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Financial Lessons Unveiled: Insights From 4 Featured Guests

Published on March 18, 2024

John Hagensen

Our emotions can often get the best of us. But when it comes to your finances, emotional reactions can have big implications. From avoiding critical investing mistakes (2:26) to having financial conversations with your spouse (40:30) and planning for retirement (15:22), join John as he gets insights from four special guests to help you navigate your finances with confidence. Plus, discover how high-net-worth families can plan for their unique circumstances (25:00).

Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!

John Hagensen: Welcome to the Rethink Your Money podcast presented by Creative Planning. I’m John Higginson, and ahead on today’s show I’m interviewing four fantastic guests to hear their thoughts on behavioral finance, investing strategies for the high net worth, and how to engineer a solid retirement game plan. Now, join me as I help you rethink your money.

My first guest is Creative Planning president, Peter Mallouk. And if you work in finance or you follow finance, you are very familiar with that name. And I’m not just saying that because he is the president here at Creative Planning, but because he’s been a trendsetting visionary for this entire profession. He was providing advice as a fiduciary long before that gained momentum, when the standard practice at the time was slinging a bunch of commissionable products.

Through Creative Planning, he was the first at any scale to build a comprehensive offering like a true comprehensive offering, a hundred CPAs. He’s a New York Times bestselling author. He’s been named three times consecutively in 2013, 14, and 15 by Barron’s as the number one financial advisor in America, and is the architect responsible also for Creative Planning’s success, being named the number one firm in America by CNBC, Barron’s, and RIA channel, which is published by Forbes in 2014, 15, 17, and 2020 respectively.

Peter’s on a number of boards. He’s received so many awards that it’d take five minutes for me to read them all, we wouldn’t even get to the interview. And by the way, I’m not joking. But I would be leaving out a huge part of who he is if I didn’t mention the time and resources that he and his wife, Veronica, have dedicated to serving those in need. He inspires me to be better, and that extends far beyond just the workplace.

Peter graduated from the University of Kansas in 1993 with four majors. You heard that correctly, four majors, including degrees in business administration and economics. He went on to earn a law degree and also receive his MBA, both at the University of Kansas. He’s the recipient of the University of Kansas School of Business Distinguished Alumni Award, becoming the second-youngest recipient ever to receive that award. And fun fact, his wife, Veronica, holds the spot of the youngest.

Without further delay, Peter Mallouk, thank you for joining me on Rethink Your Money.

Peter Mallouk: Awesome to be with you.

John: Peter, you wrote a book, The Five Mistakes Every Investor Makes and How to Avoid Them. So often investors are looking for that big win. But in many cases it’s less about knocking the ball out of the park, and more about avoiding the strikeout. One of those unforced errors pertains to timing the market. Why do you think, Peter, it’s so hard to beat the market?

Peter: It’s interesting. Because when we start with the bias, if you’re talking to somebody who’s got 500,000, one million, five million, this is a small part of the population. It’s not a big part of the population. They tend to be more successful. Sure, some of them are lucky, but of them worked really hard. They saved a lot. They’re really diligent. They’re good at repeating the behaviors that create wealth.

And so their whole lives, their brains have been trained to believe, which is accurate in almost every field, the more effort I put in, the smarter I get, I will get an edge over other people. This works in professional sports, it works with architecture, engineering, medicine, law. It works in construction.

And so you expect, well, I’m going to enter this area where there’s millions of people investing. And of course if I try harder, or get them smarter, or some combination, I will beat them. So it’s a natural feeling to have.

And what’s different about the markets is, there’s so many people in them, that you have so much smart money on both sides of every trade, that it’s very hard to beat it enough to win. Winning meaning, after fees and taxes that you’ve beaten, just buying and holding a basket of securities, and rebalancing, and tax-harvesting and things like that.

So this just enormous bias comes into play that makes us want to believe that we can beat the market, and that’s the starting point of all of the big mistakes that happen along the way.

And I think the biggest mistake is the one you pointed out, which is market timing. And the reason market timing is so dangerous is there’s a perception of, if I’m in the market, things can go really bad. Well, let’s look historically, things have gone really bad over 150 times now, being a 10% drop or more. And almost 40 times we’ve seen a drop of 20, 30, 40, 50% or more.

That’s pretty bad, to watch your net worth go down 10 to 50, 60%. But in every single instance, the market recovered. So it’s sort of like, yeah, you might go get a Diet Coke, over time we expect it to go up in price, but every now and then it goes on sale. But we never expect it to be permanent. But with the stock market when it’s down, people expect it to be permanent.

But we know the worst case scenario for a diversified investor has been a temporary pullback in the stock price. Now, if you’re out of the market, which perception wise is safer, hey, Obama became president, I’m going to the sideline. Trump became president, I’m going to the sideline. Whatever’s happening in Ukraine, the dollar is losing its reserve status. The banks are failing, covid, 9/11, tech bubble, I’m going to go to cash because it’s safer.

Well, with all of these instances, the market went on to new high, and may never go back to where it was before. So that loss is permanent. If you exit the market at 30,000 and the Dow goes up to 40, it may never go back to 30. And that’s why market timing is so devastating. The risk of being out is so much more significant than the risk of being in.

And you couple it with that human bias that, maybe I can do it because I’m probably smarter than average. You can’t do it enough. Even one market timing move, you have to be right twice, when to get out and when to get back in. It’s just, the odds are stacked against you. I could do our whole episode on this. And like you said, I wrote a whole chapter on a book about it.

But it is the biggest mistake I see people make. It causes just total devastation, especially when you see, in a big event like covid or tech bubble where you see somebody at the bottom exit, which is where most people exit, it causes maximum damage. You can wipe out 15, 20 years of your work life with one trade.

John: And I think the best example of this, Peter, that I hope discouraged people from trying to market time, was covid. If somebody in 2019 had a crystal ball, most rational people, certainly market timers, would’ve said, I’m shorting the market or I’m going to cash. The entire world is shutting down. The market finished up almost 20% in 2020.

So the challenge with market timing also is that you don’t know the info, and even if you did, how seven or eight billion people are going to respond to that makes it very difficult, no matter how smart you are.

Peter: Great point. And I think a lot of people look at things as, oh, this happened, so therefore because of this, then that. But the market’s dynamic. The market doesn’t care about anything but future earnings. And there’s a lot that goes into future earnings, besides, say, a pandemic or a terrorist event.

And that’s, how’s Congress going to react? If Congress is going to hand everybody, money, well they’re probably going to spend it, and that’ll impact future earnings. How’s the Federal Reserve going to act? Well, if they’re going to lower interest rates to zero, people will probably borrow money and buy cars, and maybe that’ll turn the market around.

There’s just all these things. If all market conditions are absolutely perfect, you have a perfect analyst and says, “Okay, everything’s perfect. The market’s going to go up, let’s buy.” Well, you can still have that cyber attack, that 9/11. It’s dynamic. And if you can accept that it’s dynamic and unpredictable, then you stop to do it.

There are a few warning signs that you’re talking to somebody, and I’m just going to use the word I truly believe it, that’s incompetent. They tell you that they can predict the market. If they’re telling you, “I have a downside solution, I’ve got a downside exit strategy, I’ve got a tactical allocation strategy, I don’t know when to move from one thing to another.”

If they’re telling you that, they’re usually going to fall into one of two camps; one is, they don’t know enough to know what they don’t know, and they’re gambling with your money. Or they know exactly that that’s not possible, but they’re trying to persuade you that they know how to do it. Either way, that’s not the advisor or money manager to be with.

You have to accept these basic facts. Because when you can accept those basic facts, you can then implement a strategy that works within the market, right?

John: You don’t need to look further than the fact that the Fed has 400 PhD economists, and have the ability to manipulate the money supply, and they couldn’t get it right because there are so many dynamic factors. Which leads me to my next mistake that you wrote about, which is active trading. Nobody wants to be average. Although investing is one of the weird things where, if you are average by owning indexes, you beat 85% of the active fund managers from all of history.

But how do you think about that when a client says, “Well, gosh, just boring, diversify. Isn’t there some manager that knows to buy NVIDIA before it goes up 200%?” What do you say to that person?

Peter: I think you have to start with just the understanding of why security selection is so hard. So if you’ve got somebody who says, you know what? I am going to be in the market. I’m not going to market time, but what I’m going to do is I’m going to buy and sell stocks regularly. I’m going to make these moves in and out of different securities.

Now, let’s just pick a random stock. Let’s pick McDonald’s. So McDonald’s, on an average day, has millions of people sell, which means millions of people are buying. There’s always a seller, there’s always a buyer for every seller, they have to match up. So the question is, do you know more than these millions of people?

And I think it’s easier for people to understand how hard it is to beat if you talk about real estate. So just, wherever you’re listening, whatever city you’re in, there’s probably a condo for sale nearby. Let’s say there’s a condo in a building, there’s a hundred units in there, and a couple of people put their condo up for sale. And then the average in the building is 700,000.

You probably know if somebody lists it for 900,000, no one will buy, and that no one would be stupid enough to list theirs for 600,000 if the last 10 transactions were higher. We can accept that, that the real estate market is fairly efficient. Well, the real estate market is 99% less efficient than the stock market.

Because the difference is, in the stock market by law, all the information has to be public. You have millions of people on both sides, not a couple people looking at that condo, or maybe even a hundred people looking at the condo. You have millions of people that have very sophisticated teams, that are spending millions of dollars on trying to beat the other side. That’s the kind of marketplace you’re walking into.

So if you walked into a tower with thousands of units in your downtown area, you expect if someone wants to sell it, the real estate agent’s going to say, “Look, you’ve got to sell it in this tiny band. Because if you put it higher than that, you’re not going to sell it. And lower than that, you’re crazy.” That’s kind of efficient. Multiply that by a hundred, you get the stock market.

And so it becomes very hard. I mean, give me a break. The guy down the street from you knows when to buy and sell McDonald’s? And if you look at the top a hundred mutual funds, over 90% of them won’t get that right over a decade. To your point, John, if you just owned those a hundred stocks, you would’ve done better.

And so once you accept that premise, it all becomes about, what are your goals? What asset classes should you be in, in the first place? Should you have money overseas or just in the US? Should you also have bonds in real estate or not? How do I get a better after tax outcome? Should my IRA own this account or not?

You start to make smart decisions that we know add value. And they cannot subtract value, right? And so it’s another big premise to investing. Now, the issue with active trading is people that have done really well, it’s like winning at a blackjack table, right? You’re not leaving the table, you’re winning. It feels good.

And people that are doing really poorly, they go, “Oh, I just got to get back to even.” Once Facebook gets back to where it was, then I’ll get exit. Of course, when it gets back, you’ve got those good feelings again. So it’s a very hard thing to do, because it feeds on a lot of that innate human behavior that makes us want to do it.

John: Yeah, that’s a good point. I’m speaking with Creative Planning President, three time Barron’s Financial Advisor of the Year, Peter Mallouk.

Let’s shift our focus over to someone who says, “I do think I need some help on this. I’d like to find advice, I’d like to have somebody help shepherd my life savings. It’s become too complex, either I don’t have the expertise or the time or the desire to do this.”

Well, then the most important decision isn’t figuring out whether to be active or passive, or how much international to have in the portfolio. It’s, who do I hire to help me make all of these decisions? And so that ends up being the most important financial decision that people make.

And it’s one that I’ve seen firsthand, you certainly have as well, people don’t necessarily always have a great premise with which to make that decision. Hey, I golf with this person, or they go to my church. And I don’t know, they seem like they have a decent office, I guess I’ll work with them. I mean, that’s sort of what people are doing.

Peter: It’s crazy. If you were going to go get, if you had a problem with your liver, you wouldn’t just do it with whichever of your buddies helps you with that, right? If you needed a knee surgery, you wouldn’t be like, “Oh my buddy is a surgeon.” You’re going to go on Google, and whatever you need to do, you’re going to ask around. You’re going to look for a top advisor that meets some certain criteria. You’re going to seek that person out.

But there’s something about, you can work hundreds of thousands of hours, and then hand everything you’ve ever worked for to somebody who just happens to go to your church or lived down the street. It’s crazy. There needs to be some due diligence that goes into it.

And the first thing I tell people to look for is alignment. You should never have an advisor that owns their own products. Because, guess what? They’re going to go, thank you for paying me. I now recommend my own product. It’s like going to Ford dealership, paying them a fee to ask them what car to buy. They’re going to go, thank you for the fee. Here are several Fords for you.

John: You don’t think they’re going to recommend a Silverado?

Peter: Right? Yeah. So you definitely want alignment. That’s the first thing you want. You don’t want anybody that owns their own products or gets paid revenue sharing or commissions for selling you an investment. There’s plenty of investments that don’t have commissions.

The second is, you want a fiduciary. So, someone who has a legal obligation to act in your best interest. That requirement alone eliminates 90% of advisors that work in brokerage houses, that have revenue sharing, commissions on their investments, all those conflicts.

But I think you also want experience. You want a firm that’s got a lot of expertise, and a lot of things that they can deliver to their clients. And that whatever it is that you’re going to go through, they’ve seen it before. And whatever bear market’s coming, they’ve been through something like that before. That they have access to the best investments, and the best technology, and the best cybersecurity.

So you want some scale. The sweet spot is, if you can get an independent advisor that’s got a lot of experience, you go to the problems in the marketplace, 90% of advisors are in these brokerage houses. Right? The Merrills, the Morgans, the Goldmans of the world, and where they have their own products and all these conflicts of interest.

So you go to the independent world, and there are a lot of wonderful people there, and they’re aligned with their clients, they don’t have their own products and so on. The issue is, they might only have a few hundred clients, they might only manage a few billion dollars. They just don’t have the scale to really provide the client the optimal probability of a good chance of success.

And so it’s a very interesting field. It’s hard for people to understand. Because with an architect or a doctor or a lawyer, they always have to act in your best interest.

That’s just how that works. Same with a CPA. So you expect that that’s just how it is with financial advice. But listen, the difference between doctor, lawyer, CPA and financial advisor is, you have to have some education to be a CPA, a lawyer or a doctor. Anyone can call themselves a financial advisor.

So you really have to look for experience, and alignment, and credibility and so on before you put your life’s work with somebody. And it will translate into probably a better portfolio, that will probably have a better of getting you where you want to be over time.

John: Very good points. Peter, thank you for sharing your perspective with us here on Rethink Your Money.

Peter: Thanks for having me, John.

John: I am joined by Scott Schuster. He’s a fellow wealth manager here at Creative Planning, a certified public accountant, certified financial planner, with more than 30 years of professional experience. Thank you so much for joining me here today on Rethink Your Money, Scott.

Scott Schuster: Thanks for having me, John. Really appreciate being here.

John: You have a unique background of tax, along with being a certified financial planner, and that’s what I want to discuss today is a tax-focused financial plan. So where do you believe people should begin?

Scott: When you talk about retirement planning, people really need to start with absolute square-one. And it’s amazing to me how many people don’t really know what they spend in retirement. They get out a piece of paper, or they get out a spreadsheet, and they start adding up the things they spend; their coffee, the dog walker or the times they went to dinner, and they forget that an average American spends money between 1500 and 1800 times a year.

So after about three minutes of watching them just funnel around in that, I say, let’s do something a little different. If you give me two numbers, in 35 seconds I can tell you how much you’ve spent. How much did you make, and how much did you save?

John: Perfect.

Scott: If you give me those two numbers, I can use subtraction and I can tell you what your spend rate is. And I’m right, and they’re mostly wrong. It’s kind of funny that way.

John: That’s the exact approach that I take with clients as well. I think it’s so much easier. So, know your numbers, figure out the spend rate. What next?

Scott: Understand the difference between cashflow and income. In retirement, you’re going to be super excited, you’re going to drop the mic on your boss. You’re going to say, “Hey, thanks for the chance to work here. I’m out.” And you’re going to walk to the mailbox, and you’re going to hope to heck that there’s, let’s say you need 10 grand a month to live on, you’re going to look in there and look for 10 grand.

And the reality, there’s not going to be 10 grand in your mailbox. So what there’s going to be is probably a couple streams of income, not cashflow, but income. There’s going to be a social security check possibly for one person, maybe for another, and possibly a pension.

So what they have to do is, they have to first-off understand what their income streams are, and when they start. A lot of times they don’t start exactly the day someone retires. And then figure out if their assets can make up for the difference between those two.

John: What about the three types of money from a taxation standpoint? Pulling from after tax, tax-exempt, or fully taxable retirement accounts impact how much of that gap you’re able to fill. So how do you evaluate that when you’re trying to fulfill the needed retirement income?

Scott: I love how you say that. There really are only three kinds of money, but there are three kinds of money. The three kinds of money, best to worst: best kind of money in the world is no-tax money. No tax means never to be taxed, ever, for your life plus 10 years. So that’s Roth money, that’s health savings account money. That’s the holy grail. If you spend that money, everything else is gone. That’s the last ditch effort to spend.

The second-best kind of money is actually what I call after-tax money. So you get your paycheck, Uncle Sam takes some bucks, State Sam takes some bucks, and you have some dollars left. Most of which you pay your daughter’s Starbucks cards and you pay for college, but there’s a couple dollars left over that you go invest, whether it’s in a joint account, a trust account.

Now that money, even though it’s exposed to taxation, the capital gains rate is only applied to the difference between what you put in and what it grows to. And it’s a heck of a lot lower than ordinary income. So the second-best kind of money is post-tax money.

Most people in this country have a ton of IRA 401k monies, that’s the worst kind of money out there. Every time that you need to go buy a donut or buy a cup of coffee, you got to pay the federal government for sure. And depending on what state you live in, you also got to pay the state government at times. So you really need to understand the power and the difference between your no-tax, your post-tax and your pre-tax.

And then you need to get your creative hat on, and get yourself the right cashflow depending on the buckets that you’re drawing from.

John: So once someone is aware of these three types of money, how should they determine which type of investments go into each bucket?

Scott: So that is where I can find so many different holes in people’s portfolio. They might have a perfect allocation, so their allocation good, location bad. Say a typical affluent person has a couple million bucks, and they’re getting ready to retire. Invariably, 70 to 80% of their money is going to be an IRA’s 401ks because that’s the easiest and the most convenient place for people to save.

The next bucket that people will have will be that after-tax bucket. And then obviously in the Roth IRA HSA, that’s where we want all the aggressive investments. At Creative Planning, John, you know how we do this? We talk to families and we say you want to really have between five to seven years of your spend rate in bonds.

And that’s really to let yourself go through some of these economic cycles that we’re living through right now, not an exactly wonderful time where the market’s choppy. Let yourself be able to turn the news off, not listen to what’s going on, not listen to the war stories, not listen to the banks failing, but be able to live your life and know, comfortably, that you’ve got five to seven years of spend rate to get yourself through that economic cycle.

You want every penny of those bonds, you want to hide them in your IRAs.

John: Sure.

Scott: That’s the worst tax asset that you’ve got. If you have more money than you need, Roth assets giving to the next generation are the best things in the world, because they’re tax-free. But the second-best asset you can give to a next generation is after-tax assets.

Because, and I say this tongue-in-cheek, if you forget to be alive, the federal government and the state government pay all the taxes on those dollars. And the recipient of them gets them tax-free.

So in essence, it’s almost a Roth if generation behind you spends it. If you put your bonds in those assets, you get no growth on them, and you don’t get the benefit of Uncle Sam and State Sam paying the taxes for you.

John: And a really good test on asset location is to simply look at all of your accounts. And if they each have the exact same allocation, let’s say you’re 60% stocks and 40% bonds, you’re not doing this right.

And if you are listening to Scott and me talk asset location and you’re wondering, am I doing this correctly? To schedule your meeting, visit Creative Planning.com/radio.

And so to put a bow on this portion of our discussion around what someone should know, if there are about five years out from retiring, what advice would you provide as a summary?

Scott: Definitely know your number, understand the cash flows that you’re going to have in terms of both retirement income and then what your assets look like. The last thing I’ll tee off, and I want to just make sure people know this, John, what’s your wife’s name?

John: Brittany.

Scott: So where are you and Brittany going to retire, John?

John: I have no idea.

Scott: Okay. I love that, you’re too young. I’m way older than you. I want every client within five years to know the answer to that.

And it’s not so much that I can tell you that I want you to live in the south of France or wherever it is, but I want you to understand the state tax ramifications of the state that you’re going to live in.

So knowing that as well is super helpful, in terms of making sure that your asset location, as well as maybe Roth conversion strategies, are being done right, while you have some lead time to be able to do it. So not really a super good bow, but more of a wrapper.

John: No, no, that’s great.

All right, Scott. So let’s say now we’re about to retire. We’re within a year. From a tax-focused financial planning standpoint, as a CPA, what’s your advice?

Scott: Have what I call a comfortable cash zero. So let’s say your cash zero is 50 grand. If you have 49 grand in your checking account, you’re not going to go to Starbucks because you feel destitute.

We’re going to trial run your retirement budget. You told me that you’re going to live on 12 grand a month? We’re going to have 12 grand a month flow from your paycheck into your checking account. And on April 7th, and on August 9th, and on May 13th, I’m going to call you and say, “How much do you want me have in your checking account?” And you’re going to say one of three things, right?

You’re going to say “49, 7.”

And I’m going to say, “Okay, all systems go because you’re spending 12 grand a month.”

You’re going to say, “Oh, Scott, I got 33. But don’t worry about it.” And you’re lying to yourself.

So I’m going to say, “Okay, your spend rate is really higher than what you thought.”

Or you’re going to say, “I have 63,500.”

And I’m saying, “Oh my gosh, your spend rate’s lower.” But we’re going to really dial in what your real spend rate is by test-driving it in the last year while you’re working.

John: That’s a great exercise. So what other considerations should be taken in the final year before retirement, Scott?

Scott: Now’s the time to not let any vagaries exist in their retirement plan. So it’s the time to get absolutely specific with all streams of retirement income. When are you going to take your social security at full retirement value earlier, or at age 70? When’s your spouse? Same thing.

And then, even not in a more complex fashion, but a lot of people have access to pensions. Whether they were teachers, whether they were working in a company that had a pension, and understand what the pension distribution options are. You really got to dial in all the specifics of your retirement income, because we then have to know how much your assets have to provide you on an annual basis.

And then we get our cool hats on, and try and figure out the best way to provide that cash flow in the most efficient manner possible.

John: Scott, you are the best. As always with you, this was entertaining and it was informative. I enjoyed myself and I hope you did as well. Thank you for joining me here on Rethink Your Money.

Scott: Thanks, John.

John: My guest is Jessica Culpepper. And I’m not sure where to begin in introducing Jessica, but I’ll do my best. She’s an MBA, a CPA, a CFP. She’s a fellow partner of mine here at Creative Planning, and she works on our ultra-affluent team, helping some of the highest net worth families at the entire firm.

She’s been featured in Barron’s as one of the top 100 women advisors in 2019, 20 and 22, and as one of the top 100 independent wealth advisors in America in 2018, 19 and 2022. She’s also listed in Working Mothers Magazine’s Top Wealth Advisors, moms, in 2020. And without further delay, thank you for joining me here today on Rethink Your Money, Jessica.

Jessica Culpepper: Of course, it’s my pleasure.

John: Well, your resume is really impressive. You’ve done a lot of different things. As I mentioned, you have a background in tax as well as financial planning. And through your extensive experience working with ultra-affluent families here at Creative Planning, how do you see high net worth families investing differently than others?

Jessica: So, most investors will tell you that performance is the absolute most important thing to them. And that’s common, and it certainly is important. But what’s more important than just raw performance is, what does an investor keep after things like taxes and fees?

So the more affluent families are more attuned to this, because they generally pay significantly larger dollar amounts of taxes, or are in higher tax brackets. But that’s certainly something that’s relevant to investors at any level, particularly if they have taxable accounts, so funds outside of IRAs and those traditional retirement plans.

So for our affluent families, controlling taxes with efficient tax management in the portfolio is certainly top-of-mind. Families in those top tax brackets between the federal and state, they can erode over half of their return if it’s not managed efficiently. So we put a great focus on that.

John: That’s great insight. And I talk often on the show about risk management. And I think for anyone whose plan is going to work, barring a huge loss, not always is maximizing performance the number one priority. And I would certainly imagine with an ultra-affluent type of client, am I right in saying that maybe there’s a focus on managing risk and downside, even more so maybe than looking to hit the home run on all of their investments?

Jessica: Absolutely. We have a lot of clients that have hit that home run. They have accomplished everything that they could possibly want, and then some. So their goal is to make sure that they don’t lose that wealth, for not only themselves but generations to come.

So that’s why we lead with planning. We want to understand, what are their goals? They’re financially independent. We don’t do a plan to simply understand, well, do you have enough money to live on? It shifts more to, what does that look like generationally, from a charitable, and tax-planning, and even a state tax planning standpoint?

And we craft their portfolio in a way to make sure that they’re never going to run out of money. And if they’re ultra conservative, we don’t have to take on as much risk.

But we’ll have clients who are very aggressive, but because they have such a large surplus, we can afford to take on more risk, and incorporate more alternative investments that potentially bring more reward to the table, but have some terms where we can’t get to the funds for 10 or more years. So it gives us more flexibility.

John: You mentioned families and generational planning. I mean, this is a big priority for anyone who is financially independent and going to have enough to last beyond themselves. That’s magnified with someone that’s in the affluent category. How do they treat their kids and maybe family differently from a planning perspective, and what do you think us normal people can learn from that?

Jessica: I think high net worth clients generally feel a higher level of concern over future generations, and a big responsibility to prepare them to handle wealth. And that can look different for families depending on their dynamics.

So $20 million looks a lot different than a hundred million dollars, but they’re both very affluent. The age when they became wealthy is different. If you became wealthy in your forties, and your kids are all young and they’ve experienced wealth and lavish vacations, or a higher standard of living at a young age, that’s different than someone whose parents are coming into wealth when they’re in college or older.

So there’s a lot of different dynamics here. Someone who has five kids versus two kids looks very different. The asset makeup looks different too, if someone sold their business and there’s been a large liquidity event. Or the business is continuing, versus someone who just has a lot of liquid assets or real estate. It can look differently, and preparing the next generation can look differently based upon all of that.

Clients are more willing, or ask a lot of questions about, should I bring my kids into the planning process to prepare them for what’s to come? I see that a lot with parents who’ve got kids who are in their twenties and thirties. And the one thing I really caution families about, someone can’t unsee something.

So if you’re sitting down with your kids and they’re 25, and you’re like, “Hey guys, we’re worth $30 million.” That child can’t unsee that, and that’s going to mean something to them. And how they interpret that, no one can really predict. Are they going to be responsible, and feel a sense of stewardship and shepherding what their parents have accomplished? Or are they going to have a downside where, we’re out dinner with mom and dad and they didn’t offer to pay for that? Gosh, what?

That’s a really tough dynamic. So we want to caution our clients, at least disclosing and really thinking hard about showing numbers. What we really like to say is, at a minimum, if they do want to involve the next generation, maybe start with an estate planning discussion at a very high level. If something happens to us, Uncle Ed’s in charge, he understands where everything’s at. We work with Creative Planning, and he knows that we’ve got this great binder that’s going to help him figure things out.

Creative Planning and Uncle Ed are going to take care of our charitable requests, and we’ve got 10% going to our church because we really care about that. And then, the rest is going to be available to you guys. Uncle Dan’s going to work with you until you are 35, he’s going to really help you make some decisions. And then when you’re 35 or 40 or 50, whatever that number is, you really have the full control.

So very high-level.

John: Love that.

Jessica: We know what’s going on, involving the family where you can. But I really have a strong caution, or thinking very hard about numbers. Because you can’t undo or unsee that.

John: Wow, I think that’s such a fantastic approach. And obviously we’re painting with a broad brush, and every family dynamic, to your point, is a little bit different. But for myself as a parent, and I know you’re a mom as well, Jessica, trying to instill in our children the value of a dollar can be a challenge.

I mean, this just happened last week, I think it was a hat that we bought. And my son couldn’t believe that it was $42 for this new era baseball hat. He wanted two. I was already buying him one. And I said, “Well, you can purchase the other hat with your own money if you want a second one.” And he asked how much it was, and I told him $42, and he couldn’t believe it. Because that would basically empty what he had saved.

And so not only did he not buy a hat with his own money, but he appreciated Dad a little bit more for buying him the hat. And I imagine that you start disclosing some of these very large numbers to anyone, but especially children that are in their twenties or even younger, and it potentially sets in reverse teaching the value of a dollar. The way we’ve grown, and the way our children ultimately will grow, is through challenges, and struggles, and working hard.

So you don’t want to rob your children of that opportunity, because it may hinder them from becoming the best version of themselves, because they really don’t need to. Because they know what’s out there.

Jessica: That’s absolutely correct, and I’m pretty confident I have said those exact words in client meetings. It’s so true.

John: And I’m speaking with Creative Planning wealth manager, Jessica Culpepper. What are some considerations that affluent families are thinking about, that others might not be?

Jessica: So I think as someone’s level of net worth grows, they become more attuned to asset protection. And if they’re not, we certainly bring this to their attention. And it doesn’t have to be someone who’s worth 20 million, this could be someone who’s worth $5 million or a million dollars. Asset protection is very important. No matter where you are, you’ve worked really hard to accumulate your level of assets, and so you want to be careful to make sure that they aren’t unnecessarily exposed.

You could have hit that home run, sold the business, or your portfolio has grown to a level and you want to protect it. Well, if your teenage child is driving a car that you own, and they’re in an accident and it’s their fault, well goodness sakes, because it doesn’t matter if we had 8% last year, or 10% or even zero. If someone could take it at the drop of a hat because of something completely unrelated to the portfolio, that’s a problem.

John: How about giving back? This is a conversation that we have with all of our clients once they’re financially independent, and going to have something left over. What do you want to do with that?

Obviously the ultra-affluent families that you are working with, it’s a given, assuming that they plan well, they’re going to have something left over. And in many cases, it’ll be a lot left over. So what’s been your experience working with these families in terms of their desire to give back, and some of the things that are important to them?

Jessica: My overall experience with my clients is somewhat contrary to what I think the general public may think when they view wealthy people. The clients that I work with, I think, are some of the kindest, most humble and generous people that I know. They represent the top 1% of the wealth in the country, but you probably would never know that if you met most of them. You wouldn’t think that they have that stereotype that they’re ultra wealthy.

They do amazing things. I’ve had clients fund full-ride scholarships for high schoolers who’ve had economic setbacks, foster kids or have a parent in jail. I’ve had families build entire youth camp buildings to make sure a camp could continue and have the best facilities for families and kids who want to go to camp together. They funded Children’s Hospital endowed chairs, university scholarships, building entire churches. They do amazing things.

And obviously, these are big things. But I’ve got people who give on an annual basis to really cool causes. And if they involve their children in these, their children, I think, get to see what’s possible, not just spending their money to buy things, but they see their parents set an example of how they can give back with their wealth. And it usually leads to happier people. Some pretty cool things.

And I think one thing I just want to touch on too here, that would impact the one percent. But for clients who are single and worth about $13 million, or married couples who are worth about $26 million, they hit the tier where they’re going to be paying some estate taxes to Uncle Sam. Which they might be okay with, but there are planning tools they can use to avoid or reduce what might go to the government or that estate tax.

So basically, when you’re worth as a married couple, about $26 million, any level of growth above that, basically every dollar has 40 cents earmarked going to the government. And when you tell a client that really every dollar you make from now on, 40 cents on it is earmarked for the government, that perks their ears up a bit.

So that invites a conversation, again, for the ultra affluent, but ultimately talking about ways where we can reduce what might go to Uncle Sam. And it can include giving more weight to even their kids now, to get appreciation out of their estate. And there’s a lot of great tools that our estate planning team can talk to them about to reduce the level of appreciation that’s in their estate.

It can also involve charitable giving strategies. Whether it’s giving now to charities directly, or through donor advised funds and charitable trusts, or even private foundations where appropriate. Those are all tools we talk to at length with our clients, and can help them set those up as well.

We also have advanced strategies where if we want to make sure as much as possible is going to the next generation. We can use tools like Second to Die Life Insurance, owned within trusts. We can also use, again, many fancy tools like GRATs and GRUTs and Charitable Trusts. So the sky’s the limit here, but there are tools that can be used.

If we don’t like the idea of more money going to the IRS, we can really get in the weeds with our clients here to figure out which strategies and levers they can pull to reduce that number over time.

So those are strategies that aren’t applicable to most clients. But in 2026, the government’s going to cut those numbers in about half. So in 2026 as a married couple, if you have about $13 million, the estate tax is going to kick in. So that’s going to impact a lot more people than it would today.

John: Well, let’s face it. Most people, even if they think their kids are a little bit of a knucklehead, still normally like them even a little more than the IRS. So that’s a great tip, Jessica.

As we wrap this up, do you have a favorite story or maybe moment from your time here at Creative Planning?

Jessica: I think one of the coolest stories is a client who was really helped in a nominal way as a young adult, to get a scholarship to go to college. And that impacted his life so much that he created a scholarship program to fund full-ride scholarships for kids who are underprivileged. Very, very cool. That will impact lives for many generations that he will never know about.

And I know other people on your show have said this, but it’s much better and more fun to give with a warm hand than a cold one. And when our clients are charitably-inclined, or have a passion, it is so much more fun to pursue that while they’re alive, and see the benefit it has to their family and to their community when they do that.

I’ve had a family who is really leaving everything to charity when they’re gone, they don’t have any children. And they’re charitably inclined now. And when we talk through some of the benefits of doing the giving now, they have such a large surplus, let’s take more action now so we can even get a tax benefit.

And said, you know what, why are we waiting? Why are we going to let someone else control who benefits from this money? Let’s do more, let’s do it now, and let’s get intentional with this. And then they can see all the really great things that their wealth can do now, while they’re alive.

John: Yeah, that’s so cool. The ripple effect of kindness and being able to pay it forward, so often, that long-term impact of some of those choices that we make, unfortunately we never actually get to see them in their entirety. Sometimes we do, and it’s really neat when we’re able to. Just another example of how kindness can spread far further than you’d ever think.

And it may be thought of, well, Jessica, you’re helping the wealthiest people in the whole country with their money. Isn’t that trivial or superficial? But then you start actually understanding, when money’s aligned with things that we care about, it has incredible power to make a difference in the world.

And so what a valuable opportunity for you, and for all of us here at Creative Planning, to be able to have a seat at the table, helping people do great things with the resources that they’ve been blessed with. Thank you so much for joining me here on Rethink Your Money, Jessica.

Jessica: It’s my pleasure. Thanks John.

John: I’m now joined by a guest who’s been on the program here before. He’s a doctor of psychology as well as one of our wealth managers here at Creative Planning. Dr. Dan Palin, thank you so much for joining me again here on Rethink Your Money.

Dan Pallesen:   John, always a pleasure. Thanks for having me back.

John: We know money’s one of the biggest stressors in a marriage. It’s one of the leading causes of divorce. I think it’s number two, only second to a topic that we won’t be discussing here today, because this is a family program and we’re not Howard Stern. But you get the idea, it’s important.

And if we don’t learn some of the key building blocks for how to communicate with our partners about these financial matters, it can really be a drag on the relationship. So I’m going to ask you to help us make some progress here, with your background in both psychology as well as finance. And I want to start with a foundational question. Why do you think it is so hard to discuss money with a partner or a spouse?

Dan: Whether we like it or not, money is emotional. Our feelings, our thoughts around money, evoke emotion in us. And our basic needs are all tied to money. And I’m not even talking about capitalism and greed, but just, we live in a world where our food, our water, our shelter, our medical care are all determined by, do we have money to acquire these things?

Unless we’re growing our own food, digging our own wells, building our houses from trees on our land and then heating them, we need money to meet those basic needs. And I would even argue it goes beyond just the basic needs, like love and community.

Again, not that money buys love, but it’s hard to find someone to fall in love with you if you’re so broke you can’t even take them on a date. I mean, we need money to cultivate these experiences, to spend time together. So to have a money conversation, deep down and in our subconscious, can feel like we’re having a life or death conversation.

John: That’s interesting. So when we are having these conversations, once we build up the courage to do so, what do you think we should be careful of when talking with a spouse or a family member about money?

Dan: We need to be careful of being right. I think we need to be careful of proving that we’re on the right side of an argument, right?

John: I’m just laughing because you’re talking to a man right now, right? And my wife always says, women are better at wanting to get it right, and men like to be right. I don’t know how true that is, but I just thought that was a funny start to this.

Dan: And believe me, I’m speaking as a man who’s had these difficult conversations with my wife, too. I mean, I want to be right. But no, I think that’s what gets in the way of a healthy conversation, is this desire to be right, or to win an argument. A money conversation with a partner or a spouse, it really shouldn’t be about winning. It shouldn’t be about getting the other person to submit.

This isn’t like a business negotiation, where there’s winners and losers. I mean, at the end of the day, if you’re pulling out a spreadsheet, or a financial calculator to show the time value of money lost, you’ve already lost. You’ve both lost.

So what we need to be careful of when having money conversations with our spouses or with our partners is that innate desire to be right.

John: Well, and don’t you think too, because money is a very personal thing, that it’s okay if you feel differently about things. Again, it doesn’t mean one person’s right or wrong, it just might mean we’re approaching this from different backgrounds, and with a different perspective. And so we might feel differently about wanting to save more, or spend more, or use our money for certain things that the other person thinks isn’t worth it. I think that’s, join the club. You’re married if that’s the case, right?

Dan: Yeah, yeah. I mean, the most common money argument that I have witnessed both as a therapist and now as a financial advisor, is around the idea of spending or saving. And it’s often, one wants to save, one wants to spend.

My question for you, John, think of this example. This has come up in a lot of different ways. Extra, let’s say 10,000 lying around. One spouse wants to put it into their IRAs, they want to save for their future and retirement. The other spouse is like, well, our kids are in middle school. They’re about to go off to high school. Let’s go to Disneyland. Let’s use this to have a vacation together as a family. Which one is right? Which spouse is right or wrong?

John: Well, I would absolutely say the spouse that’s wrong is the one that chose Disney. Because that’s going to be miserable, waiting in lines paying $15 for a Turkey leg. But I get the example, yeah.

Dan: Yeah. Well, and that comes up over and over again in different forms, and working with different couples around money. Is, they’re just not on the same page. They desire different things around money.

So back to your question about what to be careful of. Again, it’s that money conversation with a spouse. If your goal is to convince the other person that you are right, you’ve already lost.

John: And that’s why I think it’s so important to build and establish the foundation of your financial plan regarding what you need for your future to be secure, and to be okay. Because then I think it allows you freedom to have those conversations, because it becomes more discretionary.

We could save more, and that would obviously boost our situation. And if you see money as a safety net, it could never be too big or too strong, obviously. So you could save more. But it’s not like our whole plan’s going to unravel, or we have to work until 90 years old. So what are some tips that you have for us to have more productive conversations?

Dan: I’ve got three tips. I think number one is know thyself. Know what some of us would call money scripts, which are the early experiences we had around money that have burned their way into our brain. So you can’t have a productive money conversation if you don’t know what your own triggers, or thoughts, or feelings around money are. So number one is know thyself.

Number two, have a desire to know your spouse or your partner. So to truly understand them. Therapists would call this empathy. Sympathy, John, is feeling sorry for someone. I can understand you feel that way, I’m sorry that you feel that way. But true empathy is an experiential knowledge and feeling of that other person.

So if you can kind of get into the head and the heart of your spouse or your partner, you’re going to have a much more fruitful conversation around money. So knowing their triggers, knowing their emotions, knowing their early experiences around money and their relationship with money is going to be key.

And then finally, number three is just identifying a common goal. So back to the example of the husband and the wife with saving versus vacation. Neither one of them are wrong. One spouse wants to feel more security when they envision their retirement. The other spouse wants to create memories with their kids while they have the time.

And I think both of them can get on the same page if they realize, no, we together have a goal just to feel peace, or to feel abundance.

John: These are great tips. So let me see if I’ve got these down. Know thyself, know your spouse, and find common ground so that compromises can be reached. I love it.

I’m going to try to apply these in my marriage as well, so I appreciate you sharing these with us today here, Dan. And thank you as always for joining me today on Rethink Your Money.

Dan: Thanks, John. Always a pleasure.

John: And remember, we are the wealthiest society in the 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 Creative Planning.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 affiliates, currently manages or advises on a combined $300 billion in assets as of December 31st, 2023.

United Capital Financial Advisors is an affiliate of Creative Planning. John Higginson 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 or the station.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney-client relationship. Past performance of any market results is no assurance of future performance.

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 Creative Planning.com. Creative Planning tax and legal are separate entities that must be engaged independently.

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