Living abroad has become an increasingly popular concept, but there are many intricacies people don’t consider when making the decision. On this week’s episode, we’re joined by Partner and Director of International Investments Peter Sengelmann to discuss financial considerations you should be aware of before making the move. If moving or retiring abroad is an idea that intrigues you, tune in to this episode for valuable insights.
Episode Notes:
Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!
John:
Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m your host, John Hagensen. I have a jam packed show ahead here on Rethink Your Money, including what the financial implications are if you decide to move abroad. Also, is Social Security going to run out of money? What does that mean for your retirement? Is a 401k the best investing option and will you in fact pay less in taxes once in retirement? Now, join me as I help you rethink your money.
I am smack dab in the middle-aged category and one of the things that I committed to in this decade of my 40s is being proactive on my health. In response to this, my wife Brittany and I went through a comprehensive executive physical at a proactive medicine office here in town. Fantastic doctor. Been doing this for 30 years and this business is a passion project for him in this kind of final chapter of his professional career. He explained to me, “John, I’ve helped people my entire life as an internal medicine doc and now as the medical director for a very large organization of physicians, and what I’ve basically done is to try to create a remedy once someone comes to me who’s not doing well. I’d like to get in front of this and provide people proactive tools so that they don’t need to have that scenario later in life where, oh, I feel something really off. I better go to the doctor.” Proactive versus reactive.
Now, this process was eye-opening. We did every sort of test under the sun. I went in that MRI booth, kind of freaked me out. I asked them to put a washcloth over my eyes, don’t make fun of me, but I opened my eyes when they first put me in and I had this cage around my head and I was in this tiny cylinder. If you’ve had an MRI, you know what I’m talking about, and I didn’t even know that I was claustrophobic, but I definitely am. So they slid me back out and I said, “Cover my eyes. I don’t want to look up and see this stuff.” And I had all sorts of blood tests and genetic tests and I came back mostly healthy, pretty happy about that.
On one hand you’re like, man, I paid for this. Can you find something big? And then I realized, wait, I don’t want you to find something big. Okay. I’m okay with this. But there were some things that I was unaware of, like the fact that my visceral fat, that’s the fat around organs, the way I understand it was less than optimal, very genetic and can lead to increased potential for problems down the road.
By comparison, my wife was like a Mrs. Universe with her visceral fat. This is in the top one 10th of 1%, like you are amazing. But an interesting divergence between Brittany and I was the way that we metabolize medication. So there’s a test for this and there are certain categories of medication that given to me, I would have severe side effects, or at the least it would be ineffective. My body would just store it up where that wasn’t the case for her. This is why I’m sure you’ve had times in your life where you take a medication and feel fine and maybe one of your friends or a spouse takes that same medication and suffers major side effects. Well, it’s because you’re unique, your different than them, and the exact same principle applies when it comes to personal finances. We love to Google the answer to things and then write it as gospel.
Unfortunately, it’s not that black and white. Personal finance is far more personal than it is finance. Two people could have identical net worths, the same social security income and even be the exact same age. So on paper, these two people should have the same financial plan. They should invest the same way. Can’t one person just ask the other who went before them what they did and copy it? Absolutely not because even something as simple as one of them wanting to leave a legacy for their children and the other wants the check to the morgue to bounce, they want to deplete every single penny changes their whole plan and not just their estate plan. It changes their income plan, which changes their taxes, which changes the way that they invest money.
Here’s an example that I see often. People will say, “Hey, I’ve heard you talk about Roth conversions on the radio show. I know that we’re in a low bracket historically due to the Trump tax reform and we have $36 trillion and counting of national debt. I’ve got all this money deferred in retirement accounts. I’m going to have to pay taxes on it between now and the day I die, and anything that’s sitting there when I die is going to the kids and man, they’re in California and they’re doing really well and they’ve got high state taxes and their bracket’s way higher than mine. So based on what I’ve heard you say, John, I should probably be looking to systematically convert some of this into Roths and pay taxes today at what I perceive to be as lower rates.” And I tell them they’re on the right track, but I ask them one critically important question, are you charitably inclined? I’ve had that answer be, “Oh, absolutely. We want half of our estate to go to the kids and half of our estate to go to our church and other charities.”
Well then you would be insane to Roth convert because you’d be taking money that would’ve gone to your church and giving it to the IRS. You know why? Because even though rates are low today, historically they’re not lower than zero, which is what the organizations have to pay in taxes if they receive your retirement accounts as a non-profit. So think about that. Totally on the right track. Knew just enough to be dangerous. Had a friend who successfully executed this strategy but they weren’t charitably inclined and this person was charitably inclined, which changed the entire strategy. This is why personalization matters. Your financial plan should reflect your goals, your values, and your unique situation. This is why back to our health example, Creative Planning has been compared to the Mayo Clinic. At Mayo, your doctors communicate. That’s been their unique value proposition. Your cardiologist knows what your neurologist is recommending and everyone’s aligned.
You’re not playing a game of telephone trying to quarterback your financial situation, driving around town explaining why you did a certain level of withholding or Roth converted or harvested a certain amount of losses or deferred this much money or sold off this rental property. Your specialists are advocating on your behalf. You have an actual team around you. Let me share a few more real life examples of why customization and why communication is essential. Why you want a specialist who has experience with your situation specifically about special needs planning. If you have a child or a grandchild with special needs, your estate plan is going to want to account for that and that will probably impact your financial plan and your income planning. Do you need a special needs trust to ensure their care without disqualifying them from potential significant government benefits? Do you have somebody who knows how to do that? Who’s done that hundreds of times? It’s important. It needs to be right.
How about trustee selection? Some families benefit from having a corporate trustee because their estate’s complex or when they’re gone, no family member is willing or qualified to handle the responsibility. Have you ever wondered that? If something happens to me, who in my life is going to settle all of this up? So this is assuming that you already have your estate plan dialed in, but then who’s going to administer that? Who’s going to help with that? But you may have a sibling or a trusted friend who is a former CFO and has tons of experience and loves doing it and like, yeah, I can help you with that. Well, then you wouldn’t need a corporate trustee. That’s where the customization and the personalization really matters.
Maybe it’s impact investing. We work with a lot of clients who want their investments to align with their values. It’s another example of two people that look the same on paper may want to invest very differently. Certainly this applies to estate planning, gifting, trusts, charitable contributions, and finally your retirement lifestyle. And by the way, I’m just scratching the surface. I mean there are hundreds of other examples. I have had retirees who want to spend half the year traveling, others who want to rock in their most comfortable La-Z-Boy watching reruns of Matlock with a space heater on their feet because their circulation is bad and everything in between.
To bring this full circle, I want you to think about how you manage your health. By the way, health is far more important than even your wealth. I know in American culture sometimes we forget that, but your wealth is meaningless if you’re dead or even if you’re alive but unwell and your quality of life is bad, how are you optimizing the enjoyment of your money, which is simply a tool. You wouldn’t want to take someone else’s prescription medication just because it worked for them.
I remember my late grandmother, she had that daily pill snap down plastic containers because she had so many pills. Can you imagine me walking into the kitchen dumping out her 82,000 pills for a Friday and going, well, grandma, you say they feel good for you, I’m going to take yours today. Of course not. That would be insane and I would probably end up dead by Saturday morning. You’d consult a doctor who understands your situation and your money deserves the exact same level of care.
Today we’re exploring international investing and whether retiring abroad might be right for you. Joining me, I have a special guest, Peter Sengelmann. He’s a partner and the Director of International Investments here at Creative Planning. Peter works with clients around the world on everything from global investments, cross-border tax strategies, estate planning, college savings and retirement planning. He’s also a permanent member of our firm’s investment policy committee, bringing nearly two decades of experience to his role. Peter earned his bachelor’s in economics from the University of California San Diego and his MBA from the UCLA Anderson School of Management. He’s also a chartered financial analyst and if that wasn’t enough, Peter has six children. Peter, welcome to the show.
Peter:
Thank you very much, John. Glad to be here.
John:
Let’s start with the important stuff. You have six kids and somewhere along the way you learned Mandarin fluently. So talk to me about that. Have you used that professionally working with international clients? What was the genesis and desire to go deep on Mandarin?
Peter:
It sort of happened organically, I would say. I learned a little bit of Mandarin working in high school, went to university, decided to take more, found it really interesting, and then my professor said, “Hey, we have a scholarship for you to study abroad.” My dad said, “You got to do it. Let’s go for it.” So I did that. I went to Taiwan for a year, took the language. It resonated really well with me. I came back to Los Angeles where I’m from, worked for companies in Los Angeles started by people from Taiwan.
John:
Great.
Peter:
Speak Mandarin at work, and so now through my career I’ve actually used Mandarin a lot and even to this day I use Mandarin a lot. Ironically, I speak Mandarin with clients based in the United States. My clients outside the United States speak English.
John:
Yeah, that’s a little bit paradoxical, isn’t it? So tell me, you lived in Taiwan for a year. What’s one thing that you experienced that would surprise someone who’s never been there before?
Peter:
When I went to Taiwan, I had no idea what to expect from the people, the culture, etc. First time living outside the United States, and I found that their sense of humor was quite wonderful. I really enjoyed just discovering that people are people.
John:
Yeah.
Peter:
No matter where you go, different cultures, different types, we’re dealing with humans. Doesn’t matter where they’re from, what they look like, etc. It was just such a wonderful experience to get down and get to know people at a personal level and discover that we’re more alike than we are different.
John:
Forbes recently ranked Panama as the best place to live in the world. 82% of expats, they’re saying they’re happy as opposed to somewhere in the 60% range for just the average population. In your experience, what makes a country truly expat friendly?
Peter:
So we work with clients in over 90 countries around the world. Interestingly, Panama is not a core country. We do have clients in Panama, but it’s not a core country where our clients are based. I think there’s a lot of attributes to places to live when you’re thinking about where you’re going to retire abroad, and I think it starts with personal connections. My wife is not American, for example. We’re looking to retire ultimately in her country of origin. Why? Because there’s personal connections there.
John:
Sure.
Peter:
And so there’s that natural gravitational pull there. The second part of it is why do we like living where we live today? Because we have access to travel. So for global citizens, your family, my family and the clients that we work with, we need to think about access to travel. So for an American who decides to retire abroad, they want to live in a particular country, how easy will it be for them to get back? Then I have another category of considerations, language. If you’re going to Panama and Spanish is not a language in your wheelhouse, one you’re not interested in, maybe Panama won’t be a place you want to go.
Food and culture, are you attracted to that? The weather? Panama, certainly it’s going to have wonderful weather, right? A lot of retirees. We have snowbirds. I’m in the Midwest, so a lot of snowbirds. That’s sort of concept and even where Singapore is, where my family is from, we’re thinking, oh, that’ll be great. Joints are starting to slow down, which mine are. I’m thinking, okay, warm weather might be great.
And then of course access to medical care. That’s incredibly important. The last couple of pieces though can be overlooked and that of course is the cost of living. Singapore is not very affordable. It can be. Panama is known to be more affordable. Access to visas. How easy is it to get there? For example, I might dream of retiring in Spain, but can I? Will Spain allow me to stay there? And then lastly, are taxes. Panama, Singapore, these are great places from a tax perspective. So that feeds into the cost of living. The medical expenses feeds into the cost of living, but other countries tax you on many fronts, certainly a constraint to you wanting to retire there.
John:
What’s the biggest mistake, Peter, that you see people make when they’re planning to retire abroad?
Peter:
My experience is they don’t just up and go, “Oh, well Cayman Islands is a no tax jurisdiction. I’m just going to go there. I’ll figure it out. They got beaches. It must be wonderful.” There’s something that causes people to go somewhere. I think one of the things that people don’t think of in advance is how am I going to deal with financial planning and taxes and investments while I’m abroad? And honestly, that happened to me when I moved to Singapore many years ago. I had my furniture organized, my schools organized, my living organized, even had my cats moved, I was a professional investor. What am I going to do with my investments? That never occurred to me. The other one that gets people are trusts.
I remember many years ago a woman coming to our office who was living in Germany and she’s like, “Oh, my parent, grandparent had set up an irrevocable trust for me. Do you know what sort of problems that creates for me in Germany? And I can’t get out of it because it’s irrevocable.” That’s one story we’ve heard before and that story’s pervasive. Irrevocable trust can be problematic, let alone living trust. They can also potentially be problematic. The other one is inheritance tax. We’ve heard of stories of people moving to places like Spain. Spain is wonderful by the way. I love Spain. Moved there, haven’t lived there very long. Inherit some money from the United States. Boom, taxes rise.
John:
Wow.
Peter:
So those sorts of things, it’s a function of planning. That’s the type of work we do on our team, is trying to help people think through not only the first order effects, but the knock on effects of their decisions that they’re making today.
John:
I believe wholeheartedly, if you’re looking to move internationally somewhere across the world, you have kids or grandkids that live internationally that are going to inherit some of your estate. You just don’t want to go to a generalist financial advisor. I mean, I’m even talking about myself. They wouldn’t want to talk to me. I think I’m a pretty decent CFP, but I don’t know the ins and outs and the nuances, which is why your team, Peter, having a team dedicated to this like we do here at Creative Planning and are doing this each and every day can be so important. Well, Peter, a lot of people think retiring abroad is a ticket to living cheap in paradise. My sister in her early 20s, this is probably, I don’t know, 25 years ago now, she took off to Costa Rica, lived in a hostel and surfed every day. She came back going, “I spent no money and this was incredible.” What are people missing when they think let’s just find a cheap place. This’ll be so inexpensive.
Peter:
It really just boils down to infrastructure. So in your sister’s case, she was young, she was healthy, but had she needed advanced medical care, those sorts of services, maybe should be able to get them there, perhaps maybe not. So I think that’s really the critical consideration.
John:
The experiences you have actually living somewhere for five or 10 years, which are so different than when you go on a vacation somewhere for a week, certainly, right? And you’re on Zillow and you’re like, we should live here. This is amazing. Well, you haven’t really experienced, to your point, everyday life like a medical event or whatever it might be. I experienced some of that just living in Maui. We used to live in Hawaii as a family and it is different when you live there full time versus when you’re there as just a tourist hanging out on the beach and having fun. Some of the real world stuff of needing a pool permit to be built and it takes 12 months or something. Wait to get a permit approved that in Arizona takes a week. Those are the sorts of things that I think people don’t necessarily consider and obviously that’s still in America. I can only imagine if you’re in Costa Rica or one of these places like I was just referencing. That’s a really good point. Let’s talk taxes. What are the biggest surprises retirees face when they move overseas related to taxes?
Peter:
It’s things I just talked about, trusts and inheritance. Those are the two things I think that catch people by surprise the most. Also, especially for an American. I mean our US tax system is complicated. Most Americans are filing their 1040 and then there’s pages and pages of addendums, but when you move abroad, things get infinitely more complicated. Now suddenly you have to worry about FBARs and 8938s and 5471s potentially. Can I make investments in the local market? So those sorts of things. There’s also a mistake. We have a webinar coming up. We’ll talk about these sorts of mistakes, but the work you do in terms of planning and saving, you can continue to do, but you might need to do it slightly differently. It may not make sense. You may not even be eligible anymore to make retirement account contributions, et cetera, but you can still do the things you need to do to achieve your financial goals.
John:
Really good point. If you’re retiring abroad, you’re generally a little bit older, healthcare is going to be a big factor of your plan. Are there countries that stand out to you in this area that do a really good job?
Peter:
I don’t think there’s a one size fits all solution here because we see clients across the world who seem partially satisfied and partially disgruntled with the local system. So we hear in the United States a lot about the Canadian system. Then we talk to clients in Canada who say, “It’s not quite the panacea you think it is. If you really need something done, you’re going to have to wait a long time.” And so a lot of clients in Canada are actually paying private fees to come back to the United States to get what they need done, especially if it’s a specialty matter. If you have a common cold or something like that, then great, that public service healthcare will take care of you. Other systems, we hear clients in Mexico for example, they self-insure. Depending on what’s happening in their lives, they might have a large expense, but they might have the wealth to cover it.
So it all kind of boils down to what their comfort level is, how close they feel that they are to a system that if there was a real major catastrophe that they could get to. So clients in Southeast Asia, how quickly they can get to Singapore, clients in North America, how quickly they can get to the United States or how good the system will be where they’re residing. Clients in Western Europe for example, they tend to be okay and we’ve seen clients move to Western Europe because they like the social safety nets that are in place there. But again, pros and cons to all that. You go for the public system, the US has public healthcare as well. You go to the public system, you’re going to get a different service than if you go through the private system. So it boils down to how much you’re willing to spend and what you’re demanding from the system, how your personal health is as well will it play a big role in your decision there.
John:
Let’s transition over to currency risk. How big of a deal is that?
Peter:
That’s a really interesting one. Currencies play an important role in our world. We consume in whatever currency that we’re living in, so clients in Europe, euros and UK pounds, Japan yen, etc. The challenge is we want to make diversified investments and we don’t want to overexpose ourselves to any single currency, any single economic region, etc. So the way we mitigate some of the risk around currencies that any single currency will make or break our financial futures is to diversify. So not only are we diversifying across various types of asset classes, stocks, bonds, etc. Or various individual companies that we’re investing into, different US large companies, US small companies, European large companies, European small companies, etc. But in doing that level of diversification, we’re now also diversifying away currency risk so that when the Japanese yen for example, suddenly weakens, it doesn’t disrupt a client’s financial future.
John:
What I hear you saying is that if you’re well diversified with your strategies, currency risk shouldn’t be one of those major factors that you’re considering when looking to retire abroad or where to go.
Peter:
No, it’s something we put into the equation and so we look at where you’re planning to retire as your future liability. That’s where you’re going to consume your money. What are your assets? Your assets are the savings you’ve built up, your retirement accounts, your brokerage accounts, those sorts of things, 401k, 403B, whatever it is. And so we want to generally align those two things, your assets, your liabilities, but not to the extent that we pile all your money into Australian dollars only to discover that the Australian dollar weakened so much.
John:
Sure.
Peter:
And now all your eggs are in one basket.
John:
It goes back to the tried and true age-old principle, that’s evergreen, right? It’s diversify, diversify, diversify, don’t oversaturate and create risks unnecessarily by having too much in one spot. Well Peter, this has been a great conversation. I found it really interesting. Thanks for sharing your insights and walking us through the opportunities and challenges for retiring abroad. Thanks for coming on the show.
Peter:
My pleasure. Thank you so much.
John:
This college football playoff, it’s a huge improvement, it’s going to be a lot of fun, but what I didn’t understand were people saying how could a three loss Alabama team possibly get in over a two loss SMU team? I mean one team has three losses and one team has two losses. Seems pretty simple, doesn’t it? All right, let me give you a comparison. If I had to play one-on-one against LeBron James and he beat me three times and you got to play one-on-one against my three-year-old daughter Luna and she beat you two times, would it be a good argument to say, well, I’m more deserving because I only lost twice. You lost three times and I know maybe the gap between the ACC and the SEC isn’t quite my three-year-old and LeBron, but it is the Grand Canyon. So somehow moving forward the committee has to figure out how to reconcile that the scheduled disparity and the quality of opponents is so wildly varied that there are not easy solutions.
This is very nuanced. What does that have to do with finance?, you’re asking. Very little other than a lot of things people say, a lot of conventional wisdom, a lot of the things that talking heads put out there is logical or correct may just not be or at least are only partially true. And that leads me to my first piece of common wisdom that I’d like to rethink with you today and it’s an extension of last segment’s interview surrounding Americans living abroad. And I think the perception so often is that these are American retirees settling in their post-working years in another country. And yes, that’s sometimes the case, but it’s certainly not the whole story. At Creative Planning, we work with a significant number of clients who are earning income abroad, who moved abroad with their company or took a new job with a company based outside of the United States.
We have other clients who their company’s in the US, all their business is in the US, but in this post-COVID world, you want to move to the South island of New Zealand, walk around the hills where The Lord of Rings was filmed. I mean it does look beautiful. Yeah, go for it. You can work remote. We don’t care where you’re at, just have reliable internet. Well, does that change their overall financial situation and their strategies? Of course. So the bottom line is whether you’re working abroad or retiring abroad, there’s certainly no one size fits all approach. You need a plan that’s tailored to account for your unique situation and that unique specific country where you are residing. Another piece of conventional wisdom that is often just simply not the case is this notion that you’ll pay less taxes once in retirement. For many that’s simply not true.
In fact, successful savers often find themselves in a higher tax bracket and this shocks retirees when they come to talk, they’re like, “Wait, I envisioned John, that my taxes would be so low once I didn’t have all of this income.” Obviously I’m painting with a broad brush, but for many, especially successful savers, your taxes don’t magically disappear or reduce once in retirement. Most Americans have saved primarily in tax deferred accounts like traditional IRAs, their 401k, their 403B, their 457s, and that’s where the bulk of their savings lies, which has certainly reduce their taxes in the short term. But again, you’re not eliminating tax, you’re simply asking to pay it later and hoping that quote, unquote later is at a lower tax rate. That’s the savings, is the difference between what you would’ve paid and what you end up paying where tax deferral can make sense.
I mean, you maybe even received an employer match for many years or decades in those accounts and because of some of the penalties to withdraw that money before retirement, you’re a lot less likely to tap them early like you might an after tax brokerage account. So what ends up happening is even when people save in a parallel account that’s just a brokerage account because it’s liquid and there are no penalties, if they need money over the 30 or 40 years they’re saving money, they usually go there for the down payment of a house, or to buy a vacation home, or whatever it might be because they’re certainly not wanting to take a 10% penalty plus the tax hit on those retirement distributions. And so you get into retirement, the withdrawals from those accounts are taxed at ordinary income. They stack on top of everything else. Once you’re in your 70s, you have required minimum distributions, RMDs, which force you to withdraw money based upon the account balance on December 31st of that previous year, and that’s factored in with your remaining life expectancy.
So your age, which is obviously you’re getting older, your life expectancy is compressing, meaning the government makes you divide your total account balance, which is hopefully growing if you’re invested properly by a smaller number, meaning you have to take more and more and more out in most cases every year you get older. And a big factor and nuance that is often forgotten about is that while you’d love to be like The Notebook and you’re laying on a twin size bed at the nursing home holding hands and you pass away at the exact same time with your spouse, that’s not normally how it works. One spouse dies before the other. The surviving spouse then inherits all the assets, but goes from paying taxes as a married filing jointly taxpayer to a single filer and all of your tax brackets get cut in half at that point.
And this is simultaneous to those required distributions getting larger and larger and larger. So don’t fall into this trap, this conventional wisdom, this thinking that oh, oh taxes, they’re going to be nothing once I’m in retirement, that’ll be no big deal. No, we have $35 trillion of national debt and we’re in the lowest tax environment we’ve seen in decades right now. So start considering your tax strategies. If you’re still saving right now, should you be deferring or should you be saving into the Roth side of your employer plan, eating the taxes today to get into a tax-exempt environment moving forward? I mean, shoot, if you’re married filing jointly right now and you’re under about $370,000 of income, you’re not even out of the 24% tax bracket. To put that in perspective, the 25% bracket started during the Bush tax cut years at $76,000. Deferring right now is less viable for more people because a lot of people aren’t making 400 grand plus per year.
So that’d be one thing, Roth contributions, maybe even Roth conversions. So if you’re in retirement, maybe you’re in that window before required minimum distribution in that age range of your 60s where you have some flexibility on where you take income and when you turn on social security, maybe your wages have dropped or you’ve already retired and you’ve got this big chunk of money that you did a great job saving and deferring the past 20, 30, 40 years. Should you be converting some of those deferred monies proactively and strategically with the help of your CPA? That’s the question I think you should be asking yourself if you have a big chunk of deferred retirement dollars and if you’re not sure where to turn, we can do that for you here at Creative Planning. If you’d like our help to analyze how much to do, what the sequence might look like, this is something we do every day for clients here at Creative Planning, helping them determine how much would be the right amount to potentially convert.
Because remember any conversion amount stacks on top of all the rest of your income and has some Medicare means testing components and potentially will hit you with an Obamacare tax increasing your capital gains rate by around 3%. So you do want to be mindful of this. It’s irrevocable. Once you make the conversion, you can’t reverse it. You want to do it right. You want to ensure that your advisor and your CPA are talking, not just looking at this year, but projecting out, strategizing for the next several years and decades. Another factor to consider is that you want to be smart with your charitable giving. If you’re charitably inclined, charitable distributions will help you kill two birds with one stone. It’ll satisfy that RMD and get money to charities. There’s things like asset location that can help you reduce your taxes. Again, because we’re talking about am I actually going to pay less in taxes in retirement?
Well, these are the types of considerations and strategies, like having the right investments in the right types of accounts and efficient withdrawal strategies. Which accounts do you pull from first, which do you let run longer? How do you synthesize the investments with that withdrawal strategy? How much do you take from one account versus another? All of these things are the types of conversations a great financial advisor can help you with. A great CPA, a great attorney can integrate all of these things and it can make a huge difference on your bottom line because the assumption that you’ll pay a lot less in taxes once you’re in retirement simply might not be the case and its common wisdom. I want you to rethink. Well, you’ve probably heard this one before. Social Security is going broke and with headlines about trust fund shortfalls, it’s easy to see why and there’s a lot of truth to Social Security being in trouble.
But let’s take a closer look because this is the SMU, Bama argument for the college football playoff because there is a lot of nuance. Social Security is funded primarily through payroll taxes, what you and I pay while working. So those current workers are funding the benefits that retirees are currently receiving. And yes, there’s a demographic challenge. Baby boomers, a massive generation are retiring in droves every single day. And so while millennials are also huge, there’s more of them now than boomers, they’re just now hitting their peak earning years, which is significant because their payroll taxes are what are funding this massive baby boomer generation’s income. According to current estimates, the Social Security Trust Fund could face a shortfall around 2034, about a decade from now. If nothing changes, benefits might need to be reduced by around 25%. If that concerns you, it should. That’s a big deal.
Many retirees depend on Social Security as the lion’s share of how they support themselves. So going from what barely gets you by to 75% of that would create an economic catastrophe, which is why it’s not going to happen. Unless a politician wants to never be reelected, have their house egged and tipied every night for the rest of their life, they’re going to figure out a solution to Social Security. It’s one of the few things that’s bipartisan, not because the left and right are getting along, but because they’re both in self-survival mode and they know that they have to figure it out because the largest voting constituencies, their most important people care deeply about this and don’t want to hear that they’re going to lose their benefits. So here are a few options that have been proposed. Raise the full retirement age. So right now it’s 67, gradually increase it to 68 or 69 or 70, and that would create relief on the system.
By the way, this is very logical. When Social Security was enacted, when the new deal was put together, life expectancy was 62 and a half years old and full retirement benefits on Social Security was 65. Well, we’re now living way longer. I mean people are living into their 100s, many into their 90s and full retirement age has simply gone from 65 to 67. We’ve moved it back two years. It’s not rational. The reason this hasn’t changed sooner and probably won’t until right at the end when we’re forced to is because any legislator proposing that we move this back immediately becomes less likely to be elected. So that’s why they’re not going to do it until Americans say, well, I’d rather have that than lose 25% of my benefits. Then it would become popular. Just increase payroll taxes. That’s another solution. Increase the payroll tax rate and increase revenue.
A third option would be to remove the wage cap on Social Security taxation. So currently once you make over about $160,000, no more of your income is subject to Social Security taxes. And that’s different than Medicare, which is uncapped, but Medicare’s percentage is much smaller that comes out of your paycheck than Social Security which has had this cap. Well imagine if the person making $800,000 a year or 2 million a year had to pay Social Security taxes on that million dollars of income beyond 160 grand, it would boost that trust significantly. Now whether or not that’s fair or should happen, it depends upon your social and political views. The person arguing against that would say, why should someone making 2 million a year pay that much into Social Security and only receive a benefit equivalent to the person who paid on $160,000 of income? They’re basically redistributing all that wealth.
Someone else would say that person’s fine. They’re making $2 million a year. They can pay more in to help Social Security remain solvent. But here’s the takeaway, this notion that Social Security is going to disappear or I shouldn’t factor it into my plan is nonsense. Social Security will almost certainly have changes and you shouldn’t rely on it for the entirety of your retirement. Like you want to be responsible and self-fund outside of that so that you’re not beholden to this variable so that it’s one piece of the puzzle, not the entire picture. But remember even in a worst case scenario, if nothing changed, your benefits would drop by about 25% and that keeps Social Security solvent until nearly the turn of the next century. The idea that Social Security is going broke and I’ll get nothing simply is a piece of common wisdom you need to rethink. And it’s time for this week’s one simple task where I help you improve your financial situation incrementally, one small step at a time.
This week’s task is to automate your savings. We tend to spend a lot of time focusing on spending wisely, hopefully wisely, maybe budgeting, some dive into investment strategies. But I think too often we overlook the importance of automating the simple act of saving money. Automation removes the friction and it ensures that you’re consistently building and prioritizing that savings, whether it’s for emergencies, you’re just building up three to six months. Maybe it’s for long-term goals, maybe it’s for a moderate term goal, education funding, which is four years from now. Maybe it’s not 40 years down the road, but that savings creates peace of mind.
Just this week I was chatting with our 23-year-old son. We were standing in the kitchen and he wanted to discuss buying a new car. If you’ve listened to this show at all, you know I am not a expensive vehicle purchase. I think it’s one of the biggest detriments to the average American’s financial future. It just clobbers people. Put $1000 down on an $80,000 SUV and then they finance the other 79 grand at 7% and they’ve got to buy gap insurance because the second they drive it off the lot, it’s worth way less than they even owe on the darn thing. I believe that vehicles in general cause a lot of financial hardship in America, and my son knows my bias too.
So he was treading lightly. And I walked him through the depreciation and how much less he’s already going to be able to sell his current car for than he bought it. And he told me, “Dad, it’s a $5,000 difference between this and that and does it really matter?” So of course I pulled out the calculator and I ran the long-term projections and I’m sure he was internally just rolling his eyes.
I told him at your age, compounded over the next 40 years at a 10% rate of return, it’d be 400 grand. That $5,000 is 400,000. And yes, I used 10%. I wanted to be aggressive to make sure that number was as big as possible to really get his attention. His response, “Dad, give me a break. Me in my 60s, that is so far away. I want a nice car now, like it would actually make me really happy. I want this V8 5.0.” And then I’m started talking to him about that insurance will be more expensive and gas mileage will be worse, and all the other practical implications that a 23-year-old single dude doesn’t care about.
And to be fair, he’s right to some degree. You don’t want to live your life so frugally and running projected value calculations 40 years in the future on every discretionary purchase or you’ll drive yourself crazy because the reality is in life there is the decisions you could make if you were a robot and all you cared about was optimizing your savings, but then you’d be the person that dies with $10 million, never traveled, never did anything with enjoyment, was stingy and had no level of generosity. But yeah, they maximize their net worth for when they died. That’s not winning either, right? So I think for all of us, including my son and myself and you, you’re trying to find the balance between optimizing your savings and living a life of purpose and that you enjoy.
Where is that line for you? It’s probably different than for me, and mine is certainly different than my 23-year olds or even when I was 23. I’ve changed in the way that I think and that’s okay. But the $5,000 decision today impacting his future self by 400,000 does illustrate an important point. And that is that saving money today, even in small amounts adds up in ways that our brains can’t even fully grasp related to exponential compounding. So again, this week’s one simple task is to automate your savings and you can do so with a few simple steps.
Just set up an automatic transfer from your checking account to a savings account or an investment account. Choose an amount that fits your budget, don’t stretch it so far, then you’re short every month. So be realistic. I’d prefer you to do an amount that you’re comfortable with versus being concerned that it’s too much. And then not setting this up at all. Schedule a transfer right after you receive your income. So if you’re paid every two weeks, do it every two weeks. This ensures that you’re paying yourself first and you’re not using the money before you need to save it for unnecessary purchases. You can find this and all of 2024s one simple tasks on the radio page of our website. Well, it’s time for listener questions and Britt is here as always to help me with those. Britt, who do we have up first?
Britt:
Hey John, how’s it going? So we have Tim from Minneapolis up first. Tim wants to know, does Creative Planning provide guidance on family governance or wealth education to help families understand the responsibilities associated with inherited wealth?
John:
Well, absolutely Tim. It’s common for those families who want multi generational planning to have group meetings with their financial advisor and attorney and CPA to look broadly at the family plan to ensure that everyone’s on the same page and there’s fantastic communication. This tends to happen when everyone in the family, maybe even the grandchildren, if you’re going three generations deep, are adults and responsible and are in a situation where they won’t be dissuaded to work hard by understanding the big picture of the family finances. But that education component is really important and setting proper expectations and making sure that people, while everyone’s alive, are able to have an open discussion and ask questions and have those questions answered. That definitely can lead to a more harmonious transition.
Every family’s different, every dynamic is different. How much detail you share, how often you have them included in those meetings is very family specific. Creative Planning trust company also can act as the institutional partner when needed to help execute those wishes. So I think there’s value in having all of those parties in engaged over several year period so that it’s a smooth transition and not a clunky one where you have seven different family members using seven different companies and advisors and CPAs and there’s been no real centralized cohesive strategy along the way. I think that family governance and wealth education pieces are really important. That’s a great question. All right, Britt, who do we have next?
Britt:
Up next we have Jack from Omaha and Jack shares that him and his wife have started discussions about some larger personal expenditures and he’s wondering if you have any tips to plan for these types of things. He shares, John, that they’re empty nesters with retirement just a few years away for the both of them.
John:
Well, when it comes to larger expenditures, especially as you near retirement, the whole key is planning. So you’re asking the right question. Here’s some tips. I would prioritize your goals. So identify what’s most important to us, especially as we enter this new season. Is it a second home, or a big family vacation, or upgrading your lifestyle, or renovation, or a new vehicle, or getting a motor home to travel around the country. Knowing the things that you jointly value and getting on the same page with those things will help guide these decisions. Then I would create a dedicated savings fund. I like to earmark for bigger purchases, specific dollars within specific accounts.
And frankly, you might need to just from an investment strategy standpoint, if you want the money a year from now for something, you don’t want it in stocks. Too much volatility. So that’s an example of that. But if you didn’t plan to make the purchase for six years, you wouldn’t also want it sitting in cash. So I think it can help not only mentally segment and create some peace of mind and assurance that the money is there for what you need, but also hopefully you can optimize the growth rate and liquidity of those dollars as well. And finally, Britt, let’s go to Jim in Dallas for the last question.
Britt:
Our final question today, John, is from Jim out of Dallas. And Jim wants to know, should we be concerned about potential changes in international tax laws or tariffs that could impact our global holdings?
John:
The short answer, Jim, is yes, but with a caveat. Global investments inherently come with complexities including tax laws, tariffs, and geopolitical risks, and these factors can influence markets and your individual investments. But here’s the thing, you can’t predict what those will be. You don’t know the future. I don’t know the future. And even if we did the way the markets would respond and the way 7 billion people sentiment would change, good luck trying to forecast that. We saw that during COVID. You didn’t have a crystal ball, but if in 2019 you were alerted to what would happen in 2020, most rational people would’ve moved their investments to cash or shorted the market. Well, that would’ve been terrible because the market finished up 20%. That’s why these things are so hard to forecast and then stay informed about global trends, but don’t overemphasize them or in my opinion, act upon that information because so often it’s because of emotion and the biggest emotion of those being fear, which you never want dictating your investment strategy.
I found myself reflecting lately on the difference between filling your time and living your time. In America, the default answer to someone asking how you’re doing, at least in my world where everyone has a lot of kids, we’re in this full season of life is busy. How you doing? Aw, busy. We’re really busy. We almost wear it like a badge of honor. But being busy isn’t the same as being fulfilled. Being busy isn’t this great thing to say look at me, I’m not lazy. I’ve got a lot going on.
Living your time is different. It means being intentional about how you spend it. It’s about aligning your actions with your values and creating a life rich with purpose and joy and connection, which means, yeah, you may have a lot going on, but what you’re doing has been planned out with intentionality. So this season, take a step back, look at your calendar, look at your bank statement, because how you’re spending your time and your money reveals what matters most to you. Let’s live deliberately this holiday season 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.
Important Legal Disclosure:
creativeplanning.com/important-disclosure-information/
Have questions or topic suggestions?
Email us @ [email protected]
