This Veterans Day, we’re honoring military families and welcoming military veteran Tony Favela back to the show. A Chartered Financial Consultant® and a Managing Director and Partner at Creative Planning, Tony joins us to discuss the unique financial challenges veterans and their families face (as well as opportunities to look for!). We also explore how status and social influence affect finances before a taking a look at Roth accounts — do they really live up to the hype?
Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!
Episode Notes
John Hagensen: Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m your host, John Hagensen. I want to use today’s show to talk about perspective, what it means to navigate life and finances amid uncertainty. And joining me later will be Tony Favela, a managing director and partner here at Creative Planning, and importantly, a military veteran. Plus, I’m diving into the role of status, social influence, and even going on a bit of a rant regarding Roth IRAs. Now, join me as I help you rethink your money.
Let’s talk about what’s on your mind, what’s on everyone’s mind. The election is now passed and we know that President Trump will now be not only the 45th president, but also the 47th president. These results cause great happiness for some, namely Republicans and disappointment if you voted for Harris. Now, whether you’re happy with the results or you’re not, it may be affecting how you feel about the world right now, how you feel about the country right now and in turn how you feel about the prospects of your investments moving forward. But this is how it’s always been.
When you feel like your side is in power, and I’m putting that up in air quotes, your side, you often are more optimistic and by extension, more aggressive with your investment approach. On the other hand, when you feel dismayed, when you’re pessimistic, the other side won, you might instinctively want to pull back, get defensive, maybe even reconsider your entire strategy. I’ve had plenty of people over the years say, “Move me to cash. Oh, and by the way, I’m moving countries.” I’m like, “Hey, moving countries. I mean, that’s your own choice, but moving to cash. Historically speaking, that’s not going to serve you well at all.” Because here’s the thing, your feelings, especially in the first week or two post-election can be far more reactionary than maybe you’d like to admit. So let’s explore here for a moment why these emotions don’t serve you well when it comes to specifically managing your money.
Have you ever noticed how much wisdom is found in zooming out? That synonymous phrase to the word perspective. It’s one of the challenges with raising children, trying to instill perspective in a tiny human who tends to only value what is right in front of them. You see, we gain perspective as we mature and we gain perspective and the ability to zoom out when it comes to our money as we develop maturity as investors as well. A story that reminds me just how powerful perspective can be is when I took three of my children to Mexico with an amazing organization that builds homes within these impoverished communities. Let me tell you, their outlook on life shifted almost overnight. I mean, it’s amazing within 24 hours, the way they were thinking was different. They went from being preoccupied with what they didn’t have to feeling very grateful for what they do.
And in the exact same way, even as adults, we can find ourselves fixated on immediate challenges or immediate disappointments yet if we just zoom out a bit, we’re able to realize that we’re often far more blessed than we acknowledge. As one wise person once said, “The key to contentment is not having what you want, but in wanting what you have.” So let’s bring this back to the financial world. You may be in agreement that staying the course remaining disciplined, that’s all well and good, but there are these outlier historical moments, potentially like how you’re feeling with the election, again whether you’re happy or not with those results that really do dictate potential changes. They’re that significant. And while elections matter and they can reshape different aspects of our country and the world, the resilience of the stock market even in the face of these major events is undeniable. Remember going all the way back to 1926, the stock market has averaged right around 10% per year, and that’s for coming up on 100 years despite every kind of turmoil you can think of.
To remind you of just a few significant moments we faced across generations that felt like game changers. How about the Great Depression in 1929, World War II, the Cuban Missile Crisis in ’62, the Vietnam War, the 1970s oil crisis, Black Monday in 1987, the Dotcom Bubble bursting in the early 2000s? Then we had 9/11, the 2008 financial crisis, and most recently the COVID-19 pandemic. And while I’m not in any way minimizing the toll on human lives in the overall devastation, they did not negatively impact the stock market’s durable long-term returns in the way many investors believed they would, as they felt the urge to retreat to sell, to wait until things feel safer. But for those who were invested and stayed the course, the market ultimately rewarded that patience. A logical question in the midst of chaos and craziness that have inevitably ensued over the years is why are the markets so resilient?
Many of these events had huge impacts on your life. Why wouldn’t they in turn then have a significant impact on your investments? Well, think about it. No matter what’s going on, you still go on vacations, you buy groceries, you buy new sneakers, you go to work, you watch your kids’ football games, you go buy a burrito, you hang out with friends. You see the market doesn’t move on politics or major events. It may have some volatility in the very short term as a result, but ultimately it is driven by corporate earnings. Which if you peel back the layers, it’s driven by billions of people across the planet needing to buy goods and services and therefore companies producing them. It’s like this, imagine you’re on a roller coaster and while you’re on that steep climb or the sudden drop, it feels intense, it feels scary, but if you zoom out and you just look at the whole ride, it’s part of a much larger journey.
Similarly, here’s the key. If you are invested for the long term, these dramatic highs and lows become just a small part of a larger upward trend. Go look at a chart of the S&P 500 since 1926, stand 10 feet away from a wall that displays the chart. What you’ll notice is that it goes up and to the right. Now, if you walk closer and closer and closer and you get one inch away from one part of the chart, you know what you’ll notice? A whole bunch of gyrations that were really significant in the moment to investors. But if you could warp back in time and they were freaking out, you’d encourage, “Them step back away from the wall, zoom out, gain perspective, see the bigger picture, look at this line going up and to the right. Don’t worry about that short-term volatility.” And by the way, this is where financial planning and aligning your investments with your objectives matters.
Because yes, if you need income tomorrow, you probably shouldn’t be invested in volatile and short term risky investments. You need to moderate risk for stability. Because while the market has averaged 10% per year for a hundred years, that’s come with an average calendar year suffering a correction of 14% peak to trough. That’s normal. One out of every three or four years, the market’s down. You’ve got less New Year’s Eve than you had January 1st. Every five or so years, you have a bear market, a sustained loss of 20% or more in the markets. And every so often, you have a really significant bear market or even a crash. Those should not be a surprise but expected along the path to those historical returns that the market has so durably provided. So what are three things you can do post-election? Number one, take a deep breath. Whether you are euphoric right now or you’re incredibly disheartened, don’t make any changes based upon these results.
It can be tempting, but remember, short-term emotions cannot dictate your long-term financial plan. The second thing you can do post-election is schedule a meeting with both your CPA and your financial advisor. You should do this type of proactive planning toward the end of the year anyhow because it’s an ideal time to sit down and discuss tax planning, retirement contributions, or any changes to your financial goals. They can provide you some perspective to help you plan wisely.
And finally, if after all of this you still feel unsure, you have a lack of confidence, you’re not a hundred percent confident in the plan that you have in place, maybe the election’s just been the tip of the iceberg to bring this to the surface, but if you still have questions, don’t hesitate to gain another perspective. That’s what a great advisor can do for you. To summarize, the election won’t define your financial future. The markets are resilient and so are you. It’s not about ignoring what’s happening in the world, not understanding its significance. It’s about maintaining perspective and not letting it consume you. Zoom out, focus on what you can control and keep moving toward your financial goals.
Veterans Day is a time to honor those who’ve served our country, and it’s always been a significant day for my family. This year feels especially meaningful because my twenty-three-year-old son has just returned from his four years in the Army and today we’re focusing on what it means financially to serve and to transition from military to civilian life. Veterans face a unique set of financial challenges and opportunities, and for those who’ve served or have family members who have, there’s a lot to consider and that is why joining me today for this special segment is Tony Favela. Tony’s not only a managing director and a partner here at Creative Planning, a chartered financial consultant, but also a proud military veteran himself. With that said, Tony, thank you for joining me here on Rethink Your Money.
Tony Favela: Yeah. Thanks, John. Thanks for having me.
John: Absolutely. Let’s start simple. What are some key financial benefits veterans have access to that you found they might not even realize are out there?
Tony: I’m going to start with disability compensation, VA healthcare benefits, VA, home loans, education and training, GI bill, veteran pension programs, VA life insurance, veteran-specific small business benefits as well for small business owners. There’s a lot of opportunities there. You get tax benefits on many of the states for retirement plans and military pensions as well. VA burial benefits, a lot of people aren’t aware about that. As you are transitioning out of the military, there’s a program called TAP. Military loves acronyms, so it’s a Transition Assistance Program. They will actually help you with a new trade or help you get going on even down to being an electrician or things of that nature. So a lot of benefits on the federal side, but there’s also a lot of benefits on the state side. So pending your state, you also want to look at state benefits too.
John: You went through a long list there. I’ve actually seen that with my son. This transition program is pretty cool. He’s going through that process right now. I want to talk about two of those specifically. I remember you telling me at one point that Texas, for example, gives you benefits on the taxation of certain sorts of retirement income or property tax benefit if you’re a veteran.
Tony: Yeah, the first thing you want to do before you retire and pick a state, if you’re a veteran, look at veteran state benefits. There is a laundry list of every state ranked by a lot of military magazines, which is the best state. Texas is definitely one of them, mainly because there’s so many veterans in Texas and California.
John: What was one of the things that you had said about Texas that they do? I remember you telling me something that I wasn’t aware of.
Tony: One of the big benefits is if you’re a hundred percent VA disabled, you pay zero in property tax.
John: Yeah, and that’s a big one in Texas.
Tony: And that’s a big one because Texas has no state income tax, so where Texas gets their revenue from is property taxes. So property taxes are relatively high and there’s many more.
John: You mentioned VA home loans probably one of the things that applies to the most people listening. Share how those are different.
Tony: The big benefit there is you can put 0% down. Instead of putting 10 or 20% down, you could put 0% down backed by the VA. You should get preferential interest rates just because it’s backed by the VA. A lot of the times you don’t have to pay PMI, Primary Mortgage Insurance. Because normally when you put less money down, you got to pay PMI. But with the VA, you don’t need to.
John: Yeah, amazing perk and well-deserved for sure. VA benefits in healthcare are a big deal for vets as they are really for everyone in retirement, especially though when they’re planning for retirement. What’s the best way for veterans to make the most of those benefits?
Tony: It really depends on how you served. If you were active duty, if you’re a reservist, there’s TRICARE for life. I’m kind of a hybrid. I’ve done some active duty, I’ve done some reserve time, so I may not get the TRICARE Prime. There’s TRICARE retirement and then it switches at 60. You do have options if you hit your 20 years, whether it’s reserve or active duty, and TRICARE is a wonderful healthcare benefit. If you get medically retired, you also get different medical benefits as well.
John: What do you think are some of the biggest differences in terms of financial challenges that veterans face that most civilians may never see?
Tony: I think a lot of it is understanding your pensions. You can have a goal as a veteran to stay in 20 years and get your pension, but things happen. Life happens. Even for myself, my goal was to stay in for 20 years. I’m at 18. And on my last deployment I got sick, so I’m most likely not be able to stay in for 20 years, even though I’ve done my financial planning for the last 18 years assuming I was going to be in. But military is very taxing on your body and your soul. So a lot of people don’t make the 20 years and then they get cut short. So you have to be prepared for that. You want to plan for the long-term, but you want to have a lot of contingencies. And then also understanding the complexities of the VA and what they offer and what they don’t offer, and different pensions because everyone has different pensions. You can get a full pension, you can get a part pension, VA disability, things of that nature. So it’s quite complex.
John: All right, Tony, I see on here, the listeners can’t see this, but I see a bunch of medals behind you. Which one or two of those that stand out that are most important to you?
Tony: The last one I got was a Meritorious Service Medal. That was for my year in the Middle East, which was in 2020. And then also my two expeditionary medals, one for Operation Enduring Freedom and Southern Watch. So those are more of the campaign medals. Those are the two I like and obviously the commendations. Those always make me feel good knowing that I did the right thing, right?
John: Absolutely. I’m seen all sorts of medals back there and I’m just impressed and so grateful for the service that you and fellow Americans have put out there to make sure that we have the freedoms that we do, and that’s obviously one of the things that we’re thinking about and remembering and celebrating here today. So just want to tell you, thank you so much for your service. It’s an incredible sacrifice that you and your family have made so that we can enjoy the things that we do. Let’s talk about taxes. Are there any specific tax benefits or ways for veterans to save that you’ve seen make a big difference in their financial plans?
Tony: For taxes, some keynotes are if you get VA disability, the VA disability is tax-free income. That is a huge plus. There’s also other things that you may qualify for or may not. One is CRC, CRDP. And again, they’re acronyms, but those are added income. CRC, which is a combat related that is tax-free. CRDP, I believe is taxable. So those are all the little ones that you want to know of. Military pension is federally taxed, but a lot of states don’t tax it.
John: That’s a big one that I was thinking of. Yeah, the military pensions. You’ve been on disability benefits a few different times. Integrating those benefits into a financial plan is really key. What do you think the smartest way to go about that is?
Tony: The first things you want to look at is are these VA, if you are VA disabled? And they go by 10, 20, 30, 40 all the way up to a hundred percent. If you’re 10%, maybe you get $150 a month. If you’re a hundred percent, you get up to $4,200 a month. It’s substantial and it could be life changing. Not all of the VA is always going to be permanent disability. So you can get re-rated if you get sick and you get better.
For example, if you got cancer, you may go up to a hundred and then if you go into remission, they may lower it or things of that nature. So you want to see if it’s permanent and total. If it’s permanent and total, that means you basically are going to have it for the rest of your life. That basically means that the VA has deemed you… You’re never getting better. The VA disability is you have to watch out because you don’t want to plan for VA disability for the rest of your life and then have them re-rate you from a hundred percent to say 20% because if you’re-
John: I can see that being a huge surprise.
Tony: It is a huge surprise to many. Also in certain things, you can’t double dip. You can’t have military pension and retirement at the same time if you got medically retired or something like that before 20. So there’s all kinds of little caveats. Also, they may offer you military retirement and they also may offer you VA disability. Well, VA disability is tax-free. You want to make sure you probably take the VA disability versus the military pension because that’s going to be taxable.
John: Well, and certainly, those are the types of situations where it’s really important in my opinion, that you’re working with somebody like you and your team that just has experience and understands these things because those decisions in some cases are irrevocable and they can be really massive in terms of the net difference that you get. What makes the TSP valuable? Because I think that would be maybe the first spot you would suggest someone starts building wealth outside of those benefits. And what other things have you seen work well for veterans to build wealth outside of these government benefits?
Tony: The TSP Plan has a traditional option where you can put money in and it’s tax deducted up front, so it works like a traditional IRA. You have the Roth option where you’re putting it after tax and you get it tax-free. The good benefits with the TSP is one, they have really good investment options in there, and two, the internal costs of the TSP is very, very low.
John: It’s almost free.
Tony: It’s almost free. So you can’t really get a better option than just putting your money into a TSP, having it grow and they’re good funds. Also with the TSP plan, you have a couple of different retirement plans. You have the high three and then you have a blended retirement BRS, I think it’s called. Some of the old timers like me, I’m on the high three, which means your highest rank for your last three years, that’s how you get your pension.
But the newer soldiers, I think it’s after 2018, they’re going to the blended retirement system, which is they get a slightly lower pension, but the military matches 5% in the TSP. So I don’t get the match because I’m an old man and I don’t qualify for it, but I just simply put in the 10% in the TSP anyway. But for the younger soldiers, which is good because not everyone is going to make the military their career for 20 years. So there’s a lot of soldiers that don’t hit their 20 years and then they get out 10 or 15 years or even five years and they have no retirement. So having this BRS system where you’re getting 5%, if you put in 5%, you’re going to leave the military with some type of retirement plan. So that’s something really good.
John: That’s really helpful information. And you look pretty young. You keep referring to yourself as the old man, but you know what, my three-year-
Tony: I’m old in the military.
John: Yeah, I guess so. I know, and I’m old in my family. My three-year-old just the other day just looked at me and she was asking about everybody’s age in the family and mommies and nannies. After I told her my age, she goes, “You’re old.” And this is coming from my three-year-old. I was like, “Man, I guess I am.” I’m at least middle-aged. I don’t think I can refer to myself as young anymore, that’s for sure. Well, Tony, I’ve got one more before I get you out of here. One more question. Planning for family is huge. Obviously there’s a component of the family dynamics with being in the military. What planning tips would you give veterans who want to make sure that their families are financially secure?
Tony: So as many times as I’ve been deployed, you get in some situations, even with Hurricane Harvey and fires and COVID and George Floyd and you name it, there’s always an element of risk. You have SGLI, which is an insurance for service members. It’s about 400,000 and then it converts to VGLI, which is a veteran life insurance that converts after you get out to 400,000. But if that may not cover it, you may want to get your own personal insurance, term insurance, anything over and beyond just to make sure that your family is covered. I fortunately did that. I layered a term policy. I did a 10 year or 20 year and a 30-year term. One was to get my kids through college, one was to pay off the mortgage and then the other one, I called it pain and suffering for my wife dealing with me for 30 years.
John: Yeah, right. Well, you just said fortunately you did that, but actually you’re still alive, so you wasted money on those premiums in hindsight.
Tony: Well, fortunately I did that because right now I’m actually… I’m uninsurable because I got back from my last-
John: Oh yeah, so that’s a good point. So it is fortunate that you did that.
Tony: Yeah, it’s fortunate because I would never be able to get insurance again, but I locked it in before my deployment, so yes, I still have it.
John: You may have had things occur while you were serving that precludes you from getting future benefits as you mentioned. So that’s a very good point. It all starts with a great financial plan. A lot of these things we’re discussing really are encompassed within the context of a documented, written detailed financial plan, and that’s not any different for veterans or for civilians. Tony, this has been fantastic. Thank you for sharing your insights with us today on Rethink Your Money.
Tony: Thanks for having me.
John: It is Veterans Day weekend. I want to take a moment to thank all the men and women who have served this great nation, your dedication, your bravery, make the freedoms that we often take for granted possible, including the right that we just exercised to vote this past week. Speaking of the vote, what Donald Trump said to become the 47th president, I know there are a lot of strong emotions on both sides. Don’t mix your politics with your portfolio. The stock market does not see red or blue. It sees a different color green. In fact, last week I spoke on this very topic of course prior to the election with Creative Planning Chief Market Strategist, Charlie Bilello, who shared 70 years of data that really drives home this point.
Charlie Bilello, Soundbite: I went back to January 1953 and I said, “Let’s say back then you put $10,000 into the S&P 500 and you only invested during a Republican presidency. What would you have today?” 289,000. Let’s say at the time you said, “I’m only going to invest during a Democrat president.” 675,000. Now what would you have if you stayed invested regardless of who was in power? Take a guess.
John: This is going to be ridiculous. What is it?
Charlie Bilello, Soundbite: Over $19 million. So there’s no comparison because in the long run, stocks tend to go up. So if you take out a major portion of that, whether it’s Republicans in power or Democrats in power, you’re going to be missing out on that compounding. You might get it right, the stock market could go down the next four years. It’s certainly possible, but is it going to go down in 8 years, 12 years? Think about that long run return that you’re likely to miss out on if you’re letting politics influence your portfolio.
John: The message from Charlie is clear. Don’t let the political outcome that just happened dictate your investment decisions. Markets are resilient and they don’t respond to our emotions or political preferences. And with that in mind, let’s dive into a few other of common wisdom that deserve a second look. One of those I see regularly is that a financial windfall is magically going to solve all of your money problems. Now, more money, I mean obviously it can definitely create more options, but it doesn’t automatically lead to better financial health. You see, that is the myth. Think of the stories you’ve heard about lottery winners. Nearly 70% of them go broke within just a few years. As Warren Buffett said, “It’s not about how much money you make, it’s about how much you keep and how hard it works for.” You see, even a financial windfall, a lot of money, it can’t solve poor financial habits or it can help you create discipline.
In fact, a big financial windfall generally just amplifies whatever habits you already have, both the good and the bad. So if you do come into a significant sum of money, most commonly this occurs through not a lottery victory, but from an inheritance. Here are three steps to consider to make sure it’s a blessing for yourself and for your family and not a burden as it so often plays out. Number one, take a pause. Resist the urge to make immediate changes. Give yourself time to process the financial windfall. Don’t rush out and purchase a different home or an expensive car or some other depreciating asset like a boat. You may eventually want those things and decide to purchase them, but wait. Because that cooling off period will help you avoid impulsive decisions that maybe you’ll later regret, especially when your situation changes rapidly. Number two, set up a plan with a financial advisor.
Go see a certified financial planner. Create a long-term strategy. Build a written documented financial plan. In light of this new money. Incorporate that of course into the plan, and that’s going to likely involve an investment strategy. Your estate planning. Maybe you need to set up a trust before you just had a simple will. Or even deciding how much you’re going to spend, how much you’re going to save, what’s going to be used for short-term goals, longer-term goals. That clear plan gives you structure and purpose. And number three, consider the tax implications. Your foundation of the strategy will likely be built on how to legally minimize taxes to the best of your ability. And planning ultimately can make the difference between short-lived riches and lasting wealth. The next piece of wisdom we are rethinking today is this idea that if you have insurance, you really don’t need an emergency fund.
You’ve got health insurance, you’ve got car insurance, you maybe have disability insurance. So why do you need to set aside extra cash? Here’s the reality, that insurance doesn’t cover everything and life has a way of throwing you curveballs. Imagine this, you suddenly lose your job. It’s not due to a disability. No one lost their life. Insurance isn’t going to cover that income gap. Or what about when you need a new roof after a storm? Home insurance might cover some of it, but you’re likely still on the hook for the deductible. What if you just need to re-roof your house because there’s a leak and there was no storm, there was no insurable event. You have to pay for it. Even routine things like car repairs can throw a wrench into your finances if you don’t have cash on hand.
In fact, I remember just after my wife Brittany and I were married, we were driving to Palm Springs from Phoenix and it was hot as you can imagine. We’re just going through desert blowing tumbleweed, and here was what made it really bad. We had the heat on full blast because our old junkie, Nissan Xterra, rest in peace, probably in some scrap yard right now, was overheating. So we have all the windows down the heat on full blast. My wife’s being a trooper, but I mean we’re just sweating. It’s miserable. And when we pulled into town and went to the auto shop, it was $2,000 that we didn’t have. We didn’t have any money at the time. I was making a career change and we were broke. So we paid for it on a credit card. You know why? Because we didn’t have an emergency fund and not fixing it wasn’t an option. We weren’t going to drive back again and then drive around Phoenix with no air conditioning, having to blast the heat.
But this is what leads people into debt. It’s not often because they failed to acquire insurance. It’s that things happen that aren’t insurable, which require an emergency fund, and consumer debt is such a serious issue. Did you know the average American household carries around $7,000 in credit card debt at an average interest rate of 20%? Roughly 45% of Americans carry a balance month to month. They don’t pay it off, meaning half of us are paying for past expenses that we couldn’t afford like that car bill. So an emergency fund acts like a buffer. It’s there to prevent you from relying on those high interest credit cards or personal loans when unexpected events occur. Arguably the most important factor for you to have financial success is avoiding consumer debt that I just mentioned half of Americans are carrying. It can be an absolute ball and chain compounding exponentially in the wrong direction.
An emergency fund balance should be somewhere between three and six months of expenses, generally three months if both spouses are working and have similar incomes. In a single income household, you want that closer to six months. Of course, your specific situation may require that to be adjusted. And finally, let’s tackle the idea that Roth accounts are always better than traditional IRAs or 401K. I continue to hear this, Roths are better. Max out your Roth. That’s the way to go. Maybe. But here’s the thing, whether a Roth or a traditional account is better for you, which is one of the most common questions by the way, I receive from prospective clients that come in. They say, “Hey, I’ve heard the radio show. I heard you talking about Roths. My CPA and my advisor never talked to each other and what you said makes sense. I’m pretty sure I need to do a Roth.”
Well, fantastic that you’re thinking about this, but we must look at your specific situation. And by the way, the question you have to answer may not be simple to arrive at, but it is an easy question to answer. There’s one that dictates this entire decision. Do you expect your tax rate today to be higher or lower than your future tax rate often in retirement? So here’s the simplest way to think about it. With a Roth, you pay taxes now. The growth is off your return. Qualified withdrawals are tax-exempt later. With a traditional IRA or a 401k, it’s the opposite. You defer taxes today, push that income off your return until retirement with the expectation that your tax rate will be lower when you go to take that out. Because remember, the tax savings isn’t that you put $10,000 in today and you’re in a 24% tax bracket so it was $2,400.
No, the tax savings is if down the road you only have to pay 2000 in taxes and you deferred so you didn’t have to pay 2,400. The savings was $400. I went through that quickly, and this is audio only. Sorry if I lost you, but that’s the savings. It’s not the deferral amount today because you’re not eliminating tax. You’re simply asking the IRS if you can pay taxes later with deferred monies. Right now, Roths have gained massive popularity because for good reason, we are in one of the lowest tax environments in decades, and there’s a lot of uncertainty around future tax rates given that we have $35 trillion of national debt. So many people are doing Roth conversions, basically moving existing lump-sum balances from deferred accounts into a Roth and paying tax at today’s rates. Because the 24% bracket, if you’re married filing jointly, goes up beyond $370,000 of income.
So you can make a lot of money or even push that conversion amount onto your return in addition to your wages, and you don’t jump into a very high bracket from a historical perspective, making them more viable for more people. Thus, the prevailing narrative that Roth IRAs are the cats meow. They should be used all the time, but this is more like deciding between a swimsuit and a winter coat. Hey, John, which one’s better? These swim trunks? I mean, look how they fit. They’re kind of nice. I got the short ones. Those are cool. Yeah, on trend or this big hooded winter coat. If you’re headed to Hawaii, my answer’s going to be different than if you’re going to Colorado.
The only question you’re trying to figure out when it comes to a Roth, which you may want a certified financial planner or a CPA to help you arrive at what the answer is, but the question itself couldn’t be any easier. Are you going to the beach or are you going to the mountains? Is my bracket today higher or lower than what I expect it to be down the road by factoring in all known and projected scenarios? So there you have it, whether it’s managing a windfall, balancing insurance with savings or choosing between a Roth or traditional account, personal finance isn’t a one size fits all, and the key is knowing what fits your unique situation.
Today’s one simple task is kind of a soapbox topic for me. In fact, my wife would probably be rolling her eyes as she listens to this, slowly shaking her head, “Oh no, don’t get him started.” And that is taking a break from social media. This can have a real impact, especially post-election. You want to dislike a lot of people that you otherwise mostly like? Follow them on social media the week following an election. If you’ve been listening to the show for a while, I talk about this from time to time. I’m not a fan for a variety of reasons that I’ll share here in a moment, but I am aware that it has its place. You may be in a line of business where social media is your number one marketing tool. I understand that. I get that it’s 2024, but let’s be honest, our social media culture has taken on a life of its own. Hasn’t it?
It used to be that our traditions were simple, personal, enjoyable. Now it’s like everything is a performance. It’s not to capture a family memory. It’s like, “Oh wait, that lighting’s not good. Oh, you don’t look great. Come back over here. We need to take that for an 82nd time.” You want to have a lot of fun? Go to a beach and watch people splashing in the waves, then going back and checking their phone, putting it on a selfie stick, then looking, “Oh, no, no, that’s not going to work.” Then they’re adjusting their hair. Then they’re laying down in the water as the waves come upon them. And by the way, this isn’t just Instagram women. I’ve seen dudes, they’re flexing their abs, not going to mention any names, but flexing their abs, doing some pushups before the picture, and it becomes less about actually enjoying the moment, the experience you’re having because you’re so busy trying to capture it. In a way, it turns experiences into competitions, which is weird.
If you take a break from social media, there are plenty of benefits. I’ll just run through a few of them. Improve mental health. Stepping away even just for a few days can reduce anxiety and depression and boost your overall mood. No one feels better after scrolling for an hour. Better sleep. Research shows that screen time, especially before bed messes with our sleep, increased productivity. I mean, this one’s pretty self-explanatory. If you’re not sitting online wasting time on social media, you’ll probably make better use of that time. How about enhanced real life connections? When you spend less time online, you have more time to connect face to face and it’ll curb your FOMO.
Social media is the easiest and fastest way for you to feel intense fear of missing out and fall into that comparison trap. So without it, you can focus on your own life and your own priorities rather than other people’s highlight reel. So this week, try to unplug. It’s a simple task, even just for a day or two and see if it makes a difference. And all of this year’s one simple tasks as well as articles and supporting documents can be found on the radio page of our website. And now let’s get into listener questions. One of my favorite parts of the show, Britt is here to help out. Let’s dive in. What’s our first question?
Britt Von Roden: Our first question today is from James in Houston. And this is a two part question for you today, John. So the first is, what is the present and future value of a pension? And the second question is, if you are a state employee, say a teacher for example, or a federal government employee, for example, a US postal worker, how do you work pensions into your plans?
John: In simple terms, present value is what a stream of payments is worth in today’s dollars. As of right now, future value is what it would grow to over time considering compounding. Now, you have to use some assumptions when calculating these. And here’s an example. On a $30,000 a year pension. Let’s say you expect to live for 30 more years, and we use a hypothetical 6% interest rate. The present value on that $30,000 income stream is a little north of 400 grand. While the future value if you’re 62 and going to receive these until 92 is nearly $2.4 million. So that $30,000 a year pension that you’re trying to factor into your retirement plan has a significant impact on your overall wealth. We’re talking about nearly two and a half million dollars over the life of your retirement. So when it comes to incorporating a pension into your retirement plan, you should consider several factors.
One being, does this pension have a cost of living adjustment or is it fixed? That income stream will buy you about half of what it did when you retired 20 years later if it’s not going up with inflation. And then what are the tax implications? That’s another factor to consider because most pensions are taxable, but there are certain types where they may come through tax-free on the state level or the federal level. So you really want to understand how that factors in as well because if you’re in a higher bracket, that can significantly impact your after tax income. And let me back up for a moment. Oftentimes you’re trying to decide between a lump sum value or a regular monthly pension, that ongoing income stream, and you really want to figure out how this fits your personality, your risk tolerance, and your goals. If you’re someone who values liquidity, you want to have flexibility to pass money onto heirs, you’re comfortable investing, taking a lump sum might make sense, assuming that it’s invested wisely.
On the other hand, if you prefer predictability, those monthly payments can provide peace of mind just on autopilot. Maybe you don’t have beneficiaries or your plan doesn’t prioritize getting a lot of money to those, then that income stream may make the most sense. I highly recommend, it doesn’t have to be with us here at Creative Planning, but working with a certified financial planner to help you understand those options. They can break down the pros and the cons. You can play with some of the assumptions to figure out if you have a lump sum option, whether it’s more or less than the present value of that income stream. And they’ll walk you through the pros and cons based on your goals to make sure that you’re making an informed choice. Because when it comes to a pension, generally that decision is irrevocable. So you really want to factor that in to your overall strategy. Thank you for that question. Let’s go to our final question, Britt.
Britt: Our final question today, John, is from Rachel in Chicago and she shares that her and her husband are going through a divorce, thankfully an amicable one, and she recently read that a woman’s income falls by an average of 9% in the year following. Her question today is if you have any advice for her so she can be sure she won’t face a significant financial setback.
John: About half of all Americans end up in a divorce scenario, so it’s very common and it significantly alters your retirement planning, your current cashflow, your estate planning. So I do commend you for thinking about how to prepare yourself for this, and thank you for the question. I’m going to start with budgeting. Take a fresh look at your income and expenses to get a realistic view of your new financial situation because you may find areas to adjust and prioritize, which can help prevent this lifestyle inflation now that you’re in a single income household. It’ll also be interesting for you to figure out what bills will stay the same, what expenses will be minimized or go away, which ones may potentially increase. One thing’s for sure your budget will look different. Next, focus on your emergency fund. When the dust settles from the divorce proceedings, aim for six months minimum worth of expenses now that you’ll be single.
That cushion is invaluable. I talked about this earlier on the show, the value of that emergency fund. But this is especially true after a life change like this. It just gives you that buffer. It gives you peace of mind. It allows you to avoid debt for unexpected costs, and there will be some adjustments along the way. Even if you think you’ve planned for everything, you’ll have to recalibrate your budget and your plan over the first 12 to 24 months as you adjust to your new situation. Career development can be a really big area to consider. I don’t know your current career, how that’s being impacted. I don’t know your family structure, if you have young kids custody arrangement, but sometimes divorce opens up new opportunities to advance or pivot in your career. So whether that’s additional training or a career change, boosting your potential now can make a real big difference, obviously for years to come.
Finally, I would encourage you to think long-term. Review your retirement, your investment goals, consider how they’re impacted. Certainly look at your tax situation, look at your estate plan. Almost certainly need to adjust that in light of your divorce, and you may need to readjust your expectations and contributions and even maybe your timeline. And a great certified financial planner can help ask all of those questions and provide visibility on your new situation. If you’re not already working with a financial advisor, we are here to help and have an office there near you in Chicago. You can visit creativeplanning.com/radio to request that complimentary second opinion. And if you have questions similar to these about your personal finances, email those to radio at creativeplanning.com.
Let’s wrap up today with a simple theme, something for you to ponder. Use your money for you. Now by that, I don’t mean be selfish, hoard your money, avoid generosity, skip out on charitable giving. That’s not what I’m saying. What I am saying is to use your money in ways that actually make your life better. Advance your initiatives, which may be giving to those in need, supporting causes you care about, but don’t use your money to impress others. There’s a great quote from Dave Ramsey. It’s one of my favorites. “We buy things we don’t need with money we don’t have to impress people we don’t even like.” And while it’s a funny line, you can’t hear it without chuckling, it holds a lot of truth. If you are spending to keep up with the Joneses, you’re likely feeling more stress than satisfaction. Let me share a story that I heard recently from our pastor during one of his sermons about pineapples.
I know you’re like, “What church do you go to, John? You guys talk about pineapples in church?” It was a good analogy. It wasn’t something that I had ever heard before. When pineapples were first brought to Europe, they were incredibly rare and incredibly valuable. So what would happen is kings and wealthy families would pay exorbitant sums of money, not even to buy a pineapple, to rent a pineapple, not to eat a pineapple, just to display it as a symbol of their wealth, as a symbol of, “Look at how big of a baller I am. Check out my pineapple, sitting over there on the table.” One king even commissioned a portrait of himself holding a pineapple. Another king walked around many parties holding the pineapple, not setting it out, actually carrying it around to be like, “Check this out. Isn’t this awesome? Probably never seen one of these before. I’m obviously a very big deal.”
And to us, it sounds silly. I used to live in Hawaii. They’re everywhere. But think about how we still do the same thing today with things that really serve no purpose other than signaling status. Now, what I’m not suggesting is that if you buy anything that’s not practical, that’s kind of expensive, then I’m going to judge you. No, I get it. We all spend differently. I like nice hotels. My mother-in-law thinks they’re a waste of money. She’d rather stay at a cheaper place and then shop with the difference. So we all have different spending priorities, and that’s okay. But whatever you spend on, make sure it aligns with your true values and your true desires. So if you buy an expensive car, do it because you love driving that car, because you enjoy it or you have a long commute and it’s really comfortable. You’ve always wanted that car, whatever it might be.
But be honest with yourself. Don’t buy it because you want to signal to others, check this out. Because others aren’t thinking about you nearly as often as you think they are. They’re worried about themselves. Have a designer handbag, but don’t buy it so that you can walk around and kind of be like, “Look at how cool I am. Other people are going to know that I have money because I’m carrying this.” And I think if we’re honest with ourselves, we all can fall victim to that because we’re humans and there’s something inherent related to our own personal insecurities that can come to the surface. So my encouragement for you isn’t not to buy certain things that may be perceived as unimportant, but buy them only if they are truly important to you, not what you think others will admire or what they’ll validate. Because ultimately what other people think about you is none of your business. 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.
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