatically let their CDs roll over without considering what other alternatives there are.
Of course, many banks are more than happy to renew them at a rate that’s lower and rates since they’ve ticked down a little bit are probably lower than whatever you had a year ago or two years ago. Now, certainly not if it was a CD that you purchased eight years ago. But pay attention to these rollover dates. Make sure you understand what the new interest rate will be and how long you’ll be locking up that money for.
Again, the broader point is do CDs even fit into your overall financial plan? Is that the right place to put the money? Not specific to that bank, but should that be in bonds? What do you plan to use that money for? And maybe even more importantly, when do you need the money? I’ve never really understood a ten-year CD. If you plan on not using the money for 10 years, historically speaking, you have a 98% chance that the broad stock market will be up in value.
Now again, of course it’s not guaranteed. It’s less predictable. There are plenty of variables. And from a probability standpoint, you have a much higher likelihood of earning better returns and being positive than taking a much smaller rate of return in a CD. And if you’re unsure what your risk tolerance is, how much you should have in CDs?
Do you have too much? Do you have too little? How do they fit into the bigger picture? Not to mention that the interest is taxable on those CDs. Might there be a better after-tax returning vehicle than a CD? I don’t know, but it’d be worth looking at and this is a perfect example of when to seek that second opinion that I just referenced. All right, Britt, let’s go to the next question.
Britt: You bet. Our next question is from Heather in Maine. She shares that she has two children that are now in college that she wants to help when it comes to managing their money, but she also wants to avoid credit card debt. John, any ideas or tips you might have for Heather?
John: Heather, I feel you. As a parent myself, I understand wanting to set your kids up for financial success while protecting them from some of the mistakes they might make along the way. Probably mistakes that you and I made along the way. We want to help shield them from those. But when it comes to managing money in college, I’d say the number one thing is education for sure. So sit down with your kids, create a real simple budget. It’s not going to have a lot of line items.
They’re in college. But show them about how much money they’re going to need each month for essentials. What’s your rent? What are your utilities? How many roommates do you have? If you’re like me in college, we had four guys in a two bedroom place, so we were chopping up everything, groceries, textbooks, some entertainment money, like what’s this really going to cost? And make sure that they budget realistically.
They are going to go out some, they are going to have some fun, but it’s way better to plan for it than for them to be caught off guard. And help them understand these credit card companies are going to aggressively seek you out. That’s where they start attracting you with this dopamine hit of consumerism and of, “Oh, I don’t know if I really have it, but this little card, I just tap it on this machine and I can buy whatever I want. “
So educate them around the risk of credit, why it needs to be paid off every month. Frankly, a lot of kids in college shouldn’t have a credit card. I know there are a lot of different opinions on this. You know your kids, are they ready for a credit card or should they just have their debit bank card that declines if they’re going to overdraw, it just doesn’t work? But I’d sit down and have that conversation with them to make sure they understand the implications. And if they’re going to have credit cards, help them establish limits on those credit cards.
They’re even cards called secured credit cards, which requires a deposit and helps them build credit without the risk of racking up unmanageable amounts of debt. Talk to them about the value of saving early. It doesn’t have to be a lot, but even if in college they’re saving $25 a month or $75 a month, if they have a part-time job while they’re in school, maybe you can help match what they’re earning by contributing to a Roth IRA on their behalf.
There are a lot of really cool things you can do if you’re a proactive parent when it comes to your kids and their financial literacy. It’s a great question. I appreciate all those questions today. If you have questions, whether it be about your asset allocation, investments, overall financial plan, submit those by emailing [email protected]. As I wrap up today’s show, I want to talk about expectations.
They say the root of all disappointment, of all frustration, what it ultimately boils down to is unmet expectations. Discontentment is the gap between expectations and reality. And this is true in so many areas of our lives and especially when it comes to our finances. There’s an interesting psychological study about Olympic medalists that I’ve always found fascinating. It turns out that bronze medalists tend to be much happier than silver medalists.
You’d think silver would feel better, right? We beat the bronze person. We got second. We didn’t get third. But here’s the thing, silver medalists often feel like they lost the gold while bronze medalists, they’re just thrilled to be on the podium. “I made it. I’m up here.” It’s all about expectations. And the same is true with your money.
If you expect your investments to always go up, if you expect get a $40,000 raise or bonus and it ends up being 30,000, or if you expect everything to fall perfectly into place financially, if you’re a parent and you expect to come home after a long day at work and the house to be absolutely perfect, and your kids sitting there with their arms folded and all their homework done, with their hair gelled on the side. “Hi, dad, did you have a great day today?
Would you like me to iron all of your shirts?” That’s an expectation problem. You’re going to be very disappointed. But if instead you set realistic expectations, understand there’s going to be ups and downs. You’re going to need to have patience and consistency. Those are the keys. That’s when you’ll experience financial peace.
When you have an advisor who guides you and educates you, or if you’re doing it on your own, you self-study these things and you’re acutely aware that one out of every four years the market’s down in value. Couple times a decade, you’re going to have bear markets and some of them are going to be scary. You’re going to have asset categories in a diversified portfolio that underperform and underperform for years or decades. Michelle Kwan, the figure skater, gave an interview after winning a silver medal and she said she was thrilled with silver, which flies a bit in the face of that research I shared.
But here’s why she was. She knew she’d done her best, especially considering she’d been injured leading up to the Olympics. So her expectations had shifted because she wasn’t even certain she’d be able to compete. So the silver medal seemed like a great victory from that perspective. Her sister was a competitive figure skater as well, and her parents taught both of them, “Don’t compete against each other because every competition one of you is going to feel like you’ve lost. Instead, both of you just do your absolute best.”
That’s what we want you to measure. Did I do my best? Not winning and losing. And because of that, she was able to see her silver medal as a victory. The same goes for you. Set realistic expectations, do your best and be patient. Because when it comes to your money, just like in life, it’s not about beating everyone else, it’s about running your own race, at your own pace, and achieving what’s truly important to you. And remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter.
Announcer: Thank you for listening to Rethink Your Money, presented by Creative Planning. To hear past episodes or learn more about the topics and articles discussed on the show, go to creativeplanning.com/radio. And to make sure you never miss an episode, you can subscribe to Rethink Your Money wherever you get your podcasts.
Disclaimer:
The preceding program is furnished by Creative Planning, an SEC registered investment advisory firm. Creative Planning, along with its affiliate, United Capital Financial Advisors currently manages or advises on a combined $300 billion in assets as of December 31st, 2023. John Hagensen works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not necessarily represent the opinion of Creative Planning.
This show is designed to be informational in nature and does not constitute investment, tax or legal advice. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on the show, will be profitable or equal any historical performance levels. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.
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