This month, Peter Mallouk and Jonathan Clements discuss when you should make the choice to spend and why you should consider gifting to loved ones and charities during your lifetime. Plus, learn how to set up a legacy contact on your iPhone as well as the benefits of writing a letter of last instruction.
Hosted by Creative Planning Director of Financial Education, Jonathan Clements, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
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Jonathan Clements: Hi, this is Jon Clements, Director of Financial Education for Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down The Middle. Our financial lives are a constant balancing act. Do we set aside money for the future or do we use it now, whether to spend it for our own benefit or to help others? It’s a tradeoff I constantly struggle with. I know others do too. We all want the financial freedom to spend our days as we choose. That means sacrificing today so that we can save for the future. But that raises the question, Peter, when shouldn’t we make that sacrifice?
Peter Mallouk: I would put it into several categories. I have the opportunity now, my oldest son is in college. And so I started speaking more frequently when I’m requested to at colleges, particularly where I could see my son or his friends. And I was just speaking at a university yesterday, and a kid asked a question and the kid was just so proud that they weren’t going to go on this trip. They were going to save the money instead. And I had just got done talking about the most powerful asset that an investor can have is time. That if you’re young and you could put money away early, the power of compounding just takes over. You don’t really have to do a lot to make all your financial dreams come true. But my advice to that student and my advice to all young people, and really everybody, is there are certain things that come with an expiration date and they are not worth sacrificing for.
So I think it’s admirable that you have somebody who’s going, look, I’m not going to backpack Europe this summer because it’s going to cost me $5,000. And instead I’m going to put that $5,000 away and I’m going to go to work early and then later in life I can go do these things. Well, the thing is, you can’t do them later in life. You might be able to go to Europe, but you’re not going to do it this way. You’re not going to do it with a backpack. You’re not going to tolerate being in a room with five people. You’re just not going to experience it this way. That has an expiration date. And so for that student, I told him, “My advice to you is go to Europe, spend the money. It will be almost impossible to imagine a scenario where 20, 30, 40 years from now, you regret that decision and there will be more dollars to be made, right?”
So it’s a balancing act. So many people just don’t save at all. But on the other end of the spectrum is a small group of people that do save, but they can’t get themselves to enjoy their money during the period where it could bring them the most pleasure and the best memories and the best experiences. And I think it applies to people of all ages and different circumstances. And it’s a mistake I see a lot of people make.
Jonathan: I would suggest that, Peter, perhaps it’s a mistake that you see because of the people you deal with and the people I deal with, which are people who are superb at delaying gratification. They are not the ones who spend their weekends at the shopping mall or online and spend too much and save little or nothing. But among those who are excellent at delaying gratification … I think the ability to not delay gratification and be thoughtful in their spending can be a huge bonus in terms of happiness. But it’s a struggle. Just as it’s a struggle for spenders to save, it’s a struggle for savers to spend. Which brings me to the next question, Peter. If we’re diligent savers, we should eventually amass enough for a comfortable retirement, then comes the time to enjoy the wealth that we’ve amassed and that means spending. So Peter, among your clients, how successful are they in making that transition from being diligent savers to being happy spenders?
Peter: Well, it’s amazing. Because like you said, I’m dealing with a very specific subset of the population, right? People who have contributed in a way where society rewards them financially. They’ve done a good job of putting money away. They’ve found a way to not have their portfolio blow up at some point in their lives. It’s still there. They’ve saved, they’ve put it away, they’ve invested well, they’ve done all the right things and then they retire and it’s time to take the money out. And a very frequent question I get from people when they’re 72, and they have to take money from their IRA is, “How do I not take money from this? How do I leave it in there?” Or they try to spend as little as they can in retirement, and it’s very hard to flip that switch, that discipline of put away, put away, put away, and then say, now wait a second.
I’ve got the biggest pile of money I’ve ever had in my life. I no longer have any earning power. I’m a little more sensitive to the market and you want me to take money out of the portfolio, something I haven’t been doing for the last many, many decades?` It’s very hard for some people to do, and I really encourage them to do it because I’ve been doing this a long time. I don’t recollect any client ever running out of money like having their last dollar disappear. People look at their horizon and they go, okay, I’ve retired. I’m 58, I’m 68, whatever it is, and I need this money to last till I’m a hundred. And that’s true. Some of our clients are over a hundred, right? And with healthcare and technology and everything else, who knows. But your peak spending years are not going to be when you’re 93 and 94.
You really have this window and that window is in my experience, and people are different, but it’s really the late 70s and not because there aren’t people perfectly capable in their 80s of doing it, but because oftentimes a couple is married or has a good friend or a significant other that they do things with, right? Statistically, we know all the odds are pretty good that one person can make it healthy to their 80s. The odds are not great that two people can. So if you are married or you have a significant other or a friend that you do trips with, for example, or have experiences with, the second one of you has some kind of physical issue that prevents that hiking trip from happening or that overseas trip from happening or the cruise from happening, that really diminishes your ability to enjoy your wealth.
And so I really would encourage a lot of our listeners are falling in this age group, if you’re in that first decade or two of retirement, really enjoy your money, withdraw the money, get used to spending it, get used to enjoying it. And like I tell my clients, if you don’t, your kids will. They’re not going to have the pause and reservations that you have. They’re going to book the cruise, they’re going to remodel the house, they’re going to get the new car, they’re going to get the big screen TV. They’re going to do it within six months of you being gone. They’re going to miss you, but they’re going to have no problem spending your money. So just find a way to enjoy it yourself as best you can.
Jonathan: Yeah, this is a theme I hear over and over from my readers who are in their 60s and 70s. And the theme is, if you want to travel, and particularly if you want to travel internationally, do it early in retirement because there will be a point that’ll arrive — it may be in your early 70s, it may be in your early 80s — where the idea of getting on a plane and crossing the Pacific or crossing the Atlantic, losing a night’s sleep and waking up jet-lagged in a foreign country is just no longer going to be appealing. So if you want that experience, and I think everybody should travel internationally, it’s an eye-opener to see the rest of the world and see how other people live and the attitudes that they have, then you probably want to do it in your 60s or your early 70s, because later you just may not want to do it anymore.
So Peter, I have a final question for you. If retirees have more than enough money socked away, they of course don’t necessarily have to spend that money, they could give it away. They could give it to family, they could give it to charities. And they could of course wait until they die to give it away. But Peter, I gather that you think that waiting that long may be a mistake.
Peter: Yeah, that’s the theme here. I definitely think waiting that long is a mistake. We have so many clients that have foundations, and I know it brings them so much joy to move money from their personal account over the foundation. Obviously there’s other benefits, estate planning, tax planning and so on. But really to be in a position to impact others is meaningful to a lot of people. I would say though … We could do a whole other podcast on how poorly people financially do charitable giving, and perhaps we should do that next time. But for those that even get all of the elements of how to structure it correct, so many people in my experience don’t personally experience the pleasure of seeing the money go to the end charity. They set up a private foundation or a donor advice fund, transfer their money to it so it’s a charitable gift, and it sits in that fund.
And they might make a small gift here or there, and then they become incapacitated or die and their kids or somebody else takes over that fund and gets to give away all of this money, which is a couple problems. I mean, one, their values might not exactly match yours, right? The money might go to charities that would make you turn over in your grave, but also you’re not getting to experience that pleasure of everything you earned yourself, of really making the difference yourself and making it sooner rather than later. A client said this to me, I will never forget it, I think it at least weekly. She said, “It’s better to give with a warm hand than a cold one.” And I think if you’ve got the means to give to causes, if you’re funding a foundation, don’t just look at that statement every year.
Find the causes that are important to you and have the personal pleasure of impacting the mission of that organization while you’re around to enjoy it. That’s my third and final recommendation. I think all of these have the same common theme of we talk all the time about doing all the right things to accumulate wealth, to become financially independent, to be the person that can take care of others around you. And sometimes it comes with self-sacrifice over the short run, but it doesn’t have to be self-sacrifice all the time. There are moments in your life where you should enjoy your money sooner. And then certainly when you’re retired or you want to make charitable gifts, make sure that you think about yourself in that equation as well.
Jonathan: And so just one additional point, you were talking Peter most about giving to charity, but also if you plan to make gifts to your family, there is a case to be made to give at least some of it during your lifetime, partly because you’ll get the pleasure of seeing them made happier by the gifts that you make. But also to the extent that you are going to have a large estate and you are going to present your kids suddenly with a significant amount of money to deal with but by making smaller gifts over the years, you’ll get them used to handling money so that when they do get that big inheritance, they can be somewhat smarter about how they handle it.
Peter: I’m so glad you brought that up. That’s absolutely correct. So every now and then, obviously we have clients that pass away. Oftentimes they’re in their 80s or 90s, and then kids who are in their 60s are inheriting this money. They’ve already struggled to pay for their kids’ school. They already may have worked five more years than they wanted to work. They may have not done the vacations they wanted to do. And while our particular client may have been in a position to, with a small gift every year, make a very substantial difference in their adult kids’ lives, and all that money is go to the kids anyway, just like the charity, the foundation on death, someone else gets to give away. That money is going to the kids anyway. Even if your kids are adults, if they are who they are, if you’re not going to spoil them or ruin them and all those things, enjoy helping them and enjoy being able to see their lives a little bit easier while you’re around. That’s great advice.
Jonathan: All right, Peter, so the end of our podcast, it’s time for your financial wellness tip of the month. What do you got for me?
Peter: One of our advisors here, Adam Hoops, shared something with me that… I’m still learning stuff all the time here, and I’ve noticed that when clients pass, we have a very hard time really getting through all the technology of the family. Like how do I even access the Netflix password and things like that. He introduced me to something new, which is how to make sure that someone can get into your iPhone if you’re gone. And it’s a really simple, it takes about one minute. People are probably going to have to rewind it to get this later, but you go to settings, click on your name on the top of Apple ID, iCloud media and purchases, click on passwords and security, click on legacy contact, and then add in whoever you want to add in. Put their email address in there. I don’t even think it takes two minutes.
It’s quicker than that. If you do that and something happens to you, someone can get into your phone. You can do this with any type of phone. Add somebody that will be able to access all of those things when you’re gone. It’s also good to have a place where you’ve got all of your passwords for your spouse to be able to access all of your accounts and Netflix subscription and everything else that you’ve got when you’re gone as well. I’ve seen clients spend forever just trying to shut down a Facebook account. And so to the extent you can just write all these down or secure them somewhere in a password center and also give somebody a backup to your phone, you can save your heirs a lot of trouble. How about you, Jonathan?
Jonathan: That’s a great tip. I didn’t know that about setting a legacy contact for a phone. That is a very cool idea. Sort of along the same lines, one of the things that I would suggest for this month is that people should draw up a letter of last instructions. This is not a formally binding legal document. It is simply your chance to put down on paper various things that’ll make it easier for your family after your death. Think of it as a roadmap for your estate. Where can they find key papers? Who are the trusted advisors who you use? Where can they find all those passwords and usernames for the various accounts that you have? You can talk about who should get your personal possessions. As long as there aren’t hugely valuable personal possessions, people will probably follow what you say in your letter of last instructions. If they are hugely valuable, you should probably list them in the will. And finally, in this letter of last instructions, it is your chance to express some final thoughts to your family.
For instance, if in leaving them a certain sum of money, you would like it to be used in a certain way or not used in a certain way, this is your chance to express those wishes. If you’d like to see your daughter move to a better area of town, or you’d like your grandkids to go to college with this money, this is your chance to put those thoughts down on paper and perhaps also to express to your family how important they’ve been to you, what you’d like to see in their future, and to apologize for the things that you didn’t do during your lifetime. It’s a final chance to really put the record straight and to make things easier for your family after your death. I think it’s a great exercise and it will give you a chance to reflect on your own life. So that’s it for this month, Peter. This is Jonathan Clements, Director of Financial Education for Creative Planning. I’ve been talking to Peter Mallouk, President of the firm, and we are Down The Middle.
Disclosure: 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 can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.