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Debunking the Biggest Personal Finance Myth

Peter Mallouk Portrait

John Hagensen

Managing Director
PUBLISHED
September 02, 2022

In this week’s episode, John debunks the biggest, most impactful personal finance myth and covers the three rules you must know and follow for investment success. Plus, how do you avoid being scammed by a shady advisor? Also, don’t miss John’s interview with the Director of Corporate Retirement Plans at Creative Planning, Don Recker, as he shares what you need to know about the new lifetime income illustration requirement on 401(k) quarterly statements.

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!

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Transcript:

John Hagensen: Welcome to the rethink your money podcast presented by Creative Planning. I’m John and on today’s show, I debunk the biggest and most impactful personal finance myth that exists as well as the three rules you must know, and you must follow for investment success as well as how to avoid being scammed by a shady advisor. All of that and more on the podcast, Better Money Moves start here.

But I want to start with this observation that I’ve had. You may have noticed this as well, that there are things in life where false narratives, for whatever reason, prevail. We all just sort of accept this idea. It’s cement and goes down through generations as true. But if you look at all, you realize this actually isn’t right. It’s Completely wrong. For example, I was recently told by someone that I love, someone close to me, that I’m not going to call out right now by name, not going to embarrass them, that daylight savings was started for farmers. By the way, quick tangent, how dumb is daylight savings? I mean, I grew up in Seattle and I remember this is before everyone had cellphones, obviously. And so going around a couple times a year and taking down all the clocks and switching the time, you might be listening saying, John, I’m still doing that twice a year.

Our crazy state’s still doing this daylight savings thing. How many of us missed church or showed up an hour late or early on that Sunday. You know you did, don’t judge me. You know you did. Well, I live in Arizona and Sunshine’s not the only benefit of living here. We also don’t need to change out our clocks. It’s really nice. But if you’re wondering, America adopted daylight savings time, not for farmers as I was told, in 1918 after Germany first did so to conserve coal usage during World War I. So the idea here was that if summer daytime is extended one hour into the evening, that’s one less hour of darkness that needs energy for lighting or temperature control. I mean, farmers actually hate it. So there you go, the next time someone tells you that the genesis of daylight savings was for farmers’ benefit, you can tell them they’re wrong and stop believing these things, but the myth that’s even more disgusting is the idea that it’s intelligent and smart and financially savvy and responsible to pay off your mortgage early.

Interestingly, there are very few aspects of personal finance that generate as much emotion and defensiveness and anger and combativeness than when I tell someone they should not pay off their mortgage early. I know what Dave Ramsey and Suze Orman say, they’re wrong. They’re dead wrong. Now, let me say this. If you want to pay off your mortgage because, you just say, you know what, I want more peace of mind and it makes me feel better. By all means, it’s your money. I’m not telling you in that case you shouldn’t pay off your mortgage, but don’t pay it off and say, I did it because it was smart because it financially made sense. Just do it and say, yeah, it was actually not smart financially, but it just brings me a lot of peace and I’m not stressed out. And so that’s why I did it.

Okay. I can live with that. Or if you’re someone who refuses to invest money in everything, sitting in a bank account earning a quarter of 1%, well sure, then you probably shouldn’t be paying a three or a 4% interest rate on a mortgage over 30 years while your money’s only growing at a quarter of a percent. Well, yeah, of course. So I’m assuming when I say that it’s dumb to pay off your mortgage early or make extra payments, that you aren’t someone who refuses to invest money. And you’re also someone who is desiring to do the best job possible with their money. And so while this might offend you to hear, keep an open mind for the next couple of minutes. Let me break down specifically why you wouldn’t want to pay off your mortgage early. Number one, your mortgage doesn’t affect your home’s value. I think this is pretty obvious, but I’ve had people confused on this.

Your home’s going to rise and fall in value regardless of whether you have a mortgage or not. If you buy the house outright, it’s a bit like having all that money stored under your mattress. Any equity in the house essentially earns no interest. The second reason why I would encourage you to carry a mortgage, is that a mortgage won’t stop you from building equity in the house. Now it’s true that while paying off your mortgage contributes to the growth of equity in your house, certainly, that’s not the only or the most powerful way that your equity develops, generally speaking with your house. Your house is bound to grow in value over long periods of time. At least historically it has, which contributes handsomely to the total equity in your home. Number three, a mortgage is cheap money. What’s one of the major reasons that we’re seeing the cool off in the housing market.

People don’t want to move, give up their phenomenal mortgage of 3% or two and a half or 3.5% and move into a five and half or 6% mortgage. So in other words, mortgages come with about the lowest interest you can ever expect to receive on loans of that size. Mortgages are low risk from banks. They have your house as collateral if you fail to repay them and that allows the banks to offer really low interest rates relative to other prevailing rates for other types of loans. The fourth reason why I want you to carry a mortgage is that mortgage payments get easier over time. And this right now with inflation at 9% is an incredibly important point to make. This cannot be overemphasized right now. If you have a 3% mortgage and inflation’s at 9%, you are arbitraging to your benefit 6% every single year, in a broad sense. If you’ve ever rented before, you know the pain of watching your price increase from year to year on your lease. A mortgage on the other hand is fixed.

Assuming that you didn’t do an adjustable rate mortgage and eventually the price of your monthly mortgage payment may become kind of laughable how low it is. I remember one of our clients who had bought his house in the 1950s and paid $95 a month. Now that’s an extreme example to help me illustrate for you. That $95 a month doesn’t sound like a whole lot right now, does it? Well, no, because inflation’s occurred and when inflation’s high, like it is right now, historically high, that $2,000 a month or 2,500 a month or 1500 a month, or whatever your mortgage payment is right now gets easier and easier every month. Historically speaking in just a normal inflationary environment, your mortgage payment will feel like it’s about half what it is today in 20 years, if inflation stays really high, it may be cut in half in real terms, 10 years from now or 12 years from now.

What’s funny about the client paying $95 a month is he was expressing to me, Hey, John, that was actually kind of tough to make those payments. Like they were a stretch and a challenge when I first bought the house. Doesn’t sound like much now, but it was a lot then. Within a few years, of course, his income had significantly outpaced his piddly mortgage. Number five, mortgages can help you sell without selling. Clear as mud, right? I know you’re listening going, what are you talking about, John? If your house value has increased significantly, it might account for a lot of your personal balance sheet. A lot of the money, especially in non IRA accounts for most Americans is held inside the Sheetrock of their home. You may not want to uproot your kids from their school and leave your neighborhood, but it might be beneficial to access the money that’s sitting inside of your home for other purposes.

And while cash out refinancing isn’t always advisable. In some cases, it can be a really savvy decision. Number six, mortgages allow you to build more wealth. Most people that have real estate empires didn’t go around buying rental properties or commercial buildings one by one with full cash. Waited until they saved up a million dollars and then went over to that building and bought it for a million dollars. The money that you’re saving when you don’t pay off a mortgage early can be put into higher earning investment accounts. That theoretically will make you more money in the long term. Let’s not over-complicate this. If your mortgage is three and half percent for 30 years, all you need to do with that money is earn more than three and a half percent per year for that same 30 year period and you end up with more money.

In fact, I use an example of this in my second book, The Retirement Flight Plan, and the difference can be substantial. If you earn, let’s say, 7% in the stock market over 30 years while paying three and a half percent on your mortgage and the seventh and final reason I want you to carry a mortgage is that mortgages provide liquidity and flexibility. Sometimes it feels riskier to have a mortgage, doesn’t it? John, it feels safer to have my house paid off. Well, the money in your house isn’t available to you. In fact, most people when they die end up passing their largest asset, which is their home, to their children, the children don’t want to live there. And so one of the first calls they usually make is to a realtor and say, sell the house so we can take all the money out of mom and dad’s house that they weren’t able to use for the last 30 years of their retirement, because it was effectively buried in the backyard.

So $500,000 sitting inside of your home that isn’t accessible and isn’t readily available when you need it doesn’t provide a lot of flexibility. And I know I went through those quickly. So let me recap again, the seven reasons I want you to carry a mortgage. Number one, it doesn’t affect your home’s value. It doesn’t stop you from building equity in your home. It’s really cheap money, especially now. Mortgage payments get easier over time, especially now with inflation where it’s at, it can allow you to sell without needing to actually sell and uproot your family. It allows you to build more wealth because you can earn more money than the interest rate you’re paying. And the one I just shared, mortgages help provide liquidity and flexibility. And so when I read this quote from Dave Ramsey that says the paid off home mortgage has taken the place of the BMW as the status symbol of choice, actually no, that’s totally wrong.

They’re both really dumb financial decisions. And not because I don’t like BMWs, but if you or someone you know has a really nice car. I mean, that’s great if they can afford it and they enjoy driving it, more power to them, that’s awesome that they have a nice car. But imagine going to that person and saying, man, I really like your car, it’s great. It’s beautiful vehicle. And they responded with, yeah, I’m just really trying to make super savvy financial decisions. I mean, I saw this BMW, it was a hundred grand and I just thought, what smarter move could I do than buying this car? But that’s what we’ve been told about home mortgages. This is great. This is responsible. This is smart. And one last cherry on top of the Sunday, there’s no prepayment penalty.

So if at any point along the way you decide, you know what, it is stressing me out. I know that it’s not the smart financial move to pay it off. I mean, it’s only a three and a half percent interest, but I just really don’t like having a mortgage. I just can’t get over it. I can’t get myself past it. It’s just not providing me joy and freedom and all the things that really we’ve saved our money for to begin with. You wire money to the bank that day and your mortgage is paid off. It’s that simple. You always have that option.

Announcer: At CreativePlanning.com you’ll learn how your investments, including your mortgage, taxes and estate plan can work harder together. Go to CreativePlanning.com. Creative Planning, a richer way to wealth. Now back to Rethink Your Money presented by Creative Planning with your host, john, .

John: Coming up in a few minutes, we’ll be talking with Don Recker, the director of corporate retirement plans here at Creative Planning, as he has some really important news to share with us on some new legislation, that’s going into effect for all 401k plans. But before we get to Don, I’ve got to ask you a question. Are you like me, and get really confused when you enter a parking lot that’s mostly empty. There’s a lot of open parking spaces. You know what I’m talking about? If you’re an analyzer and some might accuse me, I’m over analyzer maybe. I just don’t want to pick the wrong spot. I mean, we’re driving around and then I gamble. I think I can get one a little bit better, but then, oh, dang it there’s a Miata in that one. It’s a smart car, I missed it. And we’re going around and around even though there’s 39 spots open.

My wife, Britney’s going, John, just pick a spot. We just passed that one and that one and come on, man. And of course I’m playing a game in my head that only I understand where my world’s going to be upended if I happen to park in a spot and then see a better one when we’re walking in, consider myself a failure. I mean, but sometimes it’s just easier to go, oh, full parking lot but there’s that one spot. Cool. I’ll take it. It makes things nice sometimes doesn’t it? By contrast, you’ve got In-N-Out Burger. You walk in, it’s like, do you want two patties or one and do you want cheese on it? But for a guy like me, it can be a nice experience to just walk in and not have to overthink it. And this leads me to my rule for money.

More options often leave us more confused. Let me say that again, a little bit differently. More options don’t always lead to better outcomes. In fact, all the research shows us that when we have a lot of choices, it almost always leaves us significantly less confident in whatever decision we eventually make, or we’re kind of second guessing it. I mean, certainly a double edged sword and there are some pros with choices, certainly, but we’ve got 10 different streaming services. I mean, how many of us have gone on Netflix thought, you know what it’s pretty early still the kids are in bed. I think I’ll watch something. 30 minutes later I’m still just scrolling through and occasionally watching trailers. And then it’s like, well, I’m tired, I’m going bed. I’m overwhelmed. Let me transition this thought to our money. We’ve got 8,500 exchange traded funds and about 10,000 mutual funds, we’ve got 300,000 financial advisors in America.

Well, that’s great, John. We’ve got all these choices. No, it’s confusing, it’s cluttered. It’s the cheesecake factory menu. But let me give you a little peace of mind with this credo. You don’t need to know everything. You just need to know the right things. I say this to my seven kids all the time. You don’t need to know everything. You’re not going to know everything, but you better know some of the most important things. Same is true for you with your money, but it doesn’t need to be overly complicated. Let me provide you with the three things that you need to know to be successful. Number one, buy stocks, practically speaking, be an owner of the largest companies all over the world. Number two, the rule is diversify. And you do that according to your time horizons, meaning you might not be able to have everything in stocks because you need some of the money in a year.

And the stock market’s down about one quarter at a time. So that’s too big of a risk. You don’t want to have to sell things when they’re down in value. So you’d want to diversify. And you also wouldn’t want to only own five stocks. Our philosophy here at Creative Planning is we buy the broad markets. We own thousands of stocks all over the world. We’re basically betting that the world won’t end and the seven or 8 billion people on the planet will still need to buy goods and services. And so we want to own companies that are producing those things and their values will go up and down along the way. But for a well diversified portfolio to go to zero means we’ve got way bigger problems. The third and final rule, rebalance. Rebalancing gets you back to your stated, defined allocation that works for your time horizons. If 40 years ago, you wanted 50% in stocks and 50% in bonds and you never rebalanced that account, you would’ve been over 90% stocks and less than 10% bonds, 40 years later.

You might be thinking to yourself, well, why is that? The answer is stocks grew way more than bonds. And so they just continue to get more and more over-weighted. So that’s an extreme example of why rebalancing is important. It allows you to sell high and buy low and keep your allocation intact. So the three rules, the only three you really need to know to be successful is buy stocks, diversify, rebalance. Oh, and there’s a quasi fourth. Repeat this for the rest of your life. Repeat, repeat, repeat. It’s just a cycle. Buy stocks, diversify, rebalance. Buy stocks, diversify, rebalance, and continue to do that until the day you die.

If you want to know our thoughts and what we’re doing as we manage or advise on 225 billion dollars for families just like you go to creativeplanning.com/radio and request a wealth path analysis. That’s creativeplanning.com/radio for your complimentary, no obligation wealth path analysis. Well, as promised, we are now joined by the director of corporate retirement plans here at Creative Planning. His name is Don and he has some information to share with us that will affect any person with a 401k here in America. And so with that said, thank you for joining us here on rethink your money, Don.

Don Recker: Very nice to be here, John.

John: Yeah, I think this is a very timely topic that listeners are really going to appreciate. Any time a new regulation or law comes down the question always is, well, all right, this has happened. How does this apply to me? And what do I need to know about it? And in this case, the department of labor launching this new lifetime income illustration requirement. So we need some help on this. Don can you make sense of it for us? How did the lifetime income illustration requirement even come about?

Don: Okay, well, yeah, I can absolutely help. It’s not the most exciting topic. You talk about regulations. You talk about retirement plans.

John: Hey Don, we talk about taxes and estate planning as well in this program. We even talk about insurance. So don’t worry, I actually think this will be pretty exciting compared to what we normally discuss.

Don: I agree. A hundred percent and it’s definitely a move in the right direction. It’s not without its flaws, but this really came about from the SECURE act 1.0, I know there’s pending 2.0 out there, but we’re not going to talk about that today. The SECURE act really was passed towards the end of 2019. It took effect in early 2020. And part of that act was a lifetime illustration example that must be provided. The deadline is here. The second quarter of 2022 for January 1, plan years requires that this lifetime income illustration be provided to planned participants. So that’s really how it really came about.

John: So specifically though, what can plan participants really expect to see when they receive their statements?

Don: Well, couple things, first of all, they’re going to see a projection on what their balance will look like on a monthly basis. And this is where I think it’s leading into the right course of action, because a lot of plan participants haven’t really ever done that analysis to see what their income replacement may be and what they might expect from a monthly payment process. Now, what we feel like some of the deficiencies might be is the requirements that the department of labor puts in order for the plan sponsor to have fiduciary protection for this illustration. And one of the requirements is that they look at the account balance at the end of that statement period, and they don’t make any assumptions that the participant will continue to contribute. So it’s going to immediately lower the benefit that they actually will probably have at retirement age. And another deficiency is really in regards to the investment gains. They’re not assuming that there’s going to be any additional investment gains other than the 10 year treasury rate, which as you know, John, is really low and much lower rate than most 401k participants would experience.

John: We’re talking about the new lifetime income illustrations here on Rethink Your Money with Don of Creative Planning. I think we know as certified financial planners, there are a lot of nuances to this, so I don’t think it’s possible for it to be perfect. But as you said, Don, maybe it’s a step in the right direction to give people some context. Am I close? Am I a long way off? Can you maybe give us an example of how this calculation would work in an illustration?

Don: Sure, let’s just take a regular participant. Let’s say his name’s Joe. Joe’s 40 years old. He’s not married. He’s been able to save about $125,000 in his 401k. So 40 years old, 125,000 doing okay, he’s setting aside 15% of his salary each pay period. And his company’s matching 3% from that as an employer match. So when he receives his year end statement, he’s going to see two lifetime income illustrations. Mandated first would be a single life annuity, which is just based on his life alone with no continued payment after he passes away and the return or the monthly payment on that would be about $645 a month.

So Joe is going to be a little bit discouraged. He’s going to think, wow, I’m sacrificing some of my current standard of living, 15% of my pay. That’s quite a bit. And for what? For $7,700 a year when I turn age 67? Because that’s another requirement, is they have to wait until they’re 67. And then the other illustration that he’s going to see is a qualified joint and survivor annuity, which uses some mandated, again, beginning at age 67 with the beneficiaries, usually spouse, continuing to receive the payments after Joe passes away at a hundred percent level. So the exact same payment.

John: One’s going to even be uglier. I’m already worried about what you’re going to tell Joe here.

Don: Yeah. So Joe’s going to see $533 a month as a monthly payment for all the sacrifices he’s making.

John: But it is interesting to have that reality check that $125,000 balance isn’t probably going to be enough for most people to support themselves in retirement.

Don: And that’s why we would recommend to Joe or any plan participant, really, to kind of take the approach like, well we take with our clients and that is really work with your advisor. Make sure you’re doing those projections with realistic numbers. And that includes what are you saving? What do you need to save? We call it our gap analysis. And it’s just an analysis of where you’re at, what your strategy is, how much are you saving for retirement? What level of aggressiveness do you have? Which can really determine your estimated rate of return. Now obviously we make assumptions. Everything has to be put in context, but when you actually take a look at a reasonable rate of return, ongoing contributions, what the account balance will be when you reach retirement age and then how that translates into monthly income, that’s the golden goose right there.

That’s going to get Joe motivated. Any plan participant is going to be like, wow, I’m on track. This is working. I’m going to stick with it. Whereas again, I think the lifetime income illustration is on the right track there, but for some planned participants, especially young participants that are just starting off with fairly low account balances, they’re going to be discouraged. And it’s important for planned sponsors to educate participants on what they see and why they see it as being illustrated so that they stick with their retirement plan and understand that this is possible. And in fact, they can have a very nice retirement.

John: So if you’re listening to this and you look at your statement as this rolls out and you’re feeling really depressed, like depressed to the point where you’re drowning yourself in a half gallon of chocolate ice cream, don’t worry. It’s not showing the match. It’s not showing any growth other than a T Bill of return. And it’s assuming that you fully stop contributing. So you’re probably on a lot better course than you might think. Hey, thank you so much for joining us today, Don.

Don: You’re welcome. It’s a pleasure to be with you.

Announcer: At Creative Planning our wealth managers work with in-house CPAs and attorneys to ensure your money is working as hard as it can for you every day. Give your wealth a second look at creativeplanning.com and connect with a local advisor. Now back to Rethink Your Money presented by Creative Planning with your host, John .

John: I want to start with something that may be a bit counterintuitive. The herd is usually wrong when it comes to investing. I think so often we assume that if a lot of people are doing something, it must be right. I mean, clearly they’ve done a lot of due diligence to arrive at this conclusion. So I’m just going to draft off of their research and assume that it’s correct. Now the problem, as we know, is sometimes most of the group has done that very thing from maybe just a couple of people at the beginning. And when it comes to the masses from an investment perspective, the average investor has barely outpaced inflation for the last 30 years, according to DALBAR. I mean, think of it this way. The S&P 500 has made about 10% a year for the last 30 years. The average investor’s gotten about half of that, you did not miss.

Hear me, the average investor could have earned 10% a year if they were just in the S&P 500 and lost their login and shredded their statements and did absolutely nothing. It would’ve been the simplest lowest cost. Anyone on the planet could have done its strategy, but instead we’re humans. And so we’re emotional and we make mistakes and money’s really emotional, which is why the average American lags significantly behind just what the broad indexes do. Just what the overall market does. And this is precisely why following the herd and emulating the masses and just assuming that they’re correct when it comes to investing means really bad results. And so my encouragement for you to put it concisely is question the consensus. Don’t be afraid to. It reminds me actually of a funny story. Probably two or three years ago, our entire family, we’re in our big 12 passenger van, mysteriously, this thing is a beast.

My wife’s been asked while pumping gas, do you drive corporate? She’s like what? Guy’s like, yeah, do you drive corporate? Oh no, I just have a lot of kids. And so we’re still just getting out of town and we need to fill up gas. And of course, even though I reminded all the kids, does anybody need to go to the bathroom? Just try, just try. Well, Jude’s kind of one of our more stubborn, great kid, but pretty stubborn, don’t know where he gets it from, couldn’t be his dad that’s for sure, is just insistent. I don’t need to go.

And 10 minutes later we’re pumping gas and he’s jumping around, like he’s on a Pogo stick trying to get to the bathroom. Well, if you’re a parent you know this exact scenario. We walk into the gas station and there’s a line of about five people waiting for the bathroom. But one by one, people are walking in and finally it gets to my turn.

And I walk in there with Jude and it’s not a single stall. There was a toilet and two urinals, but we were all standing in line like a bunch of idiots waiting one by one, just assuming that it was a single stall with a lock. Well, how’d that happen? Because the first idiot didn’t check it and then all of us other idiots just assumed that the first person knew what they were doing. And I bring this up because the consensus right now is that the economy’s terrible, but interestingly enough, there may be some reason for optimism. Peter Mallouk, our CEO and president here at Creative Planning, also Barron’s three time number one financial advisor in America has a monthly podcast called Down The Middle, if you’d like to check it out. It’s where him and our director of financial education, Jonathan Clements, and by the way if that name sounds familiar, he wrote for the Wall Street Journal as their personal finance columnist for almost 20 years.

Sometimes I have to pinch myself in terms of the quality of the colleagues that I get to interact with here at Creative Planning. And I want to play for you an excerpt of their conversation that took place this past week.

Peter Mallouk: Well, I think if you look at that, it was first of all, this is our 26th Bear market, it depends how far back in history you want to go. But let’s just say in the modern era, and there have been 27 Bull markets. So one thing we know is that every single time there’s been a Bear market in the United States, it’s worked itself out and it’s given way to the Bull and the trades and the discipline that an investor exhibits in the Bear market are really preparation for the Bull market. That’s really what it’s all about. And if you think about the things that people were complaining about just a year ago, oh, bond yields are too low. How would I ever buy bonds if bond yields are too low or the stock market’s an all time high. I don’t like investing when it’s an all time high.

Well, okay, here we are. Bond yields are higher. So if you’re a new investor, congrats. Bond yields are paying more than they were a couple years ago. If you are a current investor, well guess what? Your bonds are paying income to you. And the income is going to buy, in many cases, other bonds. And so you’re replacing these expiring bonds, these maturing bonds, with higher yielding bonds. If you had a CD and interest rates went up and your CD matured, and you got to buy a higher CD, you’d be happy, right? So there’s this opportunity to get the yield part of the portfolio to actually work out for you. The stocks don’t have to do all the heavy lifting.

John: So again, that was Peter Mallouk, our president and CEO on their podcast titled Down the Middle. You can find that on our website at creativeplanning.com or anywhere you listen to podcasts, but I want to be careful to not just share with you anecdotal information and not have it lead to any practical application, because the reality is knowing things doesn’t help us. It’s doing things. And so here are some practical ways that you can take advantage of the current pessimism of some of the opportunities that uniquely exist right now.

Number one, this can be a hard one. Take a deep breath, just in the words of Aaron Rogers, R-E-L-A-X. Number two, get a mid-year look with your CPA. Now this might sound obvious, but most people do not meet throughout the year with their CPA to discuss planning. I’m not talking about tax preparation. I’m not talking about having your CPA file your taxes.

I know you do that every year. I hope you do, I should say. But no, what I’m talking about is strategizing what you need to be doing so that when you file your taxes, when your accountant accounts for what you already did, are you meeting with your CPA regularly? I mean, here at Creative Planning, we’re a tax practice with over 85 CPAs, 300 plus certified financial planners, as well as a law firm with over 45 attorneys. And so we’re providing this sort of family office environment where our advisors are talking with our CPAs and including and engaging our clients in that process. And that’s how it’s been done for high net worth Americans for decades.

And our vision has been, and will continue to be, how do we deliver that for you? We don’t think that should be exclusive to people that have 50 or a hundred million dollar net worth. That should be available and probably is even more valuable to the millionaire next door who says I need what I’ve saved over the last 30 years to last me for the next 30 years.

Number three, I want you to get a second opinion from a fiduciary on your current strategy. You’re like, John, come on the most self-serving thing. Of course you want me to go? I know the wealth path analysis. Go to creativeplanning.com/radio. I get it, John. But if you had a life threatening health consideration, you would generally get a second opinion. I meet with countless people personally doing these wealth path analysis that tell me, John, I scheduled this because I haven’t had a second opinion on this in 15 years.

And so it doesn’t need to be Creative Planning, but find an independent fiduciary who is preferably also well credentialed, like certified financial planner or a CPA or an attorney, that type of credentialing to just reaffirm where you’re at and answer some of the questions that you have, and maybe potentially expose some things that you’re just not aware of. And in the meantime, do not make any large changes, continue doing what you’ve been doing. And again, if you’d like to have your tax strategies evaluated, how do they fit in with your financial plan? We know the Trump tax reform is sun setting at the end of 2025, if it doesn’t go away sooner.

And so this incredibly unique time of extraordinarily low tax rates isn’t going to be here forever. If you’re not sure where to turn and you’d like our help visit us right now at createaplanning.com/radio to request your wealth path analysis. That’s createdplanning.com/radio. All right, well, I promised you I’d share this with you. And here comes that time. What is the order withdrawals should be taken from in terms of our various accounts. This can really throw people off and be confusing. It doesn’t need to be. Well conventional wisdom was always sell your non-qualified assets, your after tax monies first, drop all of those down. Then take distributions from your IRAs and other tax deferred accounts that have never been taxed.

Of course, that money comes out at ordinary income rates. And then once those are depleted, draw down your Roth IRAs. Well, because of the Trump tax reform, I want to tweak that a little bit because tax rates are so low right now. So first I want you to take your income from those after tax accounts. And you say, John, that’s exactly what you just said conventional wisdom was. Wasn’t that the first one we’re taking from? Yes, it is. But then I want you to do one additional step. I want you to Roth IRA convert from an IRA to a Roth to fill up the bracket that you’re in. Now, of course I’d be remiss if I didn’t tell you, this is not individual advice for your situation. I mean, you might be someone making a million dollars a year, but next year you’re going to make $30,000.

Okay, but you’re not going to want to be Roth converting in a 37% bracket and your situation’s totally different. I’m just saying, if you are someone who’s under $340,000 of income, married, filing jointly, or under about $170,000 of income if you’re single, you’re in a 24, a 22 or a 12% bracket, you don’t jump to 32% until above the thresholds that I just shared. Those are really attractive rates, historically speaking. In fact, if you go back to the Bush tax cuts, if you were married at $76,000, you were in a 25% bracket. Now you can make $339,000 and still be in a 24.

And we know that’s not going to last forever. And so what we don’t want to do is leave essentially half of your water cup empty. I’m not asking you to overflow the cup and pour water all over the table, but you don’t want half of it empty because likely you won’t have that opportunity again. So to recap, you are still taking income from the non-qualified monies first, but don’t just say, well, cool, I didn’t have to pay much in taxes this year while you’re creating a ticking time bomb in retirement. So then you’re going to Roth convert and you’ll try to continue that as long as tax rates stay low from a historical perspective, it’s a great way to combat and be proactive for rising tax rates.

Announcer: At Creative Planning, we provide custom tailored solutions for all your money management needs. Why not give your wealth a second look and learn how the team at Creative Planning covers all areas of your financial life. Visit creativeplanning.com. Now back to Rethink Your Money presented by Creative Planning with your host, john .

John: I want to start with a very scary moment as a parent. My wife, Brittany, and I have always been pretty adventurous. I think at the time we had maybe four kids of our seven and we bought a houseboat. Now, before you think John, you’re just high rolling with your houseboat. This was a 35 year old houseboat. Was really clean by the way, actually, but 35 years old and we bought it for 20 grand. Now my wife fixed up the entire inside of it and I did some improvements to the outside and it was actually super cute. It’s like a restored old houseboat. By the way, fast forward, we ended up selling it for 25,000 a couple years later. So if I do some mental gymnastics, I like to think we made $5,000 on it. Even though there were a ton of expenses and the monthly slip fee and all the renovations and improvements we did.

So we’re all a little guilty of that. Yeah, we made money on, we came out really good on that. No, no, actually we didn’t. But the memories were priceless. There are about four Spider-Man fishing poles that are a hundred feet down in the marina below where our boat was. One really nice pair of women’s sunglasses. I know Brittany, sorry, kind of calling you out here and plenty of other hidden treasures that I’m not even aware of, I’m sure. But unlike a $20 fishing pole, you don’t want to dump a two year old into the lake who can’t swim. And the way that this marina is set up, you walk on the dock, which is extremely long way out to where the boats are. And so by the time you get out there, it’s really deep. Well, I went around a corner on the dock and it was one of those skinny front wheeled wagons that our two year-old was sitting in.

It tipped, she falls on the dock, does about a half roll right to the edge of the dock and I’m able to grab her just before she goes off. Now they were always in life jackets whenever we were anywhere near the boat. But at this point we were just on the dock. Now, of course she was in a life jacket by the time we were in the parking lot every single scenario after this happened, because I was freaked out. But at the time she wasn’t and it was freaky. And I learned a lot just owning a houseboat, how to tie up the boat properly, all the unique names for things and the boating lingo to kind of sound like I know what I’m talking about. I learned all of that. And maybe most importantly, I learned the value of an anchor. We got some crazy storms out there and without an anchor grounding the boat, keeping it in place, you’d be up against the red rock cliffs, just pounding against the cliffs, destroying your boat.

Well, I think so often. At least I do think of anchors and that term as this thing weighing me down and it stops me from making progress and this thing’s such an anchor for me, and it’s this negative connotation. As a boat owner, you know, no anchors are really good things. And without going too far into the weeds, our pastor actually talked about this last week in his sermon that there’s tremendous value when a storm comes to be grounded, to center back to the truths that you know to be just that. True. And without going way too far off on a tangent, I mean, that’s one of the challenges I think right now with American society, we don’t have any agreement on any level of truth and that fractures and fragments a society that can’t be unified on, really, anything. If somebody comes to me right now and they go, the sky’s green, it’s almost like I don’t know if I can tell them that it’s actually blue because I don’t want to offend them.

I can’t even agree with them on that. We’re just in this post modernistic relative society. And it’s challenging. It’s tough to find a lot of places that we can all agree on. And when it comes to our personal finances, I just want to ask you a real candid, but pointed question. Do you have an anchor? When we hit the worst first six months of a year for a 60% stock, 40% bond portfolio in 52 years, do you have an anchor that grounds you, that you know to be true, a set of rules that guide you, accountability so that you can stay on track because nobody needs an anchor when it’s calm. Nobody really relies heavily on that anchor when it comes to their finances, when the market goes straight up for three straight years. It’s when times get hard. It’s when the storm comes. And if you’re wondering, what is that anchor in this example, where’s the parallel here?

The anchor is your financial plan. It’s having a written, documented financial plan that you can review. For our clients here at Creative Planning. It’s not just accessing everything online. Our clients have a financial planning binder that has, what we call, our dashboard. All the key components and highlights of each aspect of their plan. Estate planning, taxes, financial planning, it’s like a summary. It’s a snapshot. And then behind that will be things like their tax returns and their tax strategies and their investment allocation and their retirement plan and their insurance deck pages and all of their estate planning documents, powers of attorney, wills, trust, all of that in there. And when things become uncertain, you want to be able to go back to your plan and say, we’ve already accounted for this. The plan factors this in, and I can see that I’m going to be okay.

I don’t need panic. I can stay disciplined. I’ve got a plan. If you don’t have a plan and then a storm comes, it’s exactly akin to being on our houseboat, which is a giant sail in the wind. This huge structure banging up against the cliffs. My pipe dream is that everybody in America would have a financial plan. How cool would that be? Everyone has a detailed, written, documented financial plan for their situation that’s going to help them get from point A to point B. But we know from the data, most Americans, the vast majority, don’t have a financial plan. And sadly, most of them work with advisors. They still don’t have a real financial plan in terms of what I would consider a real financial plan, a detailed financial plan. And so if you’ve got questions about that, sometimes we feel that anxiety and we sort of have this exposure that we’re without an anchor when times get a little scarier, when the markets are choppy, when the economy’s not doing as well.

When we have two consecutive quarters of negative GDP, I don’t want that for you. Doesn’t need to be with Creative Planning, but I want you to go to a credentialed, independent fiduciary who’s not going to sell you something, that has tremendous experience in these areas and can help you build out that plan so that you have one. You do not need to go about this alone. Take us up on that wealth path analysis that you’ve heard me talk about by going to CreativePlanning.com/radio. It’s a one page snapshot that overviews your entire financial situation and the best part, there’s no obligation, there’s no cost, we’re not looking to sell you something, just come and get the information that you need so that you can feel clarity around your money. One more time, that’s CreativePlanning.com/radio for your complimentary tailored wealth path analysis. Well, I was asked the other day, by a prospective client, how do I know if my advisor is scamming me?

Now, in this case, I had no reason to think that their current advisor was scamming them. I think the person was being pretty paranoid. But this parlayed with a Dateline that I had listened to on the Dateline podcast, about a month ago of a financial advisor that had just scammed all these people in his community out of tens of millions of dollars, got me thinking, maybe I should include that on a radio program just to ensure that you know what to look for. And this Dateline episode was a classic one of affinity fraud, where the advisor was a pilot. He got in a bunch of flying clubs and pilot groups and so they were all hanging out together and they shared similar interests. And then they started becoming clients because why wouldn’t they be? He’s an advisor and we’re friends.

And obviously they completely let their guard down. And there was red flags all over the place, but people just ignored them because they’re like, ah, he’s our friend. And so here’s what I want you to do so that you’ve got the highest likelihood of not getting scammed. You should be taking nothing at face value, doing your due diligence and looking into this. Okay, here’s what you want to look for. And by the way, none of these solely on their own ensure that you won’t get scammed. But when you start aggregating all of these things together and you’re getting the right answer, now you’re getting somewhere. The first thing is the size of the firm and the time it’s been in business. Now we have examples like Bernie Madoff, where he managed over $10 billion and been around a long time and finally got exposed, but it took a while.

So again, that in and of itself, isn’t foolproof, but it’s certainly starting to stack the deck in your favor. I mean, a firm like us here at Creative Planning, that’s been around since 1983 and manages or advises on 225 billion dollars with over 300 certified financial planners, 85 accountants, 45 attorneys. It’s a lot of checks and balances and a lot of people and we’ve been around a long time. So I definitely think that should be a factor. Number two, what is your advisor’s regulatory record? I mean, I’ve seen people come in for a wealth path analysis and I look up who their current advisor is and their fines and citations and suspensions and hundreds of thousands of dollars they’ve had to pay in restitution to pass clients for things they’ve done wrong.

I mean, it’s like a scroll that falls out on the ground and rolls across the room. And I’m kind of sitting there thinking, there’s 300,000 advisors out there. You don’t have to work with us at Creative Planning if we’re not a good fit, but why are you working with this person with this type of record, the third way to give you a better chance of not getting scammed by your advisor is finding out where do they custody assets. What you’re looking for is a firm that uses a third party and preferably a big company you’ve heard of. Fidelity, Schwab, TD Ameritrade. I mean, these are examples of the types of custodians that are out there. You don’t want it to be like the example of Bernie Madoff, where he just self custodied these assets. They were just in Madoff investment accounts. And so there was no third party actually holding the money. Here at Creative Planning, we are using the names I just mentioned.

That’s where the money is held. Number four, you getting charged a bunch of commissions. This doesn’t necessarily mean you’re getting scammed or that the investment recommendation is a bad one, but it’s certainly one with conflicts of interest. Once commissions enter the picture, there’s a wide disparity in what that advisor makes based upon whether you decide to buy one thing or another thing. I personally think with the amount of fee based fiduciaries that are out there today that are required to act in your best interest, that are independent, that don’t have proprietary funds, why would you go to somewhere that has that when given the choice. Because if all other things are equal, it sets you up with a better dynamic for good objective advice because your interests are aligned. And the fifth and final way to lower your risk of getting scammed, look at the people who are involved.

Now, sometimes we can be deceived and there’s bad actors. But again, we’re combining all five of these things together, but a lot of times you can just look at someone’s life broadly and observe them in areas outside of their professional relationship with you and get a decent sense of probably the type of person they are. So one more time, here’s the recap of the five ways to lower your risk of being scammed by your advisor. Number one, what’s the size of the firm and how long have they been in business? What’s the advisor’s regulatory record, which by the way is public, you can look it up. Number three, where are the assets actually held? Where is the money? Number four, are they charging me commissions? Which again, isn’t so much a scam, just where are their conflicts and number five, look at the person’s life. Do things add up in your mind? Is there consistency there or is there a disconnect? And remember we are the wealthiest society in the history of planet earth. Let’s make our money matter.

Disclosure: The preceding program is furnished by Creative Planning, an SCC registered investment advisory firm that manages or advises on 225 billion dollars in assets. John works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there could 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. Clients of Creative Planning may maintain positions in the securities discussed on this show. For individual guidance, please speak with an attorney, CPA or financial planner directly for customized legal, tax or financial advice that accounts for your personal risk tolerance, objectives and suitability. If you would like our help request a wealth path analysis by going to CreativePlanning.com/radio. Creative Planning tax and legal are separate entities that must be engaged independently.

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